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Tax Tip of the Week | 5 Ways to Fail a Sales Tax Audit March 20, 2019

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

IRS audits are horrible! Sales tax audits are worse. In some areas, a sales tax auditor has more legal authority than an IRS agent. Yes, that is scary! Some businesses think that it is not a big deal failing to collect sales tax from a “favorite” customer since the customer would be liable anyway in an audit. It is not that easy – the sales tax agent collects this shortfall from whoever they are auditing. You might be paying the sales tax for your “favorite” customer. Good luck trying to get those dollars back from them.

The article below is advertising from an Avalara blog. I do not know anything about Avalara other than this tongue in cheek article which makes a lot of sense at least from my experience over the years.
                                                      By Mark Bradstreet

 FROM THE AVALARA BLOG JANUARY 23, 2019

 “All businesses relish a good sales tax audit. After all, what’s not to like? And did you know it’s possible to spend more time, money, and resources than absolutely necessary during an audit? It’s true. Simply follow the five tips below and you’ll dramatically increase your chances of having to pay those coveted audit penalties. 

[From the Avalara blog.]

1. Give the auditor a hard time

Spare no inconvenience. Send the auditor on coffee runs. Set the auditor up in your most cramped and unappealing space then make the auditor sort through the messiest records. First impressions matter when it comes to audits, so make yours a terrible one. The harder the experience for the auditor, the more likely that auditor will help you spend more money, resources, and time.

2. Assume you don’t need to collect tax

This is a high-risk move. If you have nexus in a state, you’re required to collect and remit sales tax; and while nexus used to refer primarily to some sort of physical presence, that’s no longer the case.

On June 21, 2018, the Supreme Court of the United States ruled physical presence is not a requisite for sales tax collection. Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, or economic nexus. That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.

If you want to ensure you run afoul of auditors, just keep on not collecting in states where you make significant sales: Tax authorities are looking for you; they’ll likely find you.

3. Put your exemption certificates in a box in the warehouse

This gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records needed, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire, or vermin.

If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge — plus bonus penalties and interest.

4. Keep incorrect records

You want to fail a sales tax audit? Make sure your records don’t match your bank accounts. If you have more or less money in your account than shows up on your sales tax records, you’re begging for an audit penalty.

If incorrect records are too blatant for your taste, strive for incomplete records. Don’t stress about recording every cent of sales tax charged to your customers. Scribble sales tax records down on a sheet of paper so you’ll never know where to find them when you need them. The auditor will linger as long as there’s a clear discrepancy between how much you collect and how much you record.

5. Pay less than you owe

This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. Paying less sales tax than what your business owes will substantiate incorrect record-keeping, shoddy certificate storage, and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities for error that await when you manually manage the following:

•    State and local jurisdiction rate changes
•    Filing methods and schedules for each taxing jurisdiction
•    Changing product taxability rules

But seriously

We know you don’t actually want to waste time, money, and resources. So, hopefully these tips give you some ideas of what not to do.

The right technology can turn sales tax management from painful and risky to easy and more accurate. Avalara’s suite of solutions can reduce your risk by automating calculations, certificate management, timely filing, and easy-to-access reports.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Five Things to Know About Proposed Tweaks to the Retirement Systems March 13, 2019

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

The following article, by Anne Tergesen (WSJ), discusses possible revisions to the USA retirement system. These “proposed tweaks” may never happen or if they do, the changes will most likely be different than what follows. When I first began in taxes, an elderly tax practitioner told me to stop worrying about the future tax law changes and to make my decisions based upon the current law. For more often than not, I thought that was good advice. But that is not to say, we should bury our heads in the sand and not consider the provisions that Congress is working on.

-Mark Bradstreet

“In addition to giving annuities a greater role in 401(k) plans as part of its proposals to tweak the U.S. retirement system, Congress is considering provisions that could serve to expand workers’ access to retirement-savings plans and make it easier for savers to tap their accounts in case of emergencies. Here are five changes Americans could see in their 401(k) plans and individual retirement accounts.

(1)     A New Item on 401(k) Disclosures
Currently, 401(k) plans are required to send participants quarterly and annual account statements with their balance. Under the proposed legislation, plan sponsors would have to show an estimate of the monthly income a participant’s balance could generate with an annuity, a detail akin to the payoff disclosures required on credit-card statements. The goal is to help workers better understand how prepared they are to maintain their income in retirement.

