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Tax Tip of the Week | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental? December 13, 2017

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

Tax Tip of the Week | Dec 13, 2017 | No. 437 | What Happens to My Federal Income Taxes if I Sell My Rental?

One of the biggest tax surprises of our clients arises from the income tax liability caused by the sale of their rental property.

Here is how such a surprise typically unfolds:

The daughter heads off to college. Cash is needed for her tuition. Mom and dad decide to raise cash by selling their rental property. They paid $100,000 for this property which has now been rented for about fourteen (14) years. Net of selling expenses, the rental property is sold for $100,000. So far so good. The net sales price and the purchase price were identical. Mom and dad would have liked to sell the property for more but it is what it is. At least from a tax standpoint, mom and dad think they are home free – no gain, no income taxes. WRONG! They forgot to consider the depreciation expense that was taken over the fourteen (14) year holding period. That expense amounts to $45,000. So now, instead of the property basis or net book value being $100,000 as they guessed; it is $55,000 or the $100,000 less the depreciation expense already taken of $45,000. Now mom and dad’s taxable gain has climbed to $45,000. Mom and dad are not happy! Uncle Sam is going to take a chunk of their monies planned for tuition. Hmmmm…not good!

Now let’s look at how the federal income tax is calculated.  Since the property had been held for more than one year, the gain is a long term capital gain. However, this type of capital gain on the depreciation recapture may be taxed as high as 25%. Had the sales price exceeded the purchase price – conventional capital gain rates would have applied instead but only for that difference including the gain on the land portion. So their federal income tax may be as high as 25% of $45,000 or $11,250 – all resulting from the depreciation recapture. Not a pleasant surprise!

Always, know what your tax consequences may be before embarking down a road.

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

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 436 | Do You Need Tax Planning or Business Consulting? December 6, 2017

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

Tax Tip of the Week | Dec 6, 2017 | No. 436 | Do You Need Tax Planning or Business Consulting?

As the year end draws near – the usual hosts of magazines, newspapers and the internet will all be busy with age-old articles on tax planning. Most will be repeating essentially the same techniques as they have for the last thirty (30) plus years.

And that is not to take away from these strategies – most are quite valid and very useful. Tax planning is important! Do it! Deferring income taxes is always a good thing. And, if the tax deferral is for a long enough period of time; then, in certain situations those deferred income taxes might be eliminated with your demise.

However, what does one do when a tax liability does not exist because your business and/or other adverse personal events resulted in tax losses and little tax liability? Then, one removes the tax planning hat and instead puts on their business consulting hat. With that hat comes a new mission with a new set of questions:

1.    Do I have the right people?
2.    Do I have the right customers?
3.    Are incentives aligned with my business goals?
4.    Are my assumptions still reasonable?
5.    Am I outsourcing the right tasks?
6.    Am I measuring the right things?
7.    Were our sales on goal?
8.    How am I different than my competition?
9.    Am I really optimizing technology?
10.    Am I stressed out?
11.    Were our gross profit margins on goal?
12.    What is our accounts receivable turnover?
13.    Am I avoiding the really tough decisions?
14.    What is our inventory turnover?
15.    Are we committed?
16.    What is our accounts payable aging?
17.    What is our capital assets budget?
18.    On a day-to-day basis, can the business function without me?
19.    Do we have adequate capital to take the business where we want it to go?
20.    Etc., etc., etc.

And, provided you arrive at the right answers for these questions and implement the answers according to your strategic plan; then next year you will also be wearing a tax planning hat as well. A good business person will always be wearing both hats along with some others.

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

This week’s author….Mark Bradstreet, CPA

…until next week.

Tax Tip of the Week | No. 435 | Passive Activity Losses November 29, 2017

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Tax Tip of the Week | Nov 29, 2017 | No. 435 | Passive Activity Losses

Passive activity losses are also known as PAL’s. However, from a tax standpoint, they are anything but your PAL.

A passive activity is a business activity in which the taxpayer does not materially participate. There are seven tests for material participation, and you only need to pass one of the tests to be considered active. But most investors do not meet any of the tests.

Beginning in 1986, you may only deduct a passive activity loss to the extent you have passive activity income. A PAL cannot offset non-passive income or portfolio income.

The passive activity rules were passed by Congress in 1986 in an effort to limit the losses being deducted by many taxpayers through the use of tax shelters. Prior to enactment, taxpayers could invest in a myriad of limited partnership interests or other passive activities, most of which generated losses that the investors would deduct on their personal returns.

