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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. 426 | Birth Dates You Need to Know September 27, 2017

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Tax Tip of the Week | Sept 27, 2017 | No. 426 | Birth Dates You Need to Know

Many of the tax rules for individual taxpayers depend on age.  Attaining a birthday may entitle an individual to a special tax break or end entitlement to another. It should be noted that some apply on the date of the birthday, some rules apply when the birthday is achieved at the end of the year, and some apply with respect to a half-year birthday. Following are some of the major birthdays you need to know:

1 day:  If a child is born on December 31, the child is considered a dependent of his or her parents for the entire year.

If you are legally married on December 31, you are considered married for the entire year.  Likewise, if you are divorced on December 31, you are considered single for the entire year.

Age 13:  The dependent care credit (Daycare credit) can be claimed until the child reaches his or her 13th birthday.

Age 17:  A tax credit up to $1,000 can be claimed for a child under age 17.  You lose the credit the year the child turns 17—the credit is not prorated.

Ages 19 and 24:   A child is considered a “qualified child” and can be claimed as a dependent on the parent’s return until the child turns 19, or turns 24 if he or she is a full-time college student.

However, a parent can still claim a dependency exemption for a child as a “qualified relative” after age 19 or 24 if certain conditions are met.  For example, if a parent supports a child who is 32 years old and lives in the parent’s home and earns less than $4,050 (in 2017), then the parent can claim the dependency exemption.  Certain other factors must also be considered.

If a child has unearned income (investment income) the “Kiddie Tax” rules also apply under ages 19 or 24.

Age 26:  Under the Affordable Care Act, a child can remain on his or her parent’s health insurance policy until the age of 26.  This is true even if the child cannot be claimed as a dependent or even lives with the parent.

Age 50:  When you turn 50 you can make “catch-up” contributions to qualified retirement plans such as 401(k)s, SIMPLE IRAs and Traditional and Roth IRAs.  For 2017, the additional contributions are $6,000 for 401(k)s, $3,000 for SIMPLE IRAs and $1,000 for IRAs.

Age 55:  The 10% early distribution penalty on distributions from qualified retirement plans and IRAs prior to age 59.5 do not apply if the distributions are made because of a separation of service from the employer.

You can also make a $1,000 additional “catch-up” contribution to an HSA account once you reach age 55.

Age 59.5:  The 10% early distribution penalty on withdrawals from qualified retirement plans and IRAs do not apply after attaining age 59.5.

Age 65:  Taxpayers who use the standard deduction vs. itemized deductions can claim additional deductions the year they turn 65.  For 2017, the additional standard deduction is $1,550 for single filers and $1,250 for each spouse at age 65 on joint returns.

Age 65 is also the age when distributions from HSAs can be taken without penalty for non-medical expenses.  However, such non-medical distributions are still subject to income tax.

Age 70.5:  The year you turn age 70.5 is when you must start taking Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs.  (A full discussion of RMD rules goes beyond the scope of this Tax Tip)

Please Note:  This is a very simplified discussion of age-based tax rules and should not be relied upon without consulting with our office.

Happy Birthday!

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. 424 | Tax-Free Income September 13, 2017

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Tax Tip of the Week | Sept 13, 2017 | No. 424 | Tax-Free Income

Yes, that’s correct, there are some forms of income you receive that may be tax-free. Here is a list of eight common sources of tax-free income.

1.    Gifts. Gifts you receive are not taxable income to you. In fact, they are not subject to gift tax to the person giving the gift as long as the gifts received in one year from one person do not exceed $14,000.  As always, the “giver” is responsible for filing any gift tax returns, not the recipient.

2.   Rental income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported. Homeowners often can earn some tax-free income by renting out a home while a large sporting event (Superbowl or a golf event) is in town.

3.   Child’s income. Up to the standard deduction amount ($6,350 in 2017) in earned income (wages) and $1,050 in unearned income (interest) for children is not taxed. Excess earnings above these amounts could be taxed and $2,100 in unearned income is taxed at the parent’s higher tax rate.

4.    Roth IRA earnings. As long as you meet this retirement account type’s rules, earnings in a Roth IRA are not taxed.

5.   Child support revenue. Income you receive as child support is not deemed to be taxable income. On the other hand alimony received is taxable income.

6.  Home sales gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable.

7.  Scholarships/fellowships. Money received to cover tuition, fees, and books for degree candidates is generally not taxable.

8.  Refunds. Federal refunds (technically you’ve already accounted for this income) and most state refunds for non-itemizers are also tax-free.

This is by no means a complete list of tax-free income, but it’s nice to know that some areas of tax law still benefit taxpayers.

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. 422 | Entity Choices For Businesses August 30, 2017

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Tax Tip of the Week | Aug 30, 2017 | No. 422 | Entity Choices For Businesses

A sound foundation is critical for any business. Part of that good foundation is choosing the proper entity. Too often this important piece is overlooked or even just ignored which can cause significant problems down the road.

The proper entity choice affects many financial and legal aspects of your business. These considerations will affect the amount of your income taxes, both now and in the future for your business along with your personal income taxes.

This decision also affects how owners (sole proprietorships, members, shareholders or partners) are paid. Various payment methods for the owners may include dividends, guaranteed payments, reimbursements, wages, subcontractor payments and distributions – all of which may be taxed differently.

In today’s litigious times, asset protection is a critical factor as well. Different entities have different degrees of asset protection. For many businesses asset protection may be the most important consideration.

Some of the typical entity choices include:

1.  Sole proprietor – default entity when no selection is made

2.  LLC (Limited Liability Company)

3.  Corporations:
a. S Corporation
b. C Corporation

4.  Partnerships:
a. General Partnership
b. Limited Partnership
c. Family Partnership

Each type of entity has its own pros and cons. No one size fits all. One must work through the features of each to determine the proper fit.