(2) A Repeal of the Age Limit on IRA Contributions
If you are 70 ½ or older, you can’t currently make deductible contributions to a traditional IRA. Congress is considering removing the age cap and allowing people above 70 ½ or older to deposit up to $6,500 a year in either a traditional IRA or a Roth IRA. With a traditional IRA, account holder’s generally get to subtract their contributions from their income but they must pay ordinary income taxes on the money when they withdraw it – something they are required to do starting at age 70 ½ (the bill would do nothing to change that). With a Roth IRA, there is no upfront tax deduction but the money increases tax-free.

(3) More Types of Savings Accounts
Among the proposals under consideration is a new type of universal savings account that would offer more-flexible withdrawal rules than existing retirement accounts, according to Rep. Kenny Marchant (R, Texas) Employers could also be allowed to automatically enroll workers into emergency savings accounts. (Employees would be free to opt out.)

(4)  More Ways for Graduate Students to Fund IRAs
The bill would allow students to contribute taxable stipend or fellowship payments to an IRA, something that’s not currently possible.

(5)  Pooled 401(k) Plans
For years policy makers have tried to make retirement-savings plans more attractive and affordable to small businesses, many of which have no plan at all. About one-half of private-sector employees, many of whom work for small companies, lack access to a workplace retirement plan. Under one measure before Congress, small employers would be able to more easily band together to spread out the administrative costs of 401(k) plans. The proposal would eliminate a requirement that employers have a connection, such as being members of the same industry trade group, in order to join a so-called multiple-employer plan. Congress is also considering expanding a tax credit available to small companies to offset the costs of starting a new retirement plan. The annual credit amount would increase from $500 to as much as $5,000 for three years.”

Credit given to Anne Tergesen, WSJ
Saturday/Sunday July 21-22, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA
–until next week.

Tax Tip of the Week | How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases) February 27, 2019

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

How The New 20% QBI Deduction (199A) May Apply to Rentals (particularly triple net leases)

As a refresher, the QBI deduction is available for the first time on your 2018 Form 1040. So, this is all new stuff for you and us (and the IRS). The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Yes, if you qualify – that may be a huge deduction for you. So, when it comes to the interpretation of 199A, there is a lot at stake for a lot of businesses.

Landlords have anxiously awaited further guidance in regards to Section 199A. There has been much speculation if, when and how the Section 199A would apply for them.  Finally, on Friday, January 18, 2019, the Treasury Department and the Internal Revenue Service issued final regulations on the implementation of the new qualified business income (QBI) deduction for rentals. Now we have to interpret their interpretation. And, only time will tell, whether this final interpretation is their last interpretation (probably not).

What follows is specifically about landlords and the applicability of 199A. For starters, let’s define “triple net lease.” This term often comes up in business conversations. Interestingly, not everyone has the same definition in mind. So, excerpts from the first article below define some different types of leases before moving into the second and last article which tends to revolve around “triple net leases.” Please keep in mind that his interpretation of the final 199A interpretation as well as some of his opinions may differ from ours. Many parts of the new tax law are still fuzzy, moving targets and this one is no exception.

By Mark Bradstreet

By Rob Blundred  – Commercial Sales Associate, Henkle Schueler and Associates
Aug 6, 2018

Net lease
The benefit of a net lease is that the landlord can charge a lower base rent price. However, along with the base rent the tenant is responsible for an “additional rent fee” which covers the operations and maintenance of the property. These costs can cover real estate taxes, property insurance and common area maintenance (CAM) items. The CAM fees cover the landlord costs for janitorial services, property management fees, sewer, water, trash, landscaping, parking lot, fire sprinklers, and any shared area or service.

There are several types of net leases:

•    Single net lease (N lease). In this lease, the tenant pays base rent plus their pro rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant). The landlord covers all other building expenses. The tenant also pays utilities and janitorial services.

•    Double net lease (NN lease). The tenant is responsible for base rent plus their pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.

•    Triple net lease (NNN lease). This is the most popular type of net lease for commercial freestanding buildings and retail space. The tenant pays all or part of the three “nets” – property taxes, insurance, and CAMS – on top of a base monthly rent.

Absolute triple net lease

The absolute triple net lease is an extreme form of an NNN lease where the tenant absorbs all of the real estate risk and responsibility. The tenant is ultimately responsible for all building-related expenses and repairs, including roof and structure.

Modified gross lease

The appeal of a modified gross lease is the tenant has one set amount to pay each month. In a modified gross lease, the base rent and “nets” (property taxes, insurance and CAMS) are all included in one lump sum payment; excluding utilities and janitorial services, which are typically covered by the tenant.
The benefit of a modified gross lease is their flexibility. They are generally an easier agreement to make between the landlord and tenant. The risk is if insurance, taxes or CAM increase or decrease the cost or savings is passed on to the landlord.

