Category: Tax Law

19 Dec 2018
Tax Credits, Tax Law Pearson & Co, PC 0 comment

CHILD TAX CREDIT DOUBLED

Potential to Reduce Your Tax Bill
by as Much as $2,000 per Qualifying Child

Child Tax Credit Doubled

Raising children is an expensive responsibility. So it’s worth your while to take just a few minutes to see if you may qualify for relief under the Child Tax Credit (CTC). The CTC has been expanded under the new tax law enacted last year. Chief among the enhanced benefits is an increase of 100% which raises the credit from $1,000 to $2,000 per qualifying child.

We’ll take a look at the criteria to determine a child’s qualifications in a moment.  But first a word about tax credits. The best way to describe tax credits is in contrast to what most taxpayers understand … tax deductions. When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce your tax bill.

For example, assume you spend $2,000 that results in a tax deduction. That will reduce your taxable income by $2,000. In a 25% tax bracket, you would save $500 in taxes.

Now compare that with a $2,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $2,000 tax credit! In the above example, the tax credit increases tax savings by 400%

Taxpayers, businesses and individuals, find tax credits trump tax deductions every time in saving tax dollars.

Qualifying for the Child Tax Credit

As mentioned above, you may be eligible to claim a tax credit that will reduce your tax by as much as $2,000 per qualifying child. Additionally, if you do not qualify for the full amount, you may be able to take the refundable additional child tax credit. The basic criteria to determine a child’s qualifications are:

Your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew);

  • Was under age 17 at the end of 2018;
  • Did not provide over half of his or her own support for 2018;
  • Lived with you for more than half of 2018;
  • Is claimed as a dependent on your return;
  • Does not file a joint return for the year; and
  • Was a U.S. citizen, a U.S. national, or a resident of the United States. If the child was adopted, see Adopted child .

Check out this link f you still have questions whether your child is a Qualifying Child for the CTC?

 Note: If you have at least one child that qualifies for the CTC, you may also be eligible for the Additional Child Tax Credit if you get less than the full amount of the CTC.

Notably, if you don’t owe any tax before claiming the credit, you may receive up to $1,400 in credit refunds.

Your family income must be a minimum of $2,500 to claim the credit.

As your income increases, the child tax credit begins to phase out. The phase-out trigger is increased to $200,000, or $400,000 if married filing jointly. This means that more families with children younger than 17 qualify for the larger credit.

Dependents who can’t be claimed for the child tax credit may still qualify the taxpayer for the credit for other dependents. The new tax law creates a non-refundable Family Tax Credit of up to $500 per qualifying person. These dependents may also be dependent children who are age 17 or older at the end of 2018. It also includes parents or other qualifying relatives supported by the taxpayer.

Clearly, this may be a complicated series of qualifications to decipher. If you even think you may qualify, give us a call to discuss and determine what you may expect in tax credits.

19 Dec 2018
Charitable Giving Advice from Pearson & Co. CPAs
Charitable Giving, Tax Credits, Tax Law Pearson & Co, PC 0 comment

DECEMBER … THE MONTH FOR GIVING

Do So Charitably, and With Caution

This is the season for giving. Generally we all feel more willing to open our purses for good causes. And there are plenty of opportunities to do so … both solicited and unsolicited by you. So in this article we’ll cover two major considerations before you write that check or offer your credit card:

  • Avoid fraudsters seeking to take advantage of your generosity, and
  • Determine if your donation will be to a tax-exempt charity which will trigger a tax deduction for you.

December - The Month for Giving

Research Before Giving

Research Before GivingParticularly at this time of year, you are likely to be solicited for contributions from charities and professional fundraisers working on behalf of charities. Your contact may be by phone, face-to-face, email or the internet … including social networking sites you may frequent.

