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Tax Tip of the Week | No. 429 | Cash Method vs. Accrual Method of Accounting (Generally Speaking) October 18, 2017

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Tax Tip of the Week | Oct 18, 2017 | No. 429 | Cash Method vs. Accrual Method of Accounting (Generally Speaking)

Many taxpayers are unaware of the method of accounting used for their business income tax returns. And, many businesses are unaware that a different accounting method may also be used for their financial statements. Yes, effectively, creating two sets of books.

Typically, the two most common accounting method choices are the cash method and the accrual method.

Use of the cash basis method of accounting (if eligible) will usually result in lower income taxes than the accrual method for a particular period of time. This is especially true when a business is growing.  However, if a business is experiencing a decline in revenues, additional taxes may be incurred as a result of reporting on the cash basis.

On the other hand, accrual basis accounting will often show the largest bottom line on your financial statements. This may be important when reporting your financial results to your bank and/or your bonding company. Both always enjoy seeing good news.

Thusly, these two methods may show significantly different results even, when accounting for essentially the same transactions. One may wonder how that could be. Well, the cash basis reports only taxable income when it is received in cash. Also, under this method, a tax deduction does not occur unless a cash disbursement for an expense has occurred.  The accrual method shows the income once the sale is completed and the expense when incurred which can more accurately reflect your net income.

The choice of an accounting method is a big one.  Its importance grows with the size of your business.  If you ever decide to change methods, please remember that some changes require Internal Revenue Service approval, while others are automatic. Regardless, your accounting method choice should be evaluated on an annual basis.

This week’s author….Mark Bradstreet, CPA

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 427 | Top 10 Things to Know About Amending Returns October 4, 2017

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Tax Tip of the Week | Oct 4, 2017 | No. 427 | Top 10 Things to Know About Amending Returns

If you need to make a change or correct your federal tax return after it has been filed you will use Form 1040X. Here are the top 10 things you need to know when filing a 1040X:

1.    To file a 1040X, it must be mailed—you cannot e-file an amended return.

2.    You normally don’t need to file an amended return to correct math errors.  The IRS will automatically correct math errors and send you a bill or refund.

3.    You can track the status of the 1040X three weeks after filing.  To track the status, go to www.irs.gov and click on the “Where’s My Amended Return” link.  Note:  it can take up to 12 weeks for the IRS to process an amended return.

4.     If a refund is due from the original return, wait until you receive the refund before filing the 1040X to claim additional refund amounts.

5.     If more tax is due, file a 1040X and pay the tax as soon as possible to reduce any interest and penalties.

6.     You usually have three years to file an amended return.  See the 1040X instructions for the exact details.

7.      If you are amending more than one tax year, prepare a 1040X for each year and mail them in separate envelopes.

8.      If you use other IRS forms or schedules to make changes, attach those forms to the submitted 1040X.

9.     The most important section on the 1040X form is the “Explanation of Changes”.  You need to clearly and precisely explain why you are submitting an amended return and what changes you are making.

10.    If the changes you make on the federal return also results in a change to your Ohio return be sure to submit an Ohio amended return as well. Note: Ohio no longer uses a special amended tax return.  Instead, use the normal Ohio IT 1040 return and mark the “Amended” box located on the top of page 1.

Let us know if you have any questions about filing an amended return.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No.423 | Tips & Tricks to Reduce your Net Investment Income Tax September 6, 2017

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Tax Tip of the Week | Sept 6, 2017 | No. 423 | Tips & Tricks to Reduce your Net Investment Income Tax

With Congress in their seemingly never ending stalemate the 3.8% surtax on investment income apparently will be around at least for another year. This is a great time for taxpayers to understand the mechanics of this surtax and what goes on behind the scenes.

For starters, this surtax was heralded as a tax on the richest, and often it is. However, this 3.8% surtax can go beyond the wealthy. For example, if taxpayers have an investment windfall pushing their AGI above the surtax trigger points then this tax may make for an unpleasant and an unexpected surprise. And, its target group is ever expanding since the calculation is not adjusted for inflation.

Next, let’s define investment income –

What is investment income?  Interest, dividends, most capital gains, certain rental and royalty income, and certain passive investment income, such as from listed partnerships.

