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Tax Tip of the Week | No. 443 | New Tax Law Changes – Businesses January 17, 2018

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Tax Tip of the Week | Jan 17, 2018 | No. 443 | New Tax Law Changes – Businesses

A short recap of the new tax law changes that most commonly affect many businesses (for 2018) follows:

1)    C Corporations are now taxed at a flat rate of 21%.  No more brackets based on taxable income.
2)    Corporate Alternative Minimum Tax (AMT) is now history.
3)    New 20% deduction of qualified business income for pass-through businesses (this calculation is complex and far-reaching).
4)    Excess business losses are limited (aside from a corporation).
5)    Cash basis method of accounting has been extended to taxpayers with less than $25 million in average gross receipts. A change in accounting for inventory has also occurred.
6)    Completed contract method of accounting has been extended to businesses under $25 million in gross receipts.
7)    Like-kind exchanges are no longer allowed for any transactions aside from real property.  Ouch!!!
8)    Deductions for entertainment are gone.
9)    Depreciation amounts for luxury vehicles have increased.
10)  Businesses with sales in excess of $25 million will now have limited interest expense deductions. Excess may be carried forward.
11)  Section 179 expensing up from $510,000 to $1,000,000; but, phase out begins at $2,500,000.
12)  Definition of Section 179 property has been expanded. That is a good thing.
13)  Section 168 bonus property no longer has to be new property. The 50% has been increased to 100% on property placed in service after 9/27/17.
14)  Net operating losses (NOLs) can no longer be carried back (other than two years allowed for farming operations). They may now be carried forward indefinitely and are subject to an 80% income limitation.
15)  Domestic Production Activity Deduction (DPAD) is no longer allowed. Many businesses will be adversely affected by the loss of this provision.

We enjoy your questions, comments and suggestions for future topics. You may contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 442 | New Tax Law Changes – Individuals January 10, 2018

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Tax Tip of the Week | Jan 10, 2018 | No. 442 | New Tax Law Changes – Individuals

We have attempted to recap some of the tax law changes that affect many individuals as below:

1)   We still have the seven–bracket individual tax structure but now with mostly lower tax rates.
2)    The marriage tax penalty has been effectively eliminated for all except for married couples with taxable income north of $400,000.
3)    Although, the higher standard deduction was billed as a tax cut, it really falls more into the realm of tax simplification. However, one must keep in mind that the personal exemption deduction was eliminated. So, for most people, what the government gives with one hand, they taketh away with the other.
4)    If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to income thresholds.
5)    Funds saved in a 529 savings plan may now be used for private school and tutoring (K – 12).
6)    Income thresholds for capital gains no longer match the tax brackets as before.
7)    People who don’t buy health insurance will no longer pay a tax penalty (effective in 2019).
8)    The net investment income tax of 3.8% remains the same.
9)    Interest on home equity debt may no longer be deducted.
10)  The Child and Dependent Care Credit remains in place.
11)  Some charitable donations may now be deducted up to 60% of income (up from 50%).
12)  Alternative Minimum Tax (AMT) is now adjusted for inflation and the AMT exemption amounts have increased.  Both are good.
13)  Estate tax exemption has effectively doubled to $11.2 million lifetime exclusion.
14)  Deductions that didn’t survive:
A.    Casualty and theft losses (other than a federally declared disaster).
B.    Unreimbursed employee expenses.
C.    Tax preparation expenses (still okay for businesses, rentals, and various investments, etc.).
D.    Moving expenses.

We enjoy your questions, comments and suggestions for future topics. You may contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 441 | Company Vehicles January 3, 2018

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Tax Tip of the Week | Jan 3, 2018 | No. 441 | Company Vehicles

Many of our clients ask us about vehicles used in their businesses. . .

Basically, there are two ways to deduct vehicle expenses: the actual method and the mileage method. In the year a vehicle is placed in service, the taxpayer must choose which of these methods to use, and cannot use both on the same vehicle. If the taxpayer elects to use the mileage method in Year 1, the taxpayer can switch to actual expenses in Year 2. But if a switch to actual occurs, the straight-line method must be used to depreciate the vehicle. The basis of the vehicle must be reduced by the depreciation assumed while using the mileage rate, which is 25 cents per mile for 2017. If the basis is reduced to zero, the standard rate can continue to be used with no additional adjustments to basis.

