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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

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

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. 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

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

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. 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. 410 | You Make The Call – Home Basis June 7, 2017

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

Tax Tip of the Week | June 7, 2017 | No. 410 | You Make The Call – Home Basis

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: Albert walks into our office and tells us that he bought a house from his parents. The house is worth $350,000, but his parents only made him pay $200,000. His parents paid $100,000 for this house a few years ago. After making several improvements, their adjusted basis in the home was $150,000 when they sold it to Albert. He did not assume any mortgages on the home. What is Albert’s basis in the home?

ANSWER: This is a part gift, part sale. Albert’s parents sold it for $200,000, and they gave him a gift of $150,000 ($350,000 FMV (fair market value) less $200,000 sales price). In a part gift, part sale, Albert’s basis is the greater of the amount he paid for it ($200,000), or his parent’s adjusted basis in the home ($150,000) at the time of transfer. Thus, his basis is $200,000.

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. 402 | Filing for an Extension April 12, 2017

Posted by bradstreetblogger in : Tax Deadlines, Tax Planning Tips, Tax Preparation, Taxes, Uncategorized , add a comment

Tax Tip of the Week | April 12, 2017 | No. 402 | Filing for an Extension

If you haven’t filed your tax return by now, you should probably consider filing for an extension. It is a lot easier to file for an extension than it is to amend a return later for a mistake you made trying to rush your return to completion. Even more costly is if the IRS finds a mistake you made and assesses underpayment penalties and interest.

To file for an extension, you simply need to submit Form 4868. After submitting this form, you now have until October 16, 2017 to timely file your return.  Note, however, an extension of time to file is not an extension of time to pay.  If you suspect you will owe some taxes, you must send a payment along with the extension.  This is true for your federal, state and city returns.

Ohio will automatically accept the federal extension. Some cities, however, require a special city extension form. Also, some cities will not allow extensions if you only have W2 income.  Be sure to check with your work and/or resident cities before April 15th.

Another reason to file for extension is that some speculate your chances for an audit decreases for extended returns. How?  One of the methods the IRS uses to select a return for audit is to select a random sample of returns filed by April 17th.   If your return is not in that sample—then you don’t get picked!

Editor’s Note:  One of the pledges I make to all my clients is that my personal return will be the last one filed each year. When my most procrastinating client’s return is filed on October 16th —-mine is right behind it!  And has been that way for nearly 20 years!

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. 399 | Five Things to Know About Substantiating Donations March 22, 2017

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

Tax Tip of the Week | March 22, 2017 | No. 399 | Five Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.

No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:

1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.

2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.

3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a cancelled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.

Special Note About Cash Donations to Churches, Synagogues, etc.:  We continue to see some religious groups simply issue a statement to parishioners showing the annual amount of contributions given.  There have been many court cases showing some very specific language must be included on the receipt for the donation to be classified as a deductible donation if audited.  The statement must include some language like the following: “You did not receive any goods or services in connection with these contributions other than intangible religious benefits.”

Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged items or service. You can deduct only the difference between the amount donated and the value of the item or service.

4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgement also must include a description of the item.

5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgement and a qualified appraisal are required—unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.

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

…until next week.

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

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

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

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

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

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

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

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

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

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

…until next week.

Tax Tip of the Week | No. 367 | How Are LLC Members Taxed? March 8, 2017

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Tax Tip of the Week | March 8, 2017 | No. 397 | How Are LLC Members Taxed?

There are many issues surrounding the issue of Self-Employment (SE) tax liability for LLC members.  As you will read, we have been waiting on final regulations for 20 years!

Question: Is a limited partner (or LLC member who is not a managing member) subject to self-employment taxes on the trade or business income from the partnership?

Answer: It depends. The tax code [Section 1402(a)(13)] excludes the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in the code [§707(c)] to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

In 1997, proposed regulations define a limited partner, which includes similarly situated LLC members. Prop. Reg. §1.1402-2(h)(2) states that an individual is treated as a limited partner, and therefore won’t be subject to SE tax, unless he or she does any one of the following:

1.    Has personal liability as defined in Reg. §301.7701-3(b)(2)(ii) for the debts of or claims against the partnership by reason of being a partner.
2.    Has authority under the law of the jurisdiction in which the partnership is formed to contract on behalf of the partnership.
3.    Participates in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year.

Furthermore, a service partner in a service partnership may not be a limited partner. A partner is not considered to be a service partner if that partner only provides a de minimis amount of services to or on behalf of the partnership. A service partnership is a partnership that substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting [Prop. Reg. §1.1402-2(h)(5) and (6)].

There was opposition to these proposed regulations in the Taxpayer Relief Act of 1997. Congress provided that the IRS cannot issue any final or temporary regulations in this area until July 1, 1998. The IRS and Congress still have not issued any further guidance. However, taxpayers following these proposed regulations can use them as substantial authority in the case they are questioned by the IRS.

Confused?  Give us a call and we’ll figure it out! 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.