What’s not considered investment income?  In general, income from municipal bonds, and income from investments in partnerships or S corporations, if the recipient “actively” participates as defined by law. There are also exceptions for certain types of rental income and certain capital gains.

Here is how the tax works. The surtax of 3.8% applies to net investment income of most married couples who have more than $250,000 of adjusted gross income, or AGI. For most single filers, the threshold is $200,000. For example, a single person with $200,000 of AGI doesn’t owe any surtax. This is true, even if that income is entirely from investments. However, this person then reaps a one-time investment gain of $180,000 from selling long-held shares of stock and his income jumps to $380,000, then the $180,000 will be subject to the 3.8% surtax. Total surtax tax:  $6,840.

For those concerned about the tax, here are some tips:

    For many taxpayers, don’t worry about most home sales. A tax break allows most couples selling a primary residence to skip tax on up to $500,000 of profit ($250,000 for singles).

    Also, remember that one of the tax code’s benefits is that losses from one investment can off-set gains from another in the same tax year.

    Reduce AGI whenever possible. This alone can reduce the 3.8% tax.

Other ways of reducing AGI may include:  Making deductible contributions to tax-favored retirement plans, such as 401(k)s or pensions; making charitable contributions from IRA assets, if you’re older than 70 ½; and taking a capital loss up to $3,000.

    Taxable payments from pensions, traditional IRAs and Social Security aren’t themselves subject to the 3.8% surtax, but they can increase income in a way that subjects investment income to it. Thusly, when possible be aware of their timing.

On the other hand, tax-free payouts from Roth IRAs don’t raise taxable income and can help minimize the 3.8% surtax.

    Hold investment asset(s) until death. The 3.8% surtax doesn’t apply to profits on investments in one’s estate.

Credit to Wall Street Journal – By Laura Saunders

Thanks to Mark Bradstreet, CPA for submitting this Tax Tip!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 412 | Social Security Earnings Amount Increases June 21, 2017

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Tax Tip of the Week | June 21, 2017 | No. 412 | Social Security Earnings Amount Increases

For 2015-2016, the maximum wage amount subject to social security tax was $118,500.  For 2017, the maximum wage amount subject to social security withholding will be $127,200.

If you are an employee, this will be the wage amount shown in Box 3 of your W-2.

If you are self-employed, you will be subject to social security tax up to $127,200 of your net business income.

There remains no earnings limit subject to Medicare tax withholdings.  Any earnings for employees over $127,200 will still be subject to a 1.45% Medicare tax (2.90% Medicare tax if self-employed).

Especially for those who are self-employed, you may need to adjust your quarterly estimated payments.  As always, give us a call if you have any questions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 409 | President Trump’s Tax Plan Summary May 31, 2017

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Tax Tip of the Week | May 31, 2017 | No. 409 | President Trump’s Tax Plan Summary

We now have some information about the proposals included in President Trump’s tax plan. Remember that this plan is not a law and has not yet even been introduced to Congress as a bill, and that a bill must be passed by both the House and the Senate and then signed by the President, so there is no way to know what will be passed (if anything). This is just a summary of the proposals, without comment. The plan released by the President is a one page plan, so most other details are not available beyond this summary.

Business Changes

C corporation tax rates would be reduced from the current highest rate of 35% to a new flat rate of 15%. Pass-through S corporation and LLC income would also be taxed at 15% rate for small and medium sized businesses (which were not defined).

Corporations would no longer be taxed on a worldwide system, but would be taxed on a territorial system, and a one-time repatriation tax would apply on the foreign earnings of US companies.

The proposal does not include a provision allowing expensing of all business assets, as originally proposed.

Individual Changes

The President wants to reduce the current seven different individual tax brackets to three brackets, with rates set at 10 percent, 25 percent, and 35 percent. The President also wants to double the standard deduction to $24,000 for Joint retruns, repeal alternative minimum tax and the estate tax and expand the credit for child and dependent care expenses, while also repealing the dreaded net investment income 3.8% surtax.

With the new standard deduction and changed brackets, individual taxpayers with taxable income less than $25,000 and married taxpayers with taxable income less than $50,000 would owe no Federal income tax.

Most individual itemized deductions would be repealed, but the deduction for mortgage interest and charitable donations would be retained.

