jump to navigation

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. 424 | Tax-Free Income September 13, 2017

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

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

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

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

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

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

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

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.

Tax Tip of the Week | No. 414 | You Make The Call – EITC July 5, 2017

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

Tax Tip of the Week | July 5, 2017 | No. 414 | You Make The Call – EITC

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: Jamie and Claire are married and have total earned income of $40,000. They have a daughter, Bree, age 22 who graduated from college in May. After graduation, Bree moved back home with her parents and worked. She lived at home from June until December and earned $22,000.

Jamie and Claire would like to know if they are still eligible for the earned income tax credit (EITC) using Bree as a qualifying child for EITC purposes, and Bree would like to know if she may claim her own exemption when preparing her tax return this year.

ANSWER: Yes and yes. Under the qualifying child rules for purposes of dependency, Bree meets all the requirements except for support. Because she earns $22,000, she provides more than half of her own support. Therefore, Jamie and Claire may not claim her as a dependent. However, for EITC purposes because all the dependency tests are met, except for support, she is still a qualifying child for EITC. Therefore, Jamie and Claire may still receive EITC using Bree as a qualifying child for EITC purposes.

Additionally, because Bree is no longer a qualifying child for dependency purposes, she may claim her own exemption when she files her return.

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. 413 | Learning From Prince’s $250 Million Mistake June 28, 2017

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

Tax Tip of the Week | June 28, 2017 | No. 413 | Learning From Prince’s $250 Million Mistake

Finally, over a year after the date of his death, a judge confirmed Prince’s six siblings to be his rightful heirs – after more than 45 people had come forward claiming to be his wife, children, siblings or other relatives.

Last year, the legendary musician passed away, leaving behind not only a legacy of unparalleled music, but also a $250 million fortune – with no will or estate plan to be found. With the long-anticipated announcement that his siblings will inherit his fortune, we’re reminded again of the importance of planning ahead and hiring trusted experts to carry out your wishes.

Whether you have people clamoring after your money or not, it’s important to consider hiring an expert to sort through the, at times, very complicated process of estate planning. There are DIY websites and software packages that may seem attractive (and cheap!), but more often than not, you get what you pay for. More complicated life situations, such as children from a prior marriage, children with special needs, or capital gains from property appreciation, require the hands-on insight of an expert.

It is important to have an unbiased third party look over your documents. Even U.S. Supreme Court Chief Justice Warren E. Burger, who died in 1995, should have relied on estate planning experts to prepare his estate plan – but instead he took it upon himself, and his family paid over $450,000 in taxes because of his errors.

To be better prepared than Prince and Chief Justice Burger, seek out the assistance of an attorney or a CPA to draft a will and do estate planning, respectively. An attorney will help you navigate a will, and a CPA is best positioned to help with more complicated estate planning.

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

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

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

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

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.