Why Is the IRS Punishing Triple Net Landlords?

Alan Gassman Contributor to Forbes Jan 26, 2019
Retirement  (writes about tax, estate and legal strategies and opportunities.)

“There are horrible people who, instead of solving a problem, tangle it up and make it harder to solve for anyone who wants to deal with it.

Whoever does not know how to hit the nail on the head should be asked not to hit it at all.”

– Friedrich Nietzche

While the IRS as a whole is by no means “horrible,” the new Final Regulations regarding Section 199A of the Internal Revenue Code must seem that way to landlords who lease property under triple net leases. The vast majority of these will not be considered to be “active trades or businesses” for purposes of qualifying for the 20% deduction that will be available to most active landlords.

Code Section 199A was introduced to the Internal Revenue Code as part of the 2017 Tax Cuts and Jobs Act with the intent of giving taxpayers some degree of parity with the 21% income tax bracket bestowed upon large and small companies that are taxed as separate entities (known to tax professionals as “C corporations.” C corporations are different than “S corporations,” as S corporations report their income under the “K-1” system that causes the shareholders to pay the income tax on their personal returns).

Since the term “trade or business” was not defined under Section 199A, the real estate community has been waiting for the Final Regulations which were released on Friday, January 18, and basically follow what the Proposed Regulations (released last August) said, which is that passive investors are not considered to be an active trade or business, even though they take significant economic risks and may work hard to verify that the tenants pay the taxes, insurances and maintenance of the leased property, comply with applicable law and otherwise do what tenants are supposed to do.

The practical result will be that landlords will need to become active and possibly renegotiate lease terms to have at least a chance of being eligible to have the deductions that other landlords will have, or to perhaps qualify under the new safe harbor rules that allow the deduction to non-triple net leases if they satisfy the 250 hour per year requirement, which requires tabulation of the work hours of landlords and agents of landlords, and certain time log and verification procedures.’

This seems very unfair since REIT (Real Estate Investment Trusts) income will often include triple net lease profits that will qualify for the Section 199A deduction, and C corporations only have to pay the 21% rate on net income from triple net leases.

Tax professionals, and masochists may enjoy or derive a better understanding by reading on.

The new Final Regulations refer to several Supreme Court cases to aide in defining what types of enterprises will qualify as a trade or business, and these cases do not bode well for landlords of triple net leases. For example, the Final Regulations cite to the Supreme Court’s 1987 landmark “trade or business” case, Commissioner v. Groetzinger, which held that to be engaged in a trade or business the following two requirements must be met:

1. The taxpayer’s involvement must be continuous and regular; and

2. The primary purpose of the activity must be for income or profit.

The very definition of a triple net lease seemingly disqualifies the majority of triple net landlords from qualifying under this definition under the assumption that they do not have continuous and regular involvement.

With triple net leases, the tenant is usually responsible for the three “nets”: real estate taxes, building insurance, and maintenance. By having the tenant be responsible for most of the on-site responsibilities, the landlord is able to spend more time and effort buying and selling other properties and therefore investing more into the economy.

In turn, triple net lease agreements usually benefit the tenant because the pricing of the agreement will reflect the fact that the tenant will be responsible for a lot of the on-site responsibilities. Now tenants have the upper hand when landlords ask to be allowed to provide at least 250 hours of services per year (cumulatively, as to all leases that the landlord will aggregate under the complicated aggregation rules, which are discussed in our blog post entitled Real Estate: Investing with Section 199A: Don’t Let Your Deductions Fly Out the Window).

The new Final Regulations do, however, contain one saving grace for taxpayers with triple net leases by quoting the 1941 Supreme Court case of Higgins v. Commissioner.

In Higgins the Supreme Court stated that the determination of “whether the activities of a taxpayer are ‘carrying on a business’ requires an examination of the facts in each case.” Since it is a factual determination, a taxpayer with the right facts can successfully argue that his or her triple net or almost triple net rental enterprise should constitute a qualified trade or business.

However, doing so will be a tough and expensive hurdle for many landlords to jump over.

Perhaps Congress will act in a compromise to assist the continued growth in the economy in recognizing that taxpayers with triple net leases put themselves at significant financial risk, in that tenants like Toys R Us and Sears may go bankrupt and leave a landlord high and dry after many months of eviction and then bankruptcy litigation. Many landlords are not aware that the bankruptcy law allows tenants to have the court terminate long term leases and limit damages to one year of rent.