Stay tuned….should be an interesting summer and fall!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 408 | American Health Care Act Update May 24, 2017

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Tax Tip of the Week | May 24, 2017 | No. 408 | American Health Care Act Update

Here is a quick observation from the OSCPAs:

Experts say this is not the health care reform news some were waiting for.

House action last week to replace the Affordable Care Act might have been a big news story for a few days, but an Ohio law expert said it doesn’t represent much progress toward the reform some thought was possible this year.

The U.S. House on May 4 voted 217-213 to pass the American Health Care Act, which would repeal and overhaul parts of the ACA. The bill now goes to the Senate for consideration – and therein lies the rub, said Joe Popp, JD, LLM, tax manager at Rea & Associates in Dublin, Ohio.

“The House has passed something, but the Senate would have to pass the exact same thing for this to really be big news,” Popp said. “I think most people would tell you there’s a zero percent chance of that.”

According to some news reports, the Senate is going to build a new bill from the ground up, in which case, “you’re back to square one,” Popp said.

“The fact that this has passed out of the House is a hurdle that’s been passed, but the larger hurdle was always the Senate,” he said.

Should the bill be modified by the Senate, it would then go to a conference committee, in which both houses of Congress would attempt to agree to a final version. That’s a precarious political position, given the tight margin of the House vote. And – already – 2018 is looming.

“People are going to start to campaign for primaries,” Popp said, adding that it will influence how legislators and those who support and oppose them will behave.

“It’s going to be interesting to see what sort of folks start coming down the pipe in the primary process,” he said.

Popp said the deep philosophical differences among legislators and the public make a stalemate the most likely situation in the short term.

“Someone at some point should have the idea to get rid of just one thing they all don’t like,” he said. “They can do that in a week. The reason they don’t want to do that is there are some unsavory things they want to drive through this, and to do that they need the big thing” they agree on. “They want the whole thing or nothing at all.”

So by all means keep monitoring the news, but much work remains for lawmakers before businesses will get actionable information.

Stay tuned, we’ll keep you posted…….

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 398 | A Review of IRS Penalties March 15, 2017

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Tax Tip of the Week | March 15, 2017 | No. 398 | A Review of IRS Penalties

Many people assume that the IRS will not impose penalties if you weren’t actually trying to cheat on your taxes. Taxes are complex, and mistakes happen.  But the burden is on you to show that you acted reasonably (such as relying on professional tax advice).  If you can’t, you will probably end up with penalties.

The size of penalties varies, but often they are 25% of the outstanding tax liability.  Higher penalties or even criminal prosecution is possible.  The burden can be placed on you to prove you are right or that your mistakes were innocent.  If the IRS believes you were trying to cheat, you could face a 75% penalty or even criminal prosecution.  Most criminal tax cases start with routine audits.  Innocent mistakes can often be forgiven if you can show that you tried to comply and got some advice.

Everyone has heard that “ignorance of the law is no excuse”.  On many key tax subjects, the IRS says that with hardly any effort, you could easily learn the IRS requirements.  The tax laws draw the line between non-willful and willful.  Willfulness can be shown by your knowledge of reporting requirements and your conscious choice not to comply.  Willfulness means you acted with knowledge that your conduct was unlawful—a voluntary, intentional, violation of a known legal duty.  Watch out for conduct meant to conceal, such as:

–    Setting up trusts or corporations to hide your ownership.
–    Filing some tax forms and not others.
–    Keeping two sets of books.
–    Telling your bank not to send statements.
–    Using code words over the phone or in written instructions.
–    Cash deposits and cash withdraws.

Before conducting any actions, ask yourself if your explanations pass the “straight face test”.

Questions, call us BEFORE you do something—not AFTER!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 395 | 2017 Ohio Tax Filing Updates February 22, 2017

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Tax Tip of the Week | February 22, 2017 | No. 395 | 2017 Ohio Tax Filing Updates

The following is a recent update from the Ohio Society of CPAs, regarding the upcoming Ohio tax filing season. The two biggest take-a-ways are:

1.     If you didn’t receive your 2015 refund because you didn’t pass the identity test on your first attempt, you must follow-up with additional information.  The Ohio Department of Taxation WILL NOT follow-up with you to issue these valid refunds.

