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Eight Tips About Rental Income and Expenses | Tax Tip of the Week | No. 94 May 25, 2011

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Do you Rent Property to Others?

If you rent property to others you’ll want to read the following eight tips about rental income and expenses.

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them.  Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you rent property.

1. When to report income:  You generally must report rental income on your tax return in the year that you actually receive it.

2. Advance rent:  Advance rent is any amount you receive before the period that it covers.  Include advance rent in your rental income in the year you receive it, regardless of the period covered.

3. Security deposits:  Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

4. Property or services in lieu of rent:  If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.  If the services are provided at an agreed upon or specified price, that price is the fair market value, unless there is evidence to the contrary.

5. Expenses paid by tenant:  If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information.

6. Rental expenses:  Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.

7. Personal use of vacation home:  If you have any personal use of a vacation home, or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use.  If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.

8. Depreciation:  Properly depreciate the rental and all improvements.  When you initially offer a property as a rental you need to separate the land value from the home value because land never depreciates.  A residential property would then be depreciated over 27.5 years.  A commercial property is depreciated over 39 years.  Any subsequent improvements that have a useful life of more than one year need be depreciated over their useful lives.  New carpet, for example, has a useful life of five years.

Rental income and expenses are typically reported on Form 1040-Schedule E.

As always, we suggest you give us a call before going into the rental business—-not after!

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

Rick Prewitt – the guy behind TTW

…until next week.

Taxable or Non-Taxable Income – Part 2 | Tax Tip of the Week | No. 93 May 18, 2011

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Understanding the Differences Between Taxable and Non-Taxable Income

Several weeks ago in TTW #81 we looked at this issue.  Here are some additional examples to watch for throughout the year.

Generally, most income you receive is considered taxable but there are situations when certain types of income are partially taxed or not taxed at all.

To help taxpayers understand the differences between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items not included as taxable income:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life Insurance – If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant – If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-cash Income – Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

For a more complete look at taxable vs. non taxable income refer to IRS Publication 525 – or just give us a call. 

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.

Horizontal and Vertical Financial Statement Analysis | Tax Tip of the Week | No. 92 May 11, 2011

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Financial Analysis Tools

Let’s digress this week from our typical tax discussion and discuss some tools commonly employed by business owners for analysis of their financial statements and, thusly; their business.  In an earlier week, we explained the importance of financial statement analysis as we must remember the numbers on the financials are not an end in themselves.  And, without trend analysis and common size techniques, it is difficult to draw any meaningful conclusions from them.

Most of these financial analysis tools are in the form of either horizontal or vertical analysis.  They are designed to calculate the relationships between various components of the balance sheet and the income statement.

Horizontal Analysis (or Trend Analysis) – This tool doesn’t have to be any more difficult than laying any of your financial statements beside another period for a “line by line” comparison.  Doing so may quickly highlight trends which are useful for management’s future planning.  One can also compute the percent of the increase or decrease over the beginning number or the base period.  In this calculation the base period equals 100%.  The trend percentage is useful in quantifying the amount, helping to pinpoint and understand the underlying issues that drove the change – whether they are good or bad.  Thusly, we are looking at where we have been, to where we are now, and to where we expect to be in the future.  This information can also be leading indicators of cash needs, inventory requirements, capital asset additions, operating margins and, ultimately, the amount of profitability.

Vertical Analysis – This tool “common sizes” your financial statements.  This is necessary so that one can benchmark any size company against another with meaningful results.  The answers may be expressed as percentages, multiples or even number of days – all of which “common size” the results.

Some of these ratios may include:

(1)  Profitability ratios which measure the results of the business operations.

(2)  Liquidity ratios which calculate the short term and long term solvency of the financial position of the business.  These predict the likelihood of whether a business is able to meet short term obligations such as accounts payable and the longer term obligations of debt repayment.

(3)  Activity or Turnover ratios compute the efficiency with which the resources of a business have been used. These are often expressed in the number of days that a particular asset is being turned over into sales.

Uses of Financial Statement Analysis:

A business can analyze its own performance through financial statement analysis.  Investors may evaluate their investments on a company by company basis.  Regulatory authorities can further ensure whether the company is properly following accounting rules. Lastly, financial statement analysis can help the government agencies to analyze the taxation payable to their particular entity.

As always, give us a call if you have any questions or need a referral to an estate attorney.

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.

Estate Planning | Tax Tip of the Week | No. 91 May 4, 2011

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Key Estate Planning Documents You Need

This is a general, informational piece only and not intended to provide legal advice. Each individual should seek legal advice for their own situation.

Even though the federal estate tax rules continue to change—and Ohio’s estate tax may be eliminated— every individual needs to consider these estate planning tips.

There are five estate planning documents you may need, regardless of your age, health, or wealth:

1. Durable power of attorney
2. Advanced medical directives
3. Will
4. Letter of instruction
5. Living trust

Durable Power of Attorney
A durable power of attorney (DPOA) can help protect your property in the event you become physically unable or mentally incompetent to handle financial matters. A DPOA allows you to authorize someone else to act on your behalf, so he or she can do things, like pay everyday expenses, collect benefits, watch over your investments, and file taxes.

Advanced Medical Directives
Advanced medical directives let others know what medical treatment you would want, or allows someone to make medical decisions for you, in the event you can’t express your wishes yourself.

There are three types of advanced medical directives. First, a living will allows you to approve or decline certain types of medical care. Second, a durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. Finally, a Do Not Resuscitate order (DNR) is a doctor’s order that tells medical personnel not to perform CPR if you go into cardiac arrest.

A will is often said to be the cornerstone of any estate plan. The main purpose of a will is to disburse property to heirs after your death. Equally important, the will gives you the ability to name the executor who will manage and settle your estate and allows you to name a legal guardian for minor children or dependents with special needs. If you don’t leave a will, these items will be determined according to state law, which might not be what you want.

Letter of Instruction
A letter of instruction (also called a testamentary letter or side letter) is an informal non-legal document that generally accompanies your will and is used to express your personal thoughts and directions regarding what is in the will. Unlike your will, this document remains private and gives you the opportunity to say the things you would rather not make public. This can be the most helpful document you leave for your family members and your executor.

Living Trust
A living trust (also known as a revocable or inter vivos trust) is a separate legal entity you create to own property, such as your home or investments. The trust is called a living trust because it’s meant to function while you’re alive. You control the property in the trust, and whenever you wish, you can change the trust terms, transfer property in and out of the trust, or end the trust altogether.  Upon death the trust becomes irrevocable. The terms of the trust then control how your assets are managed or disbursed.

As always, give us a call if you have any questions or need a referral to an estate attorney.

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.