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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. 428 | Veteran or Widow of a Vet? Find Out About Benefits. October 11, 2017

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Tax Tip of the Week | Oct 11, 2017 | No. 428 | Veteran or Widow of a Vet? Find Out About Benefits.

You may qualify for VA Benefits at home or in assisted living if:

•    You served for at least 90 days on active duty
•    You require care or assistance with the activities of daily living on a regular basis to maintain your lifestyle
•    You are currently living in or thinking about going into an assisted-living facility
•    You are spending from your savings to pay for care
•    A family member is helping you with your care at home

If you fit some or all of these criteria, you may qualify for a little-known program known as Aid and Attendance through the Veterans Administration.

You May Not Know

It is not necessary to be impoverished to qualify – what you do need is enough out-of-pocket medical expenses to make you eligible.

These benefits are called a “pension”. However, this term tends to be confusing because it has nothing to do with the years of service as we normally think of a pension.

You did not have to serve “in theater” in order to qualify. Your disability does not need to be service-related. Benefits can be for you during your lifetime or for your spouse following death.

Can I Do It Myself?

Yes… but you must be careful. You will ultimately work with a Veterans’ Representative to complete the paperwork for your benefits. However, you should be prepared for this meeting in advance.

You must know exactly what program you want – the VA is a large complex organization, so it’s easy to make a costly error.

Finally, you must be aware that in the process of qualifying for VA benefits you may disqualify yourself for other government programs or create other tax or estate problems. Coordinating VA benefits with the rest of your estate plan is critical to assure that you receive the maximum government benefits to which you are entitled.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 427 | Top 10 Things to Know About Amending Returns October 4, 2017

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Tax Tip of the Week | Oct 4, 2017 | No. 427 | Top 10 Things to Know About Amending Returns

If you need to make a change or correct your federal tax return after it has been filed you will use Form 1040X. Here are the top 10 things you need to know when filing a 1040X:

1.    To file a 1040X, it must be mailed—you cannot e-file an amended return.

2.    You normally don’t need to file an amended return to correct math errors.  The IRS will automatically correct math errors and send you a bill or refund.

3.    You can track the status of the 1040X three weeks after filing.  To track the status, go to www.irs.gov and click on the “Where’s My Amended Return” link.  Note:  it can take up to 12 weeks for the IRS to process an amended return.

4.     If a refund is due from the original return, wait until you receive the refund before filing the 1040X to claim additional refund amounts.

5.     If more tax is due, file a 1040X and pay the tax as soon as possible to reduce any interest and penalties.

6.     You usually have three years to file an amended return.  See the 1040X instructions for the exact details.

7.      If you are amending more than one tax year, prepare a 1040X for each year and mail them in separate envelopes.

8.      If you use other IRS forms or schedules to make changes, attach those forms to the submitted 1040X.

9.     The most important section on the 1040X form is the “Explanation of Changes”.  You need to clearly and precisely explain why you are submitting an amended return and what changes you are making.

10.    If the changes you make on the federal return also results in a change to your Ohio return be sure to submit an Ohio amended return as well. Note: Ohio no longer uses a special amended tax return.  Instead, use the normal Ohio IT 1040 return and mark the “Amended” box located on the top of page 1.

Let us know if you have any questions about filing an amended return.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 425 | Equifax – Action Items September 20, 2017

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Tax Tip of the Week | Sept 20, 2017 | No. 425 | Equifax – Action Items

The recent cyber security breach at Equifax has compromised the personally identifiable information [“PII”], including social security numbers and credit card details, of hundreds of thousands of individuals.

There are a number of steps you can take to identify whether your PII has been stolen.

First, go to the Equifax TrustedID website to check the potential impact: https://trustedidpremier.com/eligibility/eligibility.html.  Important Consumer Information is available at:  https://www.equifaxsecurity2017.com/consumer-notice/.  You will need to input the last six digits of your social security number and your last name. You should be able to get an instant response from the site.

The second and most important step is to monitor your credit report.  There are various companies that can offer this service – in fact, Equifax’s TrustedID is being offered free for a year.  You should also check your credit on credit report regularly yourself.  You can get a free report for each of the credit bureaus listed below, but you can also go to:  www.annualcreditreport.com

Equifax Alerts
(888) 766-0008
Equifax Consumer Fraud Division,
PO Box 740256,
Atlanta, GA 30374

Experian Fraud Center
(888) 397-3742
Experian
P.O. Box 9554
Allen, TX 75013

Transunion Fraud Alert
(888) 909-8872
TransUnion Fraud Victim Assistance Department,
P.O. Box 2000
Chester, PA 19016

Any new lines of credit will show up on your report which can be disputed.  Any fraudulent activity should be reported immediately.

Thirdly, consider putting a freeze and fraud alert on all three of your credit reports if you suspect your PII has been stolen.  Equifax is waiving any fees for this at the moment. Other bureaus may impose a fee.

Some red flags that are a warning of theft of your PII:

  • Doctors send you a bill for services you didn’t use.
  • Merchants decline your check.
  • The IRS notifies you that more than one tax return was filed in your name, or that you have income from an employer you don’t work for.
  • You find unusual charges or new accounts on your credit report.
  • You get calls from a collection firm about debts that aren’t yours.
  • You see unexplained withdrawals from your bank account.
  • You stop getting bills in the mail
  • Your medical insurer declines a claim because their records show you’ve reached your benefits limit.
  • Your medical insurer won’t cover you because your records show a condition you don’t have.

You may receive spoofing emails offering assistance.  Equifax will only contact affected individuals by mail.

If you suspect your PII has been compromised you may wish to file an Identity Theft Affidavit and create an Identity Theft Report with the FTC.  This can be done by phone, mail or online at:

1-877-ID THEFT (877-438-4338)

Federal Trade Commission, 600 Pennsylvania Ave., Washington DC 20580

https://www.identitytheft.gov/#!/#what-to-do-right-away

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

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

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

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

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

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

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

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

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

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

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

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

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

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

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

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

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

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

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

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

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

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

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

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

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

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

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

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

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

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

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

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

…until next week.

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

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

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

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

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

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

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

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

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

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

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

…until next week.