Non-triple net lease landlords who spend considerable time in their leasing activities can take considerable comfort from Notice 2019-7, which was published alongside the new Final Regulations. The Notice provides the above-mentioned safe harbor for non-triple net leases to be “treated as a trade or business solely for the purposes of Section 199A.”

Under the new safe harbor, non-triple net rental real estate may be treated as a trade or business, if the following three requirements are met:

1. separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

2. 250 or more hours of rental services are performed per year with respect to the rental enterprise; and

3. the taxpayer maintains contemporaneous records, including time reports or similar documents, regarding the following: a) hours of all services performed, b) description of all services performed, c) dates on which such services are performed, and d) who performed the service.

Interestingly, while triple net lease arrangements outside of REITs will likely not qualify under Section 199A, banks that are taxed as S corporations, or partnerships, are eligible for the deduction, although in many respects a loan is like a triple net lease where the landlord has put money out for a long term series of payments, where in many cases the vast majority of the value is in the years of payments to be received, just like a long term promissory note.

It is even more disturbing that other types of businesses involving much less risk on the part of the owner qualify for the deduction. These include brothels, franchisors and vending machine owners. How is it possible that a brothel owner sitting back and receiving rent from independent contractor “professional entertainers” may qualify for the benefits of Section 199A, but taxpayers with triple net leases do not?

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | 11 Tax Deductions Every Independent Contractor Should Know About February 6, 2019

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

11 Tax Deductions Every Independent Contractor Should Know About

    Tax Day 2019 is Monday, April 15.
•    If you work as an independent contractor, you are entitled to certain tax deductions for your business expenses.
•    Even if your contract work is just a side gig, you’re still running a business, so it’s important to track your expenses.
•    We spoke with CPA and certified financial planner Harvey I. Bezozi about the deductions that independent contractors can use to reduce the amount of tax they owe.

With the rise of the gig economy, many more people now have to consider the tax implications of working as independent contractors. When you are an independent contractor, the IRS considers you a business owner, even if you contract full-time for one client.

Independent contracting comes with additional tax burdens (e.g., there is no employer contribution, so the entire payroll tax burden falls to you). On the other hand, you can deduct expenses that you couldn’t take as an employee.

Harvey I. Bezozi, a CPA and CFP, has worked with small businesses for more than three decades. He shared with us this list of tax deductions that every independent contractor should know about.

1.    First, form an entity
Before he talked about deductions, Bezozi said, “When somebody starts a business, especially if they’re new at it, they’ll usually become a sole proprietor. That’s mistake number one.”

He suggests that you form an LLC, S-corporation, or some other business entity, even if your business is very small. He believes that the tax benefits and the protection from personal liability are worth the extra paperwork.

2.    Use of your car for business
As an employee, your work commute is not tax deductible. “But as an independent contractor, it’s no longer a commute,” Bezozi said.

If you’re going from your office to your client’s office, keep a log and take your mileage off your taxes. You can also deduct transit expenses for travel to a client.

3.    Home office dos and don’ts
“There’s no reason why you can’t deduct that portion of the apartment and/or home expenses, based on square footage” that you use for a home office, Bezozi said. To be deductible, your home office “has to be regular and exclusive use and your principle place of business,” he added.

4.    Equipment purchases
The cost of any electronics you use in your business can be written off on your taxes. If a device has mixed personal and business use, your deduction is proportional. If 30% of your phone usage is for business calls and emails, you can deduct 30% of the cost of the phone and your monthly bill, Bezozi said.

Bezozi also noted that if you’re super conscious of cyber security, you might want to have separate devices for personal and business use, especially if you have employees.

5.    Insurance (and if you don’t have it, you should)
“Generally, you want to have some kind of professional liability insurance,” Bezozi said. “You may want to have cybersecurity insurance. Eventually you want to have disability insurance. That’s something that people don’t think about.” All these insurance premiums are deductible.

If you work alone, your health insurance premiums might be deductible, under the same IRS rules that govern the deductibility of healthcare expenses for individuals.

6.    Retirement savings
If you work as an independent contractor an IRA, SEP IRA, or solo 401(k), will allow you to defer taxes on that income until you retire, Bezozi noted. The amount you contribute comes off your taxable income.

7.    Business travel
“Most people that start out in business, especially in the gig type of economy, are going to be looking to meet people,” Bezozi said. Whether you go across town to a networking event or across the country to a professional conference, your travel expenses can be deductible.