2.    To file your 2016 state return, you must include your driver’s license information on the return.

The Ohio Department of Taxation said about 665,000 Ohio taxpayers were asked to take the quiz in 2016 – down from nearly 1.7 million in 2015, when, taxpayers complained about the questions and Gov. Kasich vetoed a budget provision that would have limited the questions to information obtained from the previous five years.

Those who do not take the quiz within 30 days – or fail it multiple times – have to provide documentation to receive their refunds. The requested refund will not be issued until a quiz is passed or ODT receives and accepts proper documentation to confirm your identity.

Tax Commissioner Joe Testa last year said taxpayers found the quiz quick and easy to take, a view supported by its 98.8% passage rate. And ODT said hundreds of millions of dollars of fraudulent refund claims have been blocked since 2014.

What that number should NOT include is legitimate refunds that haven’t been issued. Now, ODT isn’t going to track down failed quiz takers and demand they come get their refunds. So we suggest asking clients who were required to take the quiz whether they actually did so, and whether they received their state refunds. Once you provide the proper documentation, then ODT will release the money.

In other news, the Ohio Department of Taxation announced this week that the state income tax filing season begins Jan. 23. As expected, the ID Confirmation Quiz is back, and taxpayers will need to provide a driver’s license or state ID card information to help combat stolen-identity tax fraud.

ODT said this year’s income tax filing process will include the following changes:

–    The business income deduction for 2016 has been increased to 100% of the first $250,000 of net business income from “pass-through” businesses. Income over that amount from these businesses will remain subject to a flat 3% tax rate.

–    Ohio has added a deduction for contributions to Ohio’s STABLE Account to help taxpayers who are caring for a disabled child or other designated disabled beneficiary. This deduction allows taxpayers to reduce their taxable gross income by up to $2,000 per beneficiary per year.

–    Indexing of income brackets which protects Ohioans from the impact of inflation on their personal income tax rates resumes in 2016 at the conclusion of the phase-in of the Governor’s previous personal income tax rate reductions.

As always, give us a call if you have any questions.  You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 391 | 2017 Tax Filing Deadlines January 25, 2017

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Tax Tip of the Week | January 25, 2017 | No. 391 | 2017 Tax Filing Deadlines

Keep the following dates in mind while filing your 2016 tax returns in 2017:

March 15, 2017   Partnership/Form 1065 – This is a new due date for partnerships, changed from April 15.

March 15, 2017   S-Corps/Form 1120S – This deadline remains the same as prior years.

April 18, 2017*    Individual Tax/Form 1040, Estates, Trust/Form 1041 – *Not a typo! 4/15/17 is a Saturday and 4/17/17 is a holiday in Washington D.C.

April 18, 2017      Individual Extension/Form 4868 – Remember, if you owe taxes for 2016, a tax payment is due with the extension.

April 18, 2017      C-Corps/Form 1120 – C-Corps were previously due by March 15.

Sept 15, 2017       Extended Partnerships/Form 1065, S-Corps/Form 1120S, C-Corps(calendar year)/Form 1120,  – Any extended return that contains a K-1 is due prior to individual deadlines.

Oct 2, 2017           Extended Estates, Trust/Form 1041 – These were previously due October 15.

Oct 16, 2017         Individual Tax/Form 1040 – Last day to file individual returns that were placed on extension.

April 15, 2020      2016 Amended Return/Form1040X – You can file an Amended Return to pay taxes anytime, but you only have 3 years from the original due date to claim a refund.

Please Note:  This is not a comprehensive list of all due dates for all tax forms and does not include due date changes for fiscal year-end C-Corps.

Also Note:  Ohio generally follows all federal due dates as do most cities. Please contact us regarding your particular filing due dates.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 389 | IRS Lowers Mileage Rates for 2017 January 11, 2017

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Tax Tip of the Week | January 11, 2017 | No. 389 | IRS Lowers Mileage Rates for 2017

The Internal Revenue Service has issued the 2017 optional standard mileage rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 53.5 cents per mile for business miles driven, down from 54 cents for 2016;

• 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016;

• 14 cents per mile driven in service of charitable organizations.

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

The IRS reiterated that taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost recovery System (MACRS), or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.