Scammers use the same solicitation channels, so a few words of caution if the charity on the surface sounds appealing. Run, do not walk, when a solicitor:

  • Uses a name that closely resembles that of a better-known, reputable organization.
  • Thanks you for a pledge you don’t remember making.
  • Refuses to provide detailed information about its identity, mission, costs, and how the donation will be used.
  • Won’t provide proof that a contribution is tax deductible.
  • Uses high-pressure tactics like trying to get you to donate immediately, without giving you time to think about it and do your research.
  • Asks for donations in cash or asks you to wire money.
  • Offers to send a courier or overnight delivery service to collect the donation immediately.
  • Guarantees sweepstakes winnings in exchange for a contribution. By law, you never have to give a donation to be eligible to win a sweepstakes.

For more information, visit ftc.gov/charityfraud.

Ensuring Your Contribution is to a Tax-Exempt Charity

Not all charities are equal … when it comes to tax-deductible contributions. You may be able to deduct donations to a tax-exempt organization on your tax return so it’s critical that you determine whether your targeted charity qualifies as tax-exempt.

Before we help you determine how to identify a charities tax-exempt status, it’s worth a minute to revisit an important change in both the standard deduction and itemized deductions as enacted in the new tax law.

The standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.

Note: Traditionally, Virginia tax law has conformed to federal. However, that is not the case today as the state standard deduction has not been increased to track with the revised federal rules. There are proposals to revise the Commonwealth’s law, so be sure to check with your tax advisor to determine your best tax strategy.

OK,  let’s assume you and your tax advisor agree to consider itemizing your deductions and contribute to one or more favorite charities. To further the likelihood you will enjoy tax savings from your effort to do good, you’ll want to be sure your chosen charity is designated as tax-exempt by the Internal Revenue Service.

Happily, the IRS has a resource that will help … the Tax Exempt Organization Search tool which allows you to search for charities and identify their tax status and filings. If you choose to use the tool, here are the things to look out for:

  • Confirm an organization is tax exempt and eligible to receive tax-deductible charitable contributions.
  • Has an organization had its tax-exempt status revoked.
  • The list does not include certain organizations that may be eligible to receive tax-deductible donations, including churches, organizations in a group ruling, and governmental entities.
  • Organizations are listed under the legal name or a “doing business as” name on file with the IRS.

Questions about should you take the standard or itemized deduction route and whether a charity qualifies as tax-exempt … give us a call to discuss. We’ll respond promptly.

 

20 Nov 2018
Tax Credits, Tax Law Pearson & Co, PC 0 comment

2018 TAX PLANNING FOR THE FIRST YEAR UNDER THE NEW TAX CODE

Business & Individual Tax Rates, Deductions, Exemptions & Credits

Top of Mind Communications - Tax Planning Article

Once again, the season for tax planning is upon us … and this year with a number of challenges for both businesses and individuals. The primary driver is the changes brought about by the passage of the Tax Cuts and Jobs Act (TCJA).

On balance, most taxpayers, both businesses and individuals, will enjoy tax savings under the new regulations. Nevertheless, end of year planning is critical to maximize your benefits and minimize your tax bite.

End of year tax planning for businesses will include the need to factor in … reduced tax rates for C corporations; elimination of the corporate alternative minimum tax; allowance for a 20% deduction for individual owners of certain proprietorships, partnerships and S corporations; and accelerated up-front write-off for an ever-expanding group of business assets.

Among the changes affecting individual taxpayers include doubling the standard deduction, elimination of personal exemptions, and numerous itemized deductions reduced or eliminated.

Let’s take a closer look.

Our objective is to summarize the revised tax law provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances. Certainly, that may be a prudent step on your part as the tax code adjustments likely will affect your strategies to maximize benefits under the new law for you and your family.
This article is intended only as a review of the new law’s highlights. The details are beyond the scope of this piece so seeking advice from a professional tax expert is advised.
Now, as promised, let’s examine the tax rates, tax deductions, exemptions and tax credits provided for in the Tax Cuts and Jobs Act for both individual taxpayers and businesses.