8.    Business meals
“When you meet a client, if you have a meeting over coffee or lunch or a fancy dinner, you can write off the cost of half of that meal,” Bezozi said. The tax rules have changed, however, so you non-meal entertainment expenses are no longer deductible. “If you take a client to a concert, you can no longer deduct that,” he noted.

9.    Training and subscriptions
“Anything to make you better and more knowledgeable in what you do now” is deductible, according to Bezozi. The training must be “something that enhances your ability in your current career but doesn’t get you ready for a different career,” he added. He noted that subscriptions to professional magazines and apps and software that you use in your business are also deductible business expenses.

10.    Client gifts

Gifts to your clients are deductible, up to a point, Bezozi said. If you send a year-end gift basket to an individual client, you can deduct up to $25. If the gift is for the company as a whole (a coffee table book, for example), the limit is higher.

11.    Credit-card interest
If you charge business expenses on a credit card, Bezozi said, “the portion of interest that relates to business expenditures can be deductible.” He noted that there is a limit to the deductibility of this interest, but the limit is high enough that it won’t apply to most independent contractors.

Credit given to:  Laura McCamy  Business Insider   January 10, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | 11 Bizarre Tax Laws January 30, 2019

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

11 Bizarre Tax Laws

On a somewhat lighter note let’s look this week at some rather absurd tax laws in some of our own American states. By no means is this list all inclusive. The ones that follow are excerpts from “20 Bizarre US State Taxes” authored by Jamie Young published on March 23, 2018.  

– Mark C. Bradstreet

“Despite America’s quirks, it can seem fairly normal when compared with other countries. Take taxes, for example: Even when it comes to the most mundane of topics, countries overseas can devise some truly bizarre charges and fines. For example, Ireland and Denmark effectively tax cow flatulence by taxing cattle owners up to $110 per cow.

But it’s not just distant foreigners who are coming up with strange tax laws; Americans are just as creative — and ridiculous. If you live in any of these states, watch out for bizarre state taxes that could be affecting your budget, as well.

1. Kansas: Amusement Tax
Although many states charge something called an Amusement Tax, this one takes the cake. If you take a hot-air balloon ride in the state of Kansas, it’s considered transportation and tax-free. But if you want the security of staying tethered to the ground while in a hot-air balloon, that will cost you 6.5 percent since you’re just there to be amused. When you’re tethered to the ground, you are, unlike Dorothy, very much still in Kansas — and it’ll cost you.

2. Maryland: Flush Tax
In an attempt to protect the Chesapeake Bay, the Chesapeake and Atlantic Coastal Bays Restoration Fund in Maryland is supported by a $5 monthly fee on sewer bills and an equivalent $60 annual fee on septic system owners. Flushing your toilet in Maryland is now twice as expensive as it used to be.

3. Pennsylvania: Air Tax
Anything that comes out of compressed air vending machine or vacuuming vending machine is subject to a sales and use tax. That’s right, Pennsylvania taxes air. Vending machines located on schools or church property, however, are exempt.

4. Colorado: Coffee Cup Lid Tax
When you go to the coffee shop to get your morning fix, you probably take the lid for your coffee for granted — not in Colorado, though. All nonessential packaging in Colorado is taxed an extra 2.9 percent. Your coffee cup is essential, sure, but the lid that goes on it is not. Extra taxes are also charged on stir sticks, cup sleeves and straws.

5. Maine: Blueberry Tax
Maine’s state berry is the blueberry — which is considered a superfood — and Maine is almost the sole provider of blueberries to all of the U.S. So the state charges an extra tax for anything related to the blueberry industry. This tax probably isn’t going to break your bank, but if you grow, purchase, sell, handle or process blueberries in the state of Maine, prepare to pay 1.5 cents per pound.

6. Nevada: Loud Live Music Tax
Nevada businesses must pay a 5 to 10 percent sales tax on admissions, food, drink and merchandise to the state whenever there is live entertainment going on. This can include everything from animal stunt performances to comedy and magic. Uncompensated, short performances, however, are tax-free — so you can sing your heart out, for free.

7. New York: Bagel Tax
New York residents might want to switch to toast for breakfast. Any bagel that has been sliced or prepared with toppings, like cream cheese or lox, is subject to an 8.875 percent sales tax. If it’s whole or sliced without toppings or spread, however, you can eat it tax-free — unless, that is, you eat it while you’re still in the store; then you’ll also be charged tax.

8. Indiana: Cake Decorating Tax
When creating a decorated cake in Indiana, bakers can expect to pay a tax on the finishing touches. Although frosting in containers or tubes is tax exempt, cake decorations are not. According to the state of Indiana’s tax laws, frosting is not in a “bar, drop or piece” and does not qualify as candy, but cake decorations are considered candy because they are “a preparation of sweeteners and flavorings in a drop or piece form.”