The Actual Method:

The actual method allows deductions for depreciation of the vehicle (within certain limitations), insurance, fuel, repairs and maintenance, license fees and other actual expenses when the vehicle is owned by the business. If the actual method is used in year 1, it must continue to be used even if the mileage method would result in larger deductions. This is often the case with SUV’s that have a gross vehicle weight rating of over 6,000 pounds due to the write-off allowed in the year of purchase. For these SUV’s used predominantly for business, an election under Section 179 of the IRC allows expensing of up to $25,000 whether new or used. This is much more than what is allowed for a small SUV or passenger automobile in Year 1, which is limited to $11,160 if new, and $3,160 if used. These amounts are subject to periodic adjustment but have not changed since 2012.

The Mileage Method:

The mileage method allows a deduction for business mileage put on a vehicle, regardless of whether the vehicle is owned by a business, or owned personally. Mileage rates are determined by the IRS and vary by year. The standard mileage rate for business mileage for 2017 is 53.5 cents per mile. In some years, when economic conditions dictate, the IRS will change the rate during the year. When five or more vehicles are used in the same business, the mileage method cannot be used and the taxpayer has to claim actual expenses.

Importance of Record Keeping!

Passenger automobiles and other property that lends itself to personal use are known in tax lingo as “listed property”. Special rules may limit tax deductions related to listed property. For example, no depreciation or other deduction or credit is allowed for listed property unless the taxpayer meets certain record keeping requirements.

The records must support the amount of every expenditure such as the cost of acquiring the item, maintenance and repair costs, lease payments and any other expenses. The records must also support the amount of business use (business mileage) and total use (total mileage), the date of each expenditure or use, and the business purpose for each expenditure or use. Phone apps now exist that will help track business and personal mileage. Or, a business mileage log can be purchased at an office supply store and if kept updated correctly, will suffice for the record keeping requirement for business use, and should be mostly all that’s needed for those claiming the mileage deduction. However, an IRS audit will usually require a third party receipt at the beginning of the year and end of year to substantiate total mileage, hence the importance of keeping receipts for services such as oil changes.

Personal Use:
When personal use exists for a business asset, the personal use must be accounted for. A future tax tip will cover personal use, and how it should be reported. Leased vehicles have additional rules and will also be discussed in a future tax tip.

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

This week’s author — Norman S. Hicks, CPA

…until next week.

Tax Tip of the Week | No. 440 | Happy New Year! December 27, 2017

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Tax Tip of the Week | Dec 27, 2017 | No. 440 | Happy New Year!

And get ready for the tax filing season.

Hopefully, you followed some of the suggestions we outlined earlier in TTW #21 to organize your records. If you did, great! This will make filing your tax returns a lot easier this year. It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2018 vs. looking back to 2017.

This week we will look at some of the more common forms that you should be watching for in the coming weeks and months:

W-2:    Employers should mail these by 1/31/18.  If you have moved during the year, make sure former employers are aware of your new address.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 1/31/18 if you have gambling winnings above a certain threshold. Note: Some casinos will issue you a W-2G at the time you win a jackpot. Make sure you have saved those throughout the year.

1096:    Compilation sheet that shows the totals of the information returns that you are physically mailing to the IRS. The check box for Form 1099-H was removed from line 6, while a check box for Form 1098-Q was added to line 6. The spacing for all check boxes on line 6 was expanded. The amounts reported in Box 13 of Form 1099-INT should now be included in box 5 of Form 1096 when filing Form 1099-INT to the IRS.

1098-C :    You might receive this form if you made contributions of motor vehicles, boats, or airplanes to a qualified charitable organization. A donee organization must file a separate Form 1098-C with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. All filers of this form may truncate a donor’s identification number (social security number, individual taxpayer identification number, adoption taxpayer identification number, or employer identification number), on written acknowledgements. Truncation is not allowed, however, on any documents the filer files with the IRS.

1099-MISC :    This form reports the total paid during the year to a single person or entity for services provided. Certain Medicaid waiver payments may be excludable from the income as difficulty of care payments. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-INT:    This form is used to report interest income paid by banks and other financial institutions. Box 13 was added to report bond premium on tax-exempt bonds. All later boxes were renumbered. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-DIV:    This form is issued to those who have received dividends from stocks. A new check box was added to this form to identify a foreign financial institution filing this form to satisfy its Chapter 4 reporting requirement.