Business Tax Planning Richmond VA

BUSINESSES

Income Taxes

  • Corporate tax rate lowered from 35 percent to 21 percent
  • Alternative Minimum Tax eliminated

Business Deductions

  • Pass-through business deductions – up to 20 percent of business related income; applies to partnerships, S corporations and sole proprietorships with some limits and exceptions. Deduction phases out for certain professional service individuals – starts at $315,000 for joint return filers and $157,000 for all other taxpayers.
  • Section 179 deductions for depreciable personal property permitted in one year rather than amortizing over several; maximum amount increased to $1 million per year.
  • Bonus depreciation now available on both new and used property.
  • Vehicle depreciation cap is increased and indexed for inflation; new limits are $10,000 (year 1); $16,000 (year 2); $9,600 (year 3); $5760 per year thereafter until cost is recovered.
  • Entertainment expenses – 50 percent deduction of business-related food and beverage expenses retained; no deduction for entertainment and membership dues.
  • Corporate interest expense deductions limited to 30 percent of income.

INDIVIDUAL TAXPAYERS

Tips for Individual Tax Payers from Top of Mind CommunicationsNote: Most individual changes are effective January 1, 2018 and will expire at the end of 2025.  Unless Congress passes another law prior to then, the old tax code provisions will be reinstated.

Individual Income Taxes

The Act retains the seven income tax brackets of the previous tax code, but with reduced tax rates for individuals in all brackets but one. The net effect of these reductions were realized by most employees as employer payroll withholding was reduced … resulting in increased take-home pay beginning with their February 2018 paychecks.

Comparison of New Tax Rates vs. Old
Icome Tax RatesNote: Capital gains rates remain unchanged under the new law.

Individual Deductions

  • Standard deduction doubled from $6,350 for single filers to $12,000; married and joint filers increased from $12,700 to $24,000. This, coupled with the changes to itemized deductions, is likely to lead to more taxpayers taking a simplified approach to filing, i.e. electing the standard deduction.
  • Mortgage interest deduction limited to the first $750,000 of the loan; permitted on first or second home; interest on loans up to $1 million initiated prior to December 15, 2017 grandfathered
  • Home equity loan interest eliminated unless used to buy, build or substantially improve the taxpayer’s home that secures the loan.
  • State and local income tax, sales tax and real property tax deductions limited to $10,000 in the aggregate
  • Miscellaneous itemized deductions eliminated; includes employee business expenses and investment advisor fees
  • Charitable contributions deductions are retained for those taxpayers able to itemize deductions
  • Deduction for medical expenses increased to 7.5 percent or more of income in 2017; 10% in 2019.
  • Alimony payments no longer deductible for new divorces beginning in 2019
  • Casualty losses to personal property no longer deductible unless covered by specific federal disaster declarations

Individual Exemptions

  • Personal exemptions of $4,150 eliminated
  • Estate tax exemption doubled to $11.2 million for singles and $22.4 million for couples
  • Alternative minimum tax exemption increased from $54,300 to $70,300 for singles; from $84,500 to $109,400 for joint filers

Individual Tax Credits

When compared to tax deductions, tax credits yield the better tax savings. Tax deductions reduce the amount of your income subject to tax. Tax credits directly reduce the tax itself.

For example, assume you or your business spends $5,000 that results in a tax deduction. That will reduce your taxable income by $5,000. In a 25% tax bracket, you would save $1,250 in taxes.

Now compare that with a $5,000 tax credit. That amount is subtracted from the amount of tax owed as opposed to an offset to income … as is the case with a tax deduction. Result: Your tax bill is reduced by the full $5,000 tax credit!