9. Texas: Belt Buckle Tax
If you want to be a cowboy, or at least dress like one, there aren’t any extra taxes on cowboy boots, hats or belts. But a belt buckle is another story. In Texas — where they’re quite popular — there’s a 6.25 percent sales tax on belt buckles because they’re not considered clothes. If you’re willing to wait, you can buy it tax-free on the state’s annual sales tax holidays.

10. Tennessee: Litigation Tax
Just to add insult to injury, a tax of up to $29.50 can be levied on residents involved in criminal and civil court proceedings. Juveniles are generally exempt.

11. Arkansas: Tattoo Tax
Be prepared to pay extra sales tax in Arkansas if you’re thinking about getting a tattoo — or even electrolysis. Though it’s unlikely any rebellious teens got in trouble for coming home without body hair, electrolysis treatments are taxed an extra 6 percent along with tattoos and body piercings.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | Estimated Tax Payments January 23, 2019

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

Estimated Tax Payments

Clients who are starting a business often ask “Do I need to make estimated payments?”  The answer, as with most tax questions, is “It depends”.  While the IRS, states and cities each have their own set of rules for making estimated payments, this article will discuss only the federal provisions for individuals.

In general, you are required to pay estimated tax if:

1. You expect to owe at least $1,000 after subtracting any withholding and refundable credits you are entitled to receive, and

2. You expect your withholding and refundable credits to be less than the smaller of:

The above percentages are commonly known as safe-harbors.  These percentages may be different for farmers, fisherman, or high income taxpayers.  For farmers and fisherman, if at least two-thirds of your income is from farming or fishing, you can substitute 66 2/3% for the 90% shown above.  For higher income taxpayers, if your adjusted gross income (AGI) is over $150,000, you will need to pay in 110% of the prior year tax instead of 100% as shown above to avoid penalties.  For 2017 and earlier years, AGI was the bottom line on the first page of the Form 1040.  Starting in 2018, AGI is line 7 on the second page of the 1040 form.

If, in addition to your business income, you also receive salaries and wages, you may be able to avoid paying estimates by having your employer bump up your withholding.  We often see higher income W-2 earners owing with their tax returns because they do not have enough tax withheld.  In these cases, if nothing is done to increase withholding, and no estimates are paid, the requirements above can cause a penalty on the return, even though the taxpayer has no other outside income.

Another safe-harbor that exists stems from having no tax liability for the prior year.  In that case, you are not required to make estimated payments for the current year.  However, if you make no estimated payments, you need to be prepared to pay any balance due when your returns are filed, plus you will owe the first estimate that will be due for the next year, both of which will be due April 15th.  So plan ahead!

If you do find yourself in the position of having to make estimated payments, the due dates are on the 15th of April, June, September and January, unless weekends come into play, in which case, they are due the following Monday.  Payments can be made in several ways including online at IRS.gov/payments by using a debit or credit card, electronic funds withdrawal, or through the electronic federal tax payments system, known as EFTPS (you must have an account set up for this one).  You can also pay by phone or through a mobile device by downloading the IRS2Go app.  And yes, you can still pay the old-fashioned way by sending in a payment voucher, Form 1040-ES, with a check or money order payable to U.S. Treasury.

For more information, please see your tax advisor, or go to the IRS website at www.IRS.gov.  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 – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Students Get Help From Judges January 2, 2019

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

Students Get Help From Judges

To give you an idea of the pervasiveness of this issue, student loan debt “has eclipsed credit cards as the largest source of consumer debt after mortgages.”  Please read the write-up below for potential relief for some former students.

Mark Bradstreet, CPA

“More bankruptcy judges are throwing lifelines to people struggling to repay their student loans after decades of refusing to consider any sort of relief.

In interviews with the Wall Street Journal, more than 50 current and former bankruptcy judges, frustrated at seeing borrowers leave federal courtrooms with six-figure debts, say they or their colleagues are more open to chipping away at the decades-old guidelines that determine how such debt is treated.

“If the law’s not going to be improved by Congress, we have to help these young people who are drowning in student loan debt, said U.S. Bankruptcy Court Judge John Waites in South Carolina.

Outright cancellations remain rare, but judges said they have other tools at their disposal, including asking lawyers to represent borrowers for nothing. The lawsuits can cost $3,000 to $10,000 and take years.