The passive activity rules prevented such deductions, causing many taxpayers to search for PIG’s (passive income generators). Those looking for PIG’s need to be cautious as to the type of investment they are buying. For instance, your broker might try to sell you an interest in a publicly traded partnership (PTP). However, these types of partnerships have their own set of rules, and might not be the PIG you were hoping for.

Rentals are another form of passive activity. Ordinary rental income or loss is passive by definition. Even if you are active in a rental activity, the net income or loss is still considered passive (assuming you are not a real estate professional). However, if certain conditions are met, a landlord can deduct up to $25,000 of rental loss on his or her return, even if there is no other passive income. Since net rental income is considered passive income, non-rental passive losses can be used to offset the income.

Any PAL limited by passive activity income is not lost but carried forward indefinitely, usually until the property is sold. In the year of sale, you can deduct the suspended loss, up to the amount of your basis in the activity.

You can contact us 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 | No. 434 | Tax Depreciation – Section 179 November 22, 2017

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Tax Tip of the Week | Nov 22, 2017 | No. 434 | Tax Depreciation – Section 179
As the end of the year draws near, many taxpayers are thinking about tax planning. One of the tax planning strategies often used is the Section 179 deduction (accelerated depreciation).

This deduction allows new or used qualifying property to be expensed in the year of purchase, rather than be depreciated over the life of the asset. The maximum cost of such property under Section 179 that may be expensed in 2017 is $510,000.

There are two primary limitations which may reduce the amount of the Section 179 deduction allowed. The first is related to the total cost of Section 179 property purchased during the year. For every dollar of qualifying property purchased over $2,030,000 in 2017, the Section 179 deduction is reduced by one dollar (but not below zero).

The second limitation is the business income limitation. The business must have taxable income to take any Section 179 deduction, and the deduction cannot be used to create an overall business loss. Form W-2 is considered business income for this calculation. For example, if you are a Schedule C filer, and also have a W-2 from a different source, the W-2 income and the business income or loss is combined for the overall limitation on the taxpayer’s Form 1040. Any Section 179 unused because of the income limitation may be carried forward indefinitely. However, no carryover exists if asset additions exceed the qualifying property threshold. This situation could occur if a taxpayer has Section 179 deductions from multiple pass-through entities.

The expensing election is an annual election, and can only be used on assets placed in service during the current year. The asset must also be used more than 50% in the business. If business use drops below 50% in a future year, any Section 179 depreciation that was taken in the year of purchase must be recaptured (reported as income) in the year business use drops below 50%. Also, please note that assets purchased from a related party do not qualify for the Section 179 expensing election.

Some examples of qualifying property include furniture, machinery and equipment, certain vehicles (within limitations), tractors and single-purpose agricultural structures.

Non-qualifying property includes:  land, docks, elevators, landscaping, and swimming pools.

The Section 179 deduction is a great tax planning tool for small to medium-sized businesses. The decision to use this deduction may be made with your tax return simply by claiming the deduction on Form 4562, Depreciation and Amortization. No separate election statement is required. Please keep in mind that your cost basis in the asset(s) will be reduced by the Section 179 deduction and will increase the gain upon a subsequent sale.

You can contact us 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 | No. 433 | Municipal Net Profit Tax Return November 15, 2017

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Tax Tip of the Week | Nov 15, 2017 | No. 433 | Municipal Net Profit Tax Return

There are over 600 Ohio cities and villages that levy a municipal income tax. These taxes are administered by the  individual municipalities or by third party administrators. Business taxpayers are required to file and pay tax in every municipality where income is earned. The new plan is for the state to administer the business net profit tax. Note, this would not include sole proprietors and single member LLCs. This could be a savings of $800 million to municipalities and businesses if all businesses file centrally.

According to the Tax Reform Plan, the business taxpayer will have the choice to file and have the net profit tax administered by multiple individual municipalities or to file with Ohio Department of Taxation. This is an ‘Opt-in’ choice and is not mandatory.

Advantages for ODT will be one uniform tax return and one consistent governing body which will allow filing multiple municipalities to one central location. ODT will provide taxpayer information to the municipalities.

ODT Role:
Propose rules
Prescribe forms
Issue bills, assessments, refunds
Conduct audits, certify debts
Handle appeals & other administrative matters

Municipality Role:
Retain responsibility for Employee Withholding & Individual filings
Retain control over tax rate and tax credits

Business taxpayers who want the cost savings of reporting and filing municipal tax are urged by the Ohio Tax Commissioner to sign up for a major new and convenient tax filing service. Businesses wanting to ‘opt-in’ for the centralized filing and state administration of the municipal net profit tax for the 2018 tax year can register now at the Department of Taxation’s website (www.tax.ohio.gov). Business taxpayers need to register specifically for the municipal net profit tax to take advantage of this new one-stop, cost-saving system, even if registered with the state to pay other taxes.