1099-B:     This form is issued by a broker or barter exchange that summarizes the proceeds of sales transactions. For a sale of a debt instrument that is a wash sale and has accrued market discount, a code “W” should be displayed in box 1f and the amount of the wash sale loss disallowed in box 1g.

1099-K:    This form is given to those merchants accepting payment card transactions. Completion of box 1b (Card Not Present transactions) is now mandatory.

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1. The tax returns for these entities are not due until 3/15/18 (if they have a calendar-year accounting). Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1. These returns will be due 4/17/18 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension. If they do, the due date of the return is not until 9/15/18 or later. We often see client’s receiving K-1s in the third week of September.

If you receive, or expect to receive, a K-1 close to or after the due date of Form 1040,  it is best if you place your personal return on extension. It is a lot easier to extend your return than it is to amend your return after receiving a K-1 later in the year.

1098:    This form is sent by banks or other lenders to provide the amount of mortgage interest paid on mortgage loans. The form might also show real estate taxes paid and other useful information related to the loan.

1098-T:    This form is provided by educational institutions and shows the amounts paid or billed for tuition, scholarships received, and other educational information. These amounts are needed to calculate educational credits that may be taken on your returns.

So start watching your mailbox and put all of these statements you receive in that new file you created!

Wishing you all great things,

The Staff at Bradstreet & Company

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

…until next week.

Tax Tip of the Week | No. 439 | Special Holiday Edition December 20, 2017

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Tax Tip of the Week | Dec 20, 2017 | No. 439 | Special Holiday Edition…

Enjoy the Holidays!

We are going to take a break from our tax and business tips this week. Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2018.

We hope you enjoy the Tax Tip of The Week. As always, your topic suggestions and questions are always appreciated.

Is the Tax Tip of the Week real?
While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo.) Well, rest assured it’s us and we love to hear from you.

Enjoy the week and, “Yes Virgina, there is a Santa Claus”.

Wishing you all great things,

The Staff at Bradstreet & Company

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

…until next week.

Tax Tip of the Week | No. 438 | Planning For The New Proposed Tax Bill December 14, 2017

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Tax Tip of the Week | Dec 14, 2017 | No. 438 | Planning For The New Proposed Tax Bill

2017 is coming to a close with sweeping new tax legislation on the horizon. While the changes don’t take effect until 2018. We want to alert you to some steps you might take before year-end to preserve the best possible tax results.

As you explore these ideas, mostly you will find they contain a common and time-tested theme: where possible, defer income and accelerate the payment of deductible expenses. The reason for relying on this oldest of strategies is because ordinary income tax rates should be lower next year and many expenses will either no longer be deductible or will be less valuable in light of higher standard deductions in 2018.

1.    Maximize retirement deferrals. Be sure to fully fund your 401(k) and/or IRA to further reduce gross income for 2017. We can further discuss during the tax season fully funding 2017 SEPs and other retirement accounts that can be funded up to April 15 (or later).
2.    Business owners and consultants should delay billing. It isn’t proper to simply delay depositing checks received before year-end, but you generally won’t be paid for amounts you haven’t billed. Shift that mid- to late-December billing out until January 1 (for cash basis taxpayers).
3.    Prepay state income tax. This deduction may be eliminated beginning in 2018, so pay the fourth quarter estimate that is dated January 2018 by December 31, 2017. This strategy, however, requires that you know your status regarding alternative minimum tax (AMT). If you will be subject to AMT in 2017, it is likely that prepaying your state taxes will not reduce your 2017 taxes. In that case, with no benefit in either year, it makes better financial sense to make the payment later.
4.    Prepay property taxes. The deduction for property taxes is likely to be limited to $10,000 beginning in 2018. To the extent that you already have an assessment that isn’t due until after the first of next year, pay it by December 31. For taxpayers with high property tax bills and other large deductions such as mortgage interest and contributions, accelerating the 2018 property tax payment into 2017 may save a deduction due to disappear next year. Mid-range taxpayers may need a projection to see if this makes sense. And here again, the strategy won’t work for those in AMT in 2017.
5.    Bunching strategies. With the standard deductions possibly doubling in 2018, lower itemizers will need to begin to incorporate strategies to bunch deductible expenses every other year to “pop up” over the standard deduction and preserve tax benefits. In this case, you might warn your favorite charities as you contribute this year-end that your next contribution might not occur until January 2019. In that way, you can make double contributions at the beginning and end of 2019 to achieve deductions above the standard deduction that year.
6.    Make donations directly from IRA. If you are 70½ or older but your donations do not bring you over the new higher standard deduction, make those donations directly from your IRA as a custodial transfer.
7.    Delay business asset acquisition. First-year bonus depreciation for brand new assets may be 100% in 2018 (up from 50% in 2017). You may want to delay capital expenditures to take advantage of the more complete write-off on the acquisition.
8.    Complete trade-ins of business equipment, machinery, and autos before year-end. Section 1031 like-kind exchanges will only be available on real property beginning in 2018. If you have other business assets with low or no basis that you were considering trading in on the purchase of new, complete the transaction and place the new assets in service before year-end if possible.
9.    Complete large capital gains sales and prepay the state tax. You may want to accelerate this type of income into 2017 as long as it is accompanied by the payment of state tax. With capital gains rates remaining virtually the same under the new law, the net after-tax result can be better this year.

