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Tax Tip of the Week | No. 451 | Tax Considerations of a Reverse Mortgage March 14, 2018

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Tax Tip of the Week | March 14, 2018 | No. 451 | Tax Considerations of a Reverse Mortgage

Definition – a reverse home mortgage is a loan. Although, not a conventional one. In the case of a reverse home mortgage, the lender pays you while you still live in your home and hold title. In general, your reverse mortgage becomes due along with the interest when you move, sell your home, reach the end of a pre-determined loan period, or pass away.

Since reverse mortgages constitute a loan advance, they are not considered taxable income. Most individuals use the cash basis method of accounting, so any loan interest accrued is not deductible until paid. Often, this is when the reverse home mortgage loan is paid in full.This interest deduction may be limited because a reverse mortgage loan is generally subject to the limit on home equity debt.

Prior law: Home equity debt is any debt (other than acquisition debt) secured by a home mortgage. The amount of deductible interest may only be on the debt that does not exceed your home’s fair market value, decreased by any acquisition debt. In addition, if you are not using your reverse mortgage loan proceeds to improve your home, the amount that you can treat as home equity debt may not exceed $100,000 or $50,000, if married filing separately. Any equity interest as the result of the loan being over these limits is typically treated as personal interest which is nondeductible. Some notable exceptions include interest from loan proceeds used for investment and/or business purposes.

New law:  Whether your home equity loan is considered acquisition indebtedness or home equity indebtedness may determine if this interest will continue to be deductible in 2018 and forward. However, further IRS guidance is necessary as to how the new tax law will be applied in the real world. Some tax professionals feel that all home equity interest will be disallowed while others take the position that home equity interest from acquisition indebtedness will continue to be eligible for a tax deduction in 2018. Stay tuned for further developments.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached 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. 450 | Tax Basis of Inherited Property March 7, 2018

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

Tax Tip of the Week | March 7, 2018 | No. 450 | Tax Basis of Inherited Property

Short of selling an asset or a property at a break even, you will have a gain or a loss. This gain or loss is calculated by subtracting your tax basis in the asset from the sales price. Often, determining the amount of the sales price is not that difficult. On the other hand, calculating your tax basis may be quite complex. Your tax basis has a direct impact on your gain or loss. Therefore, arriving at an accurate amount for your tax basis is crucial.

For property inherited from an individual who died before or after 2010, your tax basis is generally one of the below:

(1) The fair market value of the property as of the date of the deceased individual’s death.

(2) The fair market value of the property on the alternate valuation date if the estate chooses to use the alternate valuation method. Several factors play in making what may be a big decision.

(3) The value under the special-use valuation method for real property used in farming or a closely held business. Election of this method may have far reaching implications.

(4) If a federal estate tax return need not be filed, the property’s appraised value at the date of death for state inheritance purposes.

Note: If you received appreciated property from the deceased individual and you or your spouse originally gave the property to that individual within one year before the individual’s death, your basis in this property is the same as the deceased individual’s adjusted basis in the property immediately before his or her death, rather than its fair market value.

Generally, if you and the deceased owned the property as joint tenants with right of survivorship, your basis in the property is determined based on (1) the proportionate amount you contributed to the original purchase price, and (2) for depreciable property, the way you were allocated income from the property.

If spouses held an interest in property as either (1) tenants by the entirety, or (2) joint tenants with right of survivorship where the spouses were the only joint tenants, then the surviving spouse’s basis in the property is the cost of the survivor’s half of the property with certain adjustments. The cost must be reduced by any deductions allowed to the surviving spouse for depreciation and depletion. The reduced cost must then be increased by the survivor’s basis in the half inherited.

If you inherited the property from an individual who died in 2010, your basis in the property depends on whether the executor of the deceased individual’s estate made a so-called Section 1022 election. If the executor did not make a Code Sec. 1022 election, your basis in the inherited property is determined under the rules described above. If the executor did make a Section 1022 election, the basis of property you acquired from the deceased individual generally is determined under modified carryover basis rules and not under the rules described above. Generally, the recipient’s basis is the lesser of the decedent’s adjusted basis or the fair market value at the date of the decedent’s death, increased by any allocation of “Basis Increase” (with certain additional adjustments).

Finally, the basis of certain property acquired from a decedent may not exceed the value of that property as finally determined for federal estate tax purposes, or if not finally determined, the value of that property as reported on Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent.

As you can see from above, there are many considerations in computing the basis of inherited property. Too often, the critical pieces of this puzzle are no longer available or require a visit to the courthouse at best to review old property and estate records. It is wise to never discard the estate paperwork of anyone from which you have inherited assets or expect to inherit assets. These may be very important to you many, many years down the road.

Thank you for all of your questions, comments and suggestions for future topics. They are all much appreciated. We may be reached 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. 449 | New Tax Law (TCJA) Restricts Like-Kind Exchange Rules for Non-Real Estate Property (Ouch!) February 28, 2018

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Tax Tip of the Week | Feb 28, 2018 | No. 449 | New Tax Law (TCJA) Restricts Like-Kind Exchange Rules for Non-Real Estate Property (Ouch!)

In a like-kind exchange, a taxpayer generally does not recognize a taxable gain or loss on an exchange of like-kind properties provided both the relinquished property and the replacement property are held for productive use in a business or for investment purposes, and no cash(boot) is received in the exchange. For those exchanges completed after Dec. 31, 2017, the TCJA limits tax-free exchanges to exchanges of real property that is not held primarily for sale. Therefore, as previously allowed, exchanges of personal property and intangible property can no longer qualify as tax-free like-kind exchanges.