Municipal Net Profit Tax Reform Timeline:
By March 1, 2018 – business (calendar year filers) registers through OBG
By April 15, 2018 – business makes first quarterly estimated payment
By April 15, 2019 – business files Tax Year 2018 tax return

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

…until next week.

Tax Tip of the Week | No. 432 | C Corporation November 8, 2017

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

Tax Tip of the Week | Nov 8, 2017 | No. 432 | C Corporation

A C Corporation is the most common type of corporation in the United States.

Along with LLC’s, S Corporations, certain trusts and limited partnerships, C Corporations offer limited liability protection. That feature is important in today’s litigious times. The C Corporation generally protects its shareholders from personal liabilities arising from the business. Other entities, such as general partnerships and sole proprietorships, do not provide such limited liability protection to their owners.

A C Corporation is its own tax paying entity. Many other entities are known as pass-through entities since their taxable income flows through and is taxed on the personal income tax returns of the owners.

The top tax bracket for C Corporations is 34% up to the first $10 million of taxable income. A surtax exemption phase-out occurs on taxable income ranging from $100,000 to $335,000. So once $335,000 of taxable income is reached the corporate income tax bracket is a flat 34% since the lower brackets are no longer considered. For comparison purposes, the top income tax bracket for an individual is 39.6%. Since the top C corporation tax rate is less than the top individual tax rate, this may at times make the C Corporation tax structure more attractive than the pass-through entity structure. Also, since these tax savings may be retained inside the C Corporation at a lower tax rate, this feature may be advantageous for those companies expected to be passed on to future generations.

Another tax aspect of C Corporations is that capital losses may only be deducted to the extent of capital gains. Any remaining net capital loss may be carried back 3 years and forward up to 5 years. That may sound unfair but it is not very different from individuals who may only deduct capital losses up to their capital gains plus $3,000 annually. However, any unused capital loss at the individual level may be carried forward up to the time of death.

As part of its structure a corporation is responsible to hold shareholder and director meetings. Failing to do so may give someone the ability to pierce the corporate veil and cause the shareholders to lose their limited liability protection for their personal assets.

Sometimes C Corporations get an undeservedly bad rap from the press because of potential double taxation that may occur in two areas. The first area involves payment of corporate dividends to shareholders.  These dividends are taxable to the shareholder but not deductible by the C Corporation, creating double taxation. The second area is in the event of a liquidation of the C Corporation. Here, a gain may be taxed at the corporate level and again at the shareholder level as the liquidating dividends are paid. However, the possibility of these double tax scenarios may, at times, be avoided if no dividends are paid or the corporate stock is sold as opposed to a corporate liquidation.

All this being said, Congress is considering making some significant revisions to the tax law surrounding C Corporations. Many of their current proposals could make C Corporations more tax attractive and possibly reverse the current trend away from the formations of S corporations and LLCs. However, what Congress may eventually decide is anyone’s guess.

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

…until next week.

Tax Tip of the Week | No. 430 | FINALLY! Penalty Relief for Delinquent Partnership Returns October 25, 2017

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

Tax Tip of the Week | Oct 25, 2017 | No. 430 | FINALLY! Penalty Relief for Delinquent Partnership Returns

In case you are unaware, some Internal Revenue Service filing due dates have changed. These new deadlines which began with the 2016 tax year for returns filed in 2017 included the Form 1065, U.S. Return of Partnership Income. The original due date for calendar-year partnerships was April 15th, the same as your personal income tax return. The new due date for calendar-year partnerships is March 15th.

S corporations have always been due March 15th. Partnerships and S corporations are known as “pass-through entities” because all items of income and expense get “passed through” and are reported on the owners’ personal income tax returns. Partnerships and S corporations generate a K-1 for each partner, shareholder or member. The K-1 provides information necessary for preparation of the owner’s personal return.

By moving the due date of partnerships up to March 15th, the IRS hopes more returns can be filed by April 15th, rather than having to file extensions due to late K-1’s. Or, to say it another way, the Internal Revenue Service hopes to get your tax money faster by taxpayers filing earlier.

However, many partnerships did not meet the new, earlier filing deadline and either filed their returns and/or their extensions late. If you are an owner of a partnership that has received a penalty notice for late filing, we may have some good news. If certain conditions are met, the Internal Revenue Service may provide you relief from the penalties normally assessed when filing a delinquent return. These types of penalties for partnerships may be quite significant since they are assessed on a per partner, per month basis. So, if you have one of these types of notices, let us know. We can help.

Sometimes we have to be thankful for the small things in life.

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. 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.