Individual situations are unique, and there are no one-size-fits-all tax planning strategies. If you would like to discuss these or other ideas that apply to your particular circumstances, please feel free to contact us.

With respect and encouragement,

The Staff at Bradstreet, CPAs

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

…until next week.

Tax Tip of the Week | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental? December 13, 2017

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Tax Tip of the Week | Dec 13, 2017 | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental?

One of the biggest tax surprises of our clients arises from the income tax liability caused by the sale of their rental property.

Here is how such a surprise typically unfolds:

The daughter heads off to college. Cash is needed for her tuition. Mom and dad decide to raise cash by selling their rental property. They paid $100,000 for this property which has now been rented for about fourteen (14) years. Net of selling expenses, the rental property is sold for $100,000. So far so good. The net sales price and the purchase price were identical. Mom and dad would have liked to sell the property for more but it is what it is. At least from a tax standpoint, mom and dad think they are home free – no gain, no income taxes. WRONG! They forgot to consider the depreciation expense that was taken over the fourteen (14) year holding period. That expense amounts to $45,000. So now, instead of the property basis or net book value being $100,000 as they guessed; it is $55,000 or the $100,000 less the depreciation expense already taken of $45,000. Now mom and dad’s taxable gain has climbed to $45,000. Mom and dad are not happy! Uncle Sam is going to take a chunk of their monies planned for tuition. Hmmmm…not good!

Now let’s look at how the federal income tax is calculated.  Since the property had been held for more than one year, the gain is a long term capital gain. However, this type of capital gain on the depreciation recapture may be taxed as high as 25%. Had the sales price exceeded the purchase price – conventional capital gain rates would have applied instead but only for that difference including the gain on the land portion. So their federal income tax may be as high as 25% of $45,000 or $11,250 – all resulting from the depreciation recapture. Not a pleasant surprise!

Always, know what your tax consequences may be before embarking down a road.

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

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 436 | Do You Need Tax Planning or Business Consulting? December 6, 2017

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Tax Tip of the Week | Dec 6, 2017 | No. 436 | Do You Need Tax Planning or Business Consulting?

As the year end draws near – the usual hosts of magazines, newspapers and the internet will all be busy with age-old articles on tax planning. Most will be repeating essentially the same techniques as they have for the last thirty (30) plus years.

And that is not to take away from these strategies – most are quite valid and very useful. Tax planning is important! Do it! Deferring income taxes is always a good thing. And, if the tax deferral is for a long enough period of time; then, in certain situations those deferred income taxes might be eliminated with your demise.

However, what does one do when a tax liability does not exist because your business and/or other adverse personal events resulted in tax losses and little tax liability? Then, one removes the tax planning hat and instead puts on their business consulting hat. With that hat comes a new mission with a new set of questions:

1.    Do I have the right people?
2.    Do I have the right customers?
3.    Are incentives aligned with my business goals?
4.    Are my assumptions still reasonable?
5.    Am I outsourcing the right tasks?
6.    Am I measuring the right things?
7.    Were our sales on goal?
8.    How am I different than my competition?
9.    Am I really optimizing technology?
10.    Am I stressed out?
11.    Were our gross profit margins on goal?
12.    What is our accounts receivable turnover?
13.    Am I avoiding the really tough decisions?
14.    What is our inventory turnover?
15.    Are we committed?
16.    What is our accounts payable aging?
17.    What is our capital assets budget?
18.    On a day-to-day basis, can the business function without me?
19.    Do we have adequate capital to take the business where we want it to go?
20.    Etc., etc., etc.