  • Child tax credit increased to $2,000 from $1,000
  • American Opportunity Credit and Lifetime Learning Credit remain unchanged
  • Credit of $500 for each non-child dependent.
  • 529 savings plans permitted for tuition at private and religious K-12 schools

Obamacare tax on those without health insurance repealed beginning in 2019

Summary

Again, the tax code revisions likely will affect your strategies to maximize benefits under the new law for you and your family. Our objective is to summarize the new provisions and prompt you to seek guidance from your tax advisor to determine the specifics as it pertains to your unique circumstances.

Alternatively, a time-saving and less stressful approach is to give us a call or drop an email to schedule a time to review the specifics of your unique situation and develop an optimum tax strategy that benefits you and your family.

With the new tax code as the frame of reference, we stand ready to help you with traditional end-of-year tax strategies that include deferring income to a later year and accelerating deductions into the current year. The TCJA may deliver on a number of additional benefits to you, your family and/or your business.

 

29 Oct 2018
Business, News, Tax Law Pearson & Co, PC 0 comment

END OF YEAR TAX STRATEGIES

END OF YEAR TAX STRATEGIES

For Business Owners and Individual Taxpayers

Pearson & Co. CPAs - November 2018 Blog Post

Yes … it’s hard to believe … the 2018 income tax season is nearly upon us. Certainly, seems like we just finished with 2017.

As the old adage goes, “No time like the present”, to start thinking about what steps to take to be sure you enjoy maximum tax-savings advantage in the first taxable year under the Tax Cuts and Jobs Act (TCJA).  So here are considerations for you to discuss with your professional tax advisor.

As ever, Pearson & Co. stands ready to serve you in your tax and accounting needs.

Pearson & Co. CPAs - Year End Tax Strategies

Business Owners

The TCJA reforms can affect the bottom line of many small businesses. Notably, the tax-saving benefits come down to three major categories:

  • Qualified Business Income Deduction
  • 100% Expense Deduction for Depreciable Business Assets
  • Employee Fringe Benefits

Qualified Business Income Deduction

This provision in the tax reform legislation applies to so-called pass-through businesses, i.e. enterprises’ income that is taxed on the firm-owners’ personal tax return. These entities include partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors.

All taxpayers who qualify as described above and who earn less than $157,500 and file singly ($315,000 for a married couple) can now deduct from their overall taxable income 20% of the income they receive via pass-through businesses.

There is more to the story, so be sure to seek guidance from a qualified tax professional. For example, S corporation owner’s salary must meet the “reasonable compensation” standard.

100% Expense Deduction for Depreciable Business Assets

For tax years 2018 through 2025, businesses are now able to write off most depreciable business assets in the year the business places them in service. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property.

Machinery, equipment, computers, appliances and furniture generally qualify. Additionally, the TCJA expands definition of eligible property improvements made to non-residential property.

Note: The maximum deduction increased from $500,000 to $1 million per year.

So if you’ve been holding off on these types of purchases, reconsider your position in light of the considerable tax savings that may result.

Employee Fringe Benefits

Entertainment and meals: The new law eliminates the deduction for expenses related to entertainment, amusement or recreation. However, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer or an employee of the taxpayer is present and other conditions are met. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Qualified transportation: TCJA disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting unless necessary for employee safety.

Bicycle commuting reimbursements: Employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. However,  these reimbursements in must be included in the employee’s wages.

Qualified moving expenses reimbursements: Reimbursements an employer pays to an employee in 2018 for qualified moving expenses are subject to federal income tax.

Employee achievement award: Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. The new law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities and other similar items.

An employer also may deduct awards that are tangible personal property, subject to certain deduction limits.

Pearson & Co. CPAs - Year End Tax Strategies

Individual Taxpayers

Double-check Your W-4 Form

If you haven’t already done so check to be sure that your employer is withholding the correct amount of federal taxes from your paycheck. The idea is to have your withholdings match your anticipated tax bill, thereby avoiding owing taxes or penalty. On a more positive note, you may find that it is more advantageous to have less withheld and enjoy more take-home pay.