On the surface, you may think losing like-kind exchanges for personal and intangible property is not a big deal since we can instead use IRC Sections 168 and/or 179 to write-off the new or used equipment placed in service. This reasoning may be valid. BUT, what about those situations where some equipment or machinery is sold without buying a replacement? Under the new tax law, this scenario will cost you tax dollars since you most likely will have a gain on the sale. This is especially true if Sections 168 and/or 179 had been used on the asset sold.  In fact, the entire gain may all be taxable in the year of sale since your tax basis is zero.

Make your CPA aware of any significant asset sales during the year, especially the sale of any equipment or machinery for which a replacement won’t be purchased in the same tax year (of an equal or greater value). Otherwise, you may be in for an unpleasant surprise.

Thank you for all of your questions, comments and suggestions for future topics. We may be reached 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. 447 | New Tax Law (TCJA) – Rules Significantly Eased for Code Section 168 & 179 February 14, 2018

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

Tax Tip of the Week | Feb 14, 2018 | No. 447 | New Tax Law (TCJA) – Rules Significantly Eased for Code Section 168 & 179

Good news for business owners!

The Tax Cuts and Jobs Act (TCJA) has very favorably changed the tax rules for “accelerated” tax depreciation expense under IRC Sections 168 and 179.

Prior Law:  Section 168 (bonus depreciation) – taxpayers were allowed to deduct 50% of the cost of most new tangible property other than buildings (with a few exceptions). This “50% bonus depreciation” was scheduled to be reduced to 40% for property placed in service in calendar year 2018, 40% in 2019 and 0% in 2020 and thereafter.

New Law:  For property placed in service and acquired after Sept. 27, 2017, the TCJA has raised the 50% rate to 100%.

Also, perhaps, even more importantly, under the TCJA the post-Sept. 27, 2017 property eligible for bonus depreciation may be new or used.

Prior Law:  Section 179 expensing – taxpayers could elect to deduct the entire cost of Section 179 property up to an annual limit of $510,000. For qualifying assets placed in service in tax years that begin in 2018, the adjusted limit was $520,000. This annual limit was reduced by one dollar for every dollar that the cost of all Section 179 property placed in service during the tax year exceeded a $2,030,000 threshold. For those assets placed in service in tax years that begin in 2018, the threshold was to be $2,070,000.

New Law:  The TCJA ratcheted up the annual dollar limit for expensing to $1 million and $2,500,000 as the new phase down threshold.

The new definition of qualifying property has been expanded for both Sections 168 and 179. More favorable depreciation lives were also made available, meaning faster tax write-offs.

Vehicles.  The TCJA triples the annual dollar caps on depreciation (and the Code Sec. 179 vehicle expensing) of passenger automobiles and small vans and trucks. Also, because of the extension in bonus depreciation, the increase for vehicles allowed bonus depreciation of $8,000 in the other-wise-applicable first year cap is extended through 2026 (with no phase-down).

Farm property.  More good news!  For items placed in service after 2017, the TCJA reduces the depreciation period for most farm equipment from seven years to five. It also allows many types of farm property to be depreciated under the 200% (instead of 150%) declining balance method.

Thank you for all of your questions, comments and suggestions for future topics. We may be reached 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. 444 | New Tax Law – 20% Pass-through Business Deduction January 24, 2018

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

Tax Tip of the Week | Jan 24, 2018 | No. 444 | New Tax Law – 20% Pass-through Business Deduction

For tax years beginning in 2018 and before 2026, the new 20% deduction is generally allowed by individuals, estates and trusts that have interests in pass-through business entities. These entities are sole proprietorships, partnerships, S corporations and limited liability companies (LLCs) and their income passes through and is taxed by another entity (generally taxed on your personal income tax return – Form 1040). This deduction will typically equal 20% of the qualified business income (QBI) provided personal taxable income is less than a threshold of $157,500 or, if married filing jointly, $315,000. Further limitations apply provided personal taxable income is in excess of these thresholds. Please note the QBI deduction isn’t allowed in calculating adjusted gross income (AGI), but it does reduce your overall taxable income. For all intents and purposes, QBI is treated as an itemized deduction.

QBI is income, gains, deductions and losses that are connected with a U.S. business. Some investment items, reasonable compensation to an owner or any guaranteed payments to a partner or LLC member are not considered QBI.

Limitations

For pass-through entities aside from sole proprietorships that exceed the above thresholds, the QBI deduction generally can’t exceed the greater of the owner’s share of:

•    50% of W-2 wages paid to employees by the qualified business during the tax year; or
•    The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

Qualified property is the depreciable tangible property (including real estate) owned as of year-end and used by the business during the year for the production of qualified business income.

Another limitation is that the QBI deduction usually isn’t applicable for income from certain service businesses. These include businesses that involve investment-type services and most professional practices (exceptions are engineering and architecture).

Please note that other rules and limitations are applicable to the QBI deduction.

These rules are complex and will require careful planning to optimize any benefits.

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. 443 | New Tax Law Changes – Businesses January 17, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Preparation, Tax Tip, Taxes, Uncategorized , 1 comment so far

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

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

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. 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.