As your business evolves, please remember further evaluation of your business entity choice is needed.

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. 421 | The Most Overlooked Business Deduction August 23, 2017

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Tax Tip of the Week | Aug 23, 2017 | No. 421 | The Most Overlooked Business Deduction

Way back in 2004 Congress added a new Internal Revenue Code Section that allows a deduction to businesses just for operating a business. There is no requirement to buy anything, there is no requirement to spend anything, and there is no requirement to borrow anything. This deduction is available to sole proprietors, farmers, LLC’s, S corporations and C Corporations, and is available just for “doing what you are doing”. Yes, it is a true made-up deduction, just like non-cash charity deductions, only this one is legal! We call this deduction the Domestic Production Activities Deduction (DPAD), but the IRS calls it the manufacturer’s and producer’s deduction.

The deduction is 9% of the lesser of net income or qualified production income (the deduction is limited to 50% of wages). So nearly any business with qualified production income is able to take an additional 9% deduction just for producing a product. This means that a farmer gets a 9% of net income deduction without spending any more money. It means machine shop clients, builders, developers, manufacturers, print shop operators and many more business owners will get this deduction as well.

The deduction is aimed at companies that produce a tangible product in the United States, and that employ workers to do so. And yes, it is 9% of the profit! The owner that qualifies and makes $100,000 will only pay tax on $91,000 if you remember this deduction.

The deduction is taken on IRS Form 8903, which has been unchanged for many years. It is taken directly on the applicable schedule C or F, or as a flow through item on a K-1 for partnerships, LLCs and S corporations.

The deduction is available to taxpayers whose activities are the manufacture, production or growth of items they sell, which include:

•    The sale of tangible personal property
•    The sale of computer software (but not online services)
•    The sale of recordings, books, tapes, CD’s and DVD’s
•    Business interruption proceeds and payments not to produce
•    Farming, raising animals and fishing
•    Printing (including advertising sales in printed publications)
•    Most new construction and renovation.

Activities that do not qualify for the deduction include most service businesses and most grocery stores and restaurants unless the restaurant packages and sells products that it produced itself.

If you own a business, give us a call to make sure you are not missing out on this important deduction.

An upcoming event that would qualify for a personal charitable deduction would be attending the STEMM Charity Gala presented by the Dayton Defense Education Foundation. The Gala takes place on 9/23/17, more information and event registration can be found by clicking the link below:

http://www.daytondefense.org/home/events.html#id=146&cid=667&wid=401&type=Cal

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. 419 | You Make The Call – Head of Household August 9, 2017

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Tax Tip of the Week | Aug 9, 2017 | No. 419 | You Make The Call – Head of Household

You Make the Call is a monthly format of questions and answers our office faces on a daily basis.  We hope you will find these tips to be a quick and fun read.

QUESTION: The taxpayer’s mother lives in her home and she has provided care for her for several years. Her mother’s only income is from social security. The taxpayer pays over half of the living expenses for her mother, therefore she is her dependent. If her mother dies in January, can the taxpayer still claim head of household in the year of death?

ANSWER: Yes, as long as the taxpayer is eligible to claim her mother as a dependent. For head of household purposes, “The taxpayer and such other person must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as a head of household if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year”. There is a similar explanation for dependency purposes that states, “The fact that the dependent dies during the year shall not deprive the taxpayer of the deduction if the dependent lived in the household for the entire part of the year preceding his death.”

Please note that the question and answer provided does not take into account all options or circumstances possible.  Call us if you find yourself in a similar situation.

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. 417 | Five Home Office Deduction Mistakes July 26, 2017

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Tax Tip of the Week | July 26, 2017 | No. 417 | Five Home Office Deduction Mistakes

Here are five common mistakes of those who deduct home office expenses.

1. Not taking it. Some believe the home office deduction is too complicated, while others believe taking the deduction increases your chance of being audited.

2. Not exclusive or regular. The space you use must be used exclusively and regularly for your business.

• Exclusively: Your home office cannot be used for another purpose.

• Regularly: It should be the primary place for conducting regular business activities, such as recordkeeping and ordering.

3. Mixing up your other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can only use a home office deduction as an employee if your employer doesn’t provide you with a local office.

4. The recapture problem. When selling your home you will need to account for any home office depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.

5. Not getting help. The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

As always it is a good idea to call before considering any deductions.

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. 416 | Reap the Benefits of Hiring Your Child for the Summer July 19, 2017

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

Tax Tip of the Week | July 19, 2017 | No. 416 | Reap the Benefits of Hiring Your Child for the Summer

Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain real-life experience in the workplace, and learn what you do every day. And you will reap a few tax benefits in the process. The following guidelines will help you determine if the arrangement will work in your situation.

• Make sure your child works a real job that he or she can reasonably handle, no matter how basic or simple. Consider tasks like office filing, packing orders, or customer service.

• Treat your child like any other employee. Expect regular hours and appropriate behavior. If you are lenient with your child, you risk upsetting other employees.

• To avoid questions from the IRS, make sure the pay is reasonable for the duties performed. It’s not a bad idea to prepare a written job description for your files. Include a W-2 at year-end.

• Record hours worked just as you would for any employee. If possible, pay your child using the normal payroll system and procedures your other employees use.

• Hiring your children works best if you are a sole proprietor. It has additional tax benefits not  available if your business is organized as a C corporation or an S corporation.

If you have questions, give us a call. Together we can determine if hiring your child is the right course of action for your business and family.

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.