The IRS has made your reality check simple. Just use the IRS Withholding Calculator. Here’s what to do.

Just click here and answer a few questions … Withholding Calculator

Harvest Stock Losses That Qualify as Tax Deductions

If you file jointly you may deduct up to $3,000 ($1,500 if filing singly) in losses on stocks you sell before year-end. Doing so will reduce your taxable income, plus offset any gain on stocks you sell as well.

Compare Benefits of Standard Deduction vs. Itemizing

The new tax law essentially doubled the standard deduction and significantly reduced the qualifications for itemized deductions. Even if you have a history of itemizing, this year you may be better off taking the standard deduction.

Note: Traditionally, Virginia tax law has conformed to federal. However, that is not the case today as the state standard deduction has not been increased to track with the revised federal rules. There are proposals to revise the Commonwealth’s law, so be sure to check with your tax advisor to determine your best tax strategy.

Maximize Your Tax Advantaged Retirement Plan Contributions

Make the most of your 401K, IRA and other tax favored savings plans.

Flexible Spending Accounts

Check on your plan’s deadline for withdrawals and your current account balance. To avoid losing funds, schedule your medical appointments and purchase other health care items covered by your plan.

Divorce Considerations – Possible Sense of Urgency

Thanks to the Tax Cuts and Jobs Act (TCJA), alimony payable for divorces entered into after this year will no longer be tax deductible to the payor and will not be taxed as income to the recipient. That may result in conflicting desires on the part of divorcing couples based on comparative benefits.

Couples considering a divorce should study five areas of concern before the end of the year … ideally with guidance from a tax professional and other expert advisors with a success history of dealing with married partners calling it quits.

  • Alimony
  • Business Valuation
  • Pensions
  • Other Assets
  • Prenuptial Agreements

Takeaways

Is the tax code complex? Yes … for both business owners and individual taxpayers. And this, the first taxable year under the revised tax code, stands to be even more complex as there are unanswered questions and interpretations that will continue to surface.

Pearson & Co. stands ready to help. Call or email … we’ll respond promptly!

24 Sep 2018
Supreme Court Ruling
Business, News, Tax Law Pearson & Co, PC 0 comment

SUPREME COURT RULING STUNS SMALL ONLINE BUSINESSES

SUPREME COURT RULING STUNS SMALL ONLINE BUSINESSES
At Stake … Comply With Tax Laws of 50 States and 3,000+ Counties
To Collect and Remit Sales Taxes

Pearson & Co. CPAs

In a decision earlier this year, the Supreme Court of the U.S. (SCOTUS) ruled that states may collect sales taxes on sales by businesses within the state … whether or not the business had a physical presence in the state. This overturned a 1992 SCOTUS ruling which limited states ability to collect sales taxes only from entities with a brick-and-mortar presence within its borders. The prior decision has now been declared “unsound and incorrect” by the high court.

Impacts of the latest ruling have been received as either an unprecedented economic burden or a long overdue and positive leveling of the playing field. Small businesses selling online subscribe to the former while larger companies and tax collecting jurisdictions applaud the decision. Let’s take a look at who loses, who wins and what role Congress may play as the repercussions of this ruling pan out.

Small Online Businesses

The real challenge for small online businesses is the complexity of compliance issue. Each state determines what products, goods or services are subject to sales tax. Additionally, there are county and local tax jurisdictions that may weigh in for their share as well. So small online businesses are faced with a myriad of designations of what’s taxable, by whom, and in what amount … without any uniform definition.

So from a practical standpoint, let’s consider a Virginia based business that sells online. Clearly, the responsibility for sales within the Commonwealth is to collect and remit taxes to appropriate tax collection entities. Depending on volume of sales, that may require a few hours or at most several days for an employee to perform this function as part of a larger job responsibility.