And, provided you arrive at the right answers for these questions and implement the answers according to your strategic plan; then next year you will also be wearing a tax planning hat as well. A good business person will always be wearing both hats along with some others.

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

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 435 | Passive Activity Losses November 29, 2017

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Tax Tip of the Week | Nov 29, 2017 | No. 435 | Passive Activity Losses

Passive activity losses are also known as PAL’s. However, from a tax standpoint, they are anything but your PAL.

A passive activity is a business activity in which the taxpayer does not materially participate. There are seven tests for material participation, and you only need to pass one of the tests to be considered active. But most investors do not meet any of the tests.

Beginning in 1986, you may only deduct a passive activity loss to the extent you have passive activity income. A PAL cannot offset non-passive income or portfolio income.

The passive activity rules were passed by Congress in 1986 in an effort to limit the losses being deducted by many taxpayers through the use of tax shelters. Prior to enactment, taxpayers could invest in a myriad of limited partnership interests or other passive activities, most of which generated losses that the investors would deduct on their personal returns.

The passive activity rules prevented such deductions, causing many taxpayers to search for PIG’s (passive income generators). Those looking for PIG’s need to be cautious as to the type of investment they are buying. For instance, your broker might try to sell you an interest in a publicly traded partnership (PTP). However, these types of partnerships have their own set of rules, and might not be the PIG you were hoping for.

Rentals are another form of passive activity. Ordinary rental income or loss is passive by definition. Even if you are active in a rental activity, the net income or loss is still considered passive (assuming you are not a real estate professional). However, if certain conditions are met, a landlord can deduct up to $25,000 of rental loss on his or her return, even if there is no other passive income. Since net rental income is considered passive income, non-rental passive losses can be used to offset the income.

Any PAL limited by passive activity income is not lost but carried forward indefinitely, usually until the property is sold. In the year of sale, you can deduct the suspended loss, up to the amount of your basis in the activity.

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

This week’s author….Norman S. Hicks, CPA

…until next week.

Tax Tip of the Week | No. 434 | Tax Depreciation – Section 179 November 22, 2017

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Tax Tip of the Week | Nov 22, 2017 | No. 434 | Tax Depreciation – Section 179
As the end of the year draws near, many taxpayers are thinking about tax planning. One of the tax planning strategies often used is the Section 179 deduction (accelerated depreciation).

This deduction allows new or used qualifying property to be expensed in the year of purchase, rather than be depreciated over the life of the asset. The maximum cost of such property under Section 179 that may be expensed in 2017 is $510,000.

There are two primary limitations which may reduce the amount of the Section 179 deduction allowed. The first is related to the total cost of Section 179 property purchased during the year. For every dollar of qualifying property purchased over $2,030,000 in 2017, the Section 179 deduction is reduced by one dollar (but not below zero).

The second limitation is the business income limitation. The business must have taxable income to take any Section 179 deduction, and the deduction cannot be used to create an overall business loss. Form W-2 is considered business income for this calculation. For example, if you are a Schedule C filer, and also have a W-2 from a different source, the W-2 income and the business income or loss is combined for the overall limitation on the taxpayer’s Form 1040. Any Section 179 unused because of the income limitation may be carried forward indefinitely. However, no carryover exists if asset additions exceed the qualifying property threshold. This situation could occur if a taxpayer has Section 179 deductions from multiple pass-through entities.

The expensing election is an annual election, and can only be used on assets placed in service during the current year. The asset must also be used more than 50% in the business. If business use drops below 50% in a future year, any Section 179 depreciation that was taken in the year of purchase must be recaptured (reported as income) in the year business use drops below 50%. Also, please note that assets purchased from a related party do not qualify for the Section 179 expensing election.

Some examples of qualifying property include furniture, machinery and equipment, certain vehicles (within limitations), tractors and single-purpose agricultural structures.

Non-qualifying property includes:  land, docks, elevators, landscaping, and swimming pools.

The Section 179 deduction is a great tax planning tool for small to medium-sized businesses. The decision to use this deduction may be made with your tax return simply by claiming the deduction on Form 4562, Depreciation and Amortization. No separate election statement is required. Please keep in mind that your cost basis in the asset(s) will be reduced by the Section 179 deduction and will increase the gain upon a subsequent sale.

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

This week’s author….Norman S. Hicks, CPA

…until next week.