Other judges are embracing debt-relief techniques that don’t fully erase student loans but make repayment more affordable by, for instance, canceling future related tax bills. The popularity of these relief strategies could get a boost from a panel of professors, judges and advocates who are studying failures in consumer bankruptcy law and plan to release a report next year.

Hundreds of thousands carry student debt in the U.S. – the total has more than doubled over the past decade to $1.4 trillion – nearly all backed by the federal government. It has eclipsed credit cards as the largest source of consumer debt after mortgages. Almost every other type can be extinguished in bankruptcy, but standards made college debt untouchable. Borrowers typically must repay student loans over their lifetime, even those facing extreme financial hardship.

In March, Federal Reserve chairman Jerome Powell said he would be “at a loss to explain” why student loans can’t be cancelled like other debt. The Trump administration is considering whether to fight cancellation requests less aggressively.

Consumer bankruptcy lawyers are starting to notice that judges are being more flexible. One Las Vegas law firm recently filed the first cancellation request in its 14-year history after hearing a judge at a conference voice concern over student loans. Other lawyers said growing sympathy amounts to judges making lenders more willing to reach resolutions in court.

“I’m getting really good results with settlements these days,” said Chicago lawyer David Leibowitz. “I’m not the only one.”

Rules governing how student debt is handled in bankruptcy are made by Congress and by judges who issue influential rulings. Several bills in Congress that would erase student-loan debt in bankruptcy have stalled in recent years.

Last year in Philadelphia, U.S. Bankruptcy Court Judge Eric Frank cancelled a single mother’s $30,000 in student loans. Opposing lawyers from the U.S. Department of Education said the borrower needed to prove her hardship would persist 25 years. Judge Frank ruled that the relevant window was five years.

An appeals court over-turned his ruling, but his decision inspired a Tacoma, Wash., judge in December to cancel a portion of another borrower’s loans.

Such rulings are rare because few troubled borrowers attempt to cancel their student loans, because of the historically slim chances of victory.

Some bankruptcy judges criticize colleagues for re-interpreting well-settled law on student loans. “My view is, if the law is clear, follow it,” said retired California judge Peter Bowie.

The push to rethink the legal standard on student-loan debt is bipartisan. Judges interviewed by the Wall Street Journal were appointed during both Republican and Democratic administrations, though bankruptcy judges are appointed by appeals court judges, not the president.

Before 1976, laws allowed borrowers to do away with student-loan debt in bankruptcy. Congress, out of concern that the new graduates would take too much advantage of that option, made a new rule: Borrowers could cancel student loan debt after only five years of payments. Judges could grant exceptions if borrowers showed that repaying would cause “undue hardship.”

Congress didn’t define “undue hardship” so the task of doing so fell to federal judges. When Marie Brunner, a 1982 graduate of a master’s program in social work tried to cancel her loans in bankruptcy, a New York judge in 1985 said she had to show three things: she struggled financially, her struggles would continue and that she had made a good faith effort to repay. She lost.

That list still serves as a baseline for hardship in circuit courts that control the rules in most states.  Some appeals courts set even higher bench-marks, with one, for instance, saying borrowers must face a “certainty of hopelessness.”

In 1998 Congress said any borrower trying to cancel any federal student loans must prove “undue hardship,” like Ms. Brunner. Congress gave private student loans the same protection in 2005.

Some of the country’s bankruptcy judges are starting to argue that the prevailing legal standard is unintentionally harsh and wasn’t meant for adults still on the hook for student-loan debt years after college.

Judge Frank Bailey in Boston made that argument in an April ruling wiping out $50,000 in student loans for a 39-year-old man whose health ailments prevent him from working.

Some judges, including U.S. Bankruptcy Court Judge Michael Keplan in Trenton, N.J., said they are looking for ways to be more forgiving after seeing their own adult children borrow heavily for their education. Other judges grew concerned after talking to their law clerks. The typical law-school student takes out $119,000 in loans.

Two judges said they regret their rulings against borrowers more than a decade ago.

Kansas judge Dale Somers said he worked particularly hard to justify the reasoning in a December 2016 ruling that cancelled more than $230,000 in interest that built up on a couple’s student loans from the 1980s. They left bankruptcy owing $78,000.

Alabama judge William Sawyer declared that student loans had become “a life sentence” in a 2015 decision cancelling a $112,000 student loan debt for high school science teacher Alexandra Conniff, a single mother of two teen boys whose yearly income is $59,400.”

Credit given to Katherine Stech (Wall Street Journal)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Happy Holidays & Happy New Year! December 26, 2018

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

Happy Holidays & Happy New Year!

And get ready for the tax filing season.

Hopefully, you followed some of the suggestions outlined in Publication 552 to organize your records. If you did, great! This will make filing your tax returns a lot easier this year. It also means that you and your tax advisor can spend more time on tax and financial planning issues for 2019 vs. looking back to 2018.

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

W-2:    Employers should mail these by 1/31/19. If you have moved during the year, make sure former employers are aware of your new address. Some employers provide W-2’s to their employees via a website. Be sure to login and print out your W-2 after it is available.

W-2G:    Casinos, Lottery Commissions and other gambling entities should mail these by 1/31/19 if you have gambling winnings above a certain threshold. Note: Some casinos will issue you a W-2G at the time you win a jackpot. Make sure you have saved those throughout the year.

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

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

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

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

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

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

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

K-1s:    If you are a partner, member or shareholder in a partnership or S corporation, your income and expenses will be reported to you on a K-1. The tax returns for these entities are not due until 3/15/19 (if they have a calendar-year accounting). Sometimes, you may not receive a K-1 until shortly after the entity’s tax return is filed in March.

If you are a beneficiary of an estate or trust, your share of the income and expenses for the year will also be reported on a K-1. These returns will be due 4/15/19 so you might not receive your K-1 before the due date of your Form 1040.

NOTE:  Many times corporations, partnerships, estates and trusts will put their tax returns on extension. If they do, the due date of the return is not until 9/16/19 or later. We often see client’s receiving K-1s in the third week of September.

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

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

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

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

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week

Tax Tip of the Week | Keep your Tax Returns Forever? October 24, 2018

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

Tax Tip of the Week
October 24, 2018

One of our more commonly asked questions is, how long do I have to keep my income tax returns?

Maybe, the key words in this question are “have to.” For practically all intents and purposes “have to” refers to the requirement of retaining three (3) years after filing them. The reasoning is that you and the IRS only have three (3) years to amend or change a return (typical statute of limitations).

BUT, there are some notable exceptions to the three (3) year rule:

(1) The IRS may go back six (6) years when a significant income amount (25%) has been omitted from an income tax return. They can also go back indefinitely if the IRS proves you filed a fraudulent tax return.

(2) What about the situation where the IRS says you failed to file a return? Let’s say the IRS asks for a return from four (4) years ago. Oops – you just shredded that one since you were diligently following the three (3) year rule. Who knows why the IRS did not receive the return. Maybe your neighbor hijacked it from your mailbox, possibly your postal carrier lost it or the IRS Center received it but simply missed processing it because the return was attached to another return and overlooked. It matters not, why the return was not shown as received by the IRS, because the burden is yours to prove the return was filed. Now you have to resurrect your records, prepare and file the tax return again or be classified forever and ever as a “non-filer.”

Bob Carlson, editor of Retirement Watch, contends that keeping your tax returns indefinitely may well be worth the hassle. “Once you show a return was filed, the statute of limitations is three (3) years, unless the fraud or six (6) year exceptions apply. With very few exceptions, the IRS won’t be able to question the details of the (older) returns. You can shred and dispose of those supporting records and keep a copy of the return.”

It may well be worth the hassle to store these old returns in an effort to gain just a little peace of mind.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C Bradstreet, CPA

–until next week

Tax Tip of the Week | Gifts to Charity: Six Facts About Written Acknowledgements September 19, 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
September 19, 2018

Throughout the year, many taxpayers contribute money or gifts to qualified organizations eligible to receive tax-deductible charitable contributions. Taxpayers who plan to claim a charitable deduction on their tax return must do two things:

•    Have a bank record or written communication from a charity for any monetary contributions.
•    Get a written acknowledgment from the charity for any single donation of $250 or more.

Here are six things for taxpayers to remember about these donations and written acknowledgements:

1.    Taxpayers who make single donations of $250 or more to a charity must have one of the following:
o    A separate acknowledgment from the organization for each donation of $250 or more.
o    One acknowledgment from the organization listing the amount and date of each contribution of $250 or more.
2.    The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year.
o    For example, if someone gave a $25 offering to their church each week, they don’t need an acknowledgement from the church, even though their contributions for the year are more than $250.
3.    Contributions made by payroll deduction are treated as separate contributions for each pay period.
4.    If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
5.    A taxpayer must get the acknowledgement on or before the earlier of these two dates:
o    The date they file their return for the year in which they make the contribution.
o    The due date, including extensions, for filing the return.
6.    If the acknowledgment doesn’t show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.

This article was provided by the Internal Revenue Service in Tax Tip 2017-59.  If you have any questions concerning charitable donations, let us know.  We can help.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

–until next week.