United States Counties

Now duplicate that function with clashing requirements by 50 states, 3,000+ counties and by some estimates potentially as many as 12,000 jurisdictions nationally … no longer a part-time activity. Perhaps a typical example is a small business paying $20 to $60 quarterly to each of dozens/hundreds of jurisdictions.

So businesses, especially small businesses, operate on the same basis as individuals … finite financial resources to be deployed in the most advantageous way to maintain and promote the value of the business to all stakeholders – customers, owners and employees. Cost to employ compliance personnel restricts or eliminates valuable assets that may otherwise be directed to job creation, capital formation and return on investment. That means added cost to the detriment of increased investment in economic growth with a “trickle-up” loss to the national welfare.

When you consider the sheer numbers of tax jurisdictions that now must be served by small online businesses, with no uniformity of compliance requirements, recognize another likely event … audits by out-of-state jurisdictions. What’s a small business to do when faced with a claim? Respond with legal representation to a demand letter … at what cost … or take the easy way out and pay the requested amount rather than trying to defend a far-off tax court action?

So small online businesses are stunned by the reversal of a long-held ruling that sales tax only need to be paid on sales where the business has a physical presence. What to do? Small online businesses are becoming aligned in an effort urging Congress to step in and create national standards for interstate commerce and supplant the current patchwork quilt of state and local tax laws. Stay tuned!

Effects on Larger Businesses

Larger Businesses … Including Those Seling Online

Companies that have a bricks-and-mortar presence have been unanimous in applauding the SCOTUS decision. Their claim, not entirely without merit, is that they have been operating at a competitive disadvantage. While online sales by small business are dwarfed by the revenues generated by the big guys, they continue to grow steadily and drive a concerted call for a more even playing field and fairer tax legislation.

A statement from Target read in part, “We are pleased the Court’s ruling will close the loophole that has allowed online-only retailers to avoid collecting and remitting sales taxes while still requiring local businesses to do so.”

Interestingly, supporters of the SCOTUS ruling include big online sellers like Amazon, Walmart and Target. While they now frequently collect and remit state taxes, local taxes are rarely if ever included in that effort. So this does add to their tax responsibilities, but they have a massive technology advantage over small sellers so are generally comfortable in dealing with the change.

Note:  Technological strength could become a boon for Amazon.  It already has the compliance machinery in place and can make it easy for a seller using Amazon’s platform to collect and remit sales tax. Small online retailers may be strongly motivated to engage with Amazon for this immediate resolution to challenges they may not be able to handle financially.

States, Counties and Local Tax Jurisdictions

“Follow the money” is often touted as a sure path to determine motivation. Sales taxes typically range broadly from 1 percent to 10 percent or so. If we think about 5 to 7 percent as a likely jump in added revenue, it’s not a tremendous windfall for the tax collectors.

That said, according to the SCOTUS decision, estimates of sales taxes lost to sellers outside of a jurisdiction run between $8 billion and $33 billion annually. As Senator Dirksen once said, “A billion here and a billion there … soon you’re talking about real money.” Clearly there has been definite support from tax collection jurisdictions for the current ruling.

As evidence of anticipation and desire for the change, many states had already passed laws to trigger tax collection when and if the Supreme Court decided as it did. That means that companies selling into these states are immediately subject to compliance. Again, small businesses will bear the brunt of the need to comply now or run the risk of audits, fines or a decision to withdraw from selling in certain states.

Tax Jurisdictions

The U. S. Congress

Many major online retailers have joined with small business groups to clarify the SCOTUS ruling and provide a framework that will both defend small businesses while providing uniformity and consistency for all online players regardless of size.

Congress has the authority to resolve the issue of online sales tax fairness, and create a solution that’s uniform across the country. That said it has failed to do so despite repeated introductions of legislation by members of Congress to resolve the issue. Congress’s most robust effort was the Marketplace Fairness Act, which was introduced in the Senate in 2013 and would have authorized states that had met standards for simplified sales tax rules to require large online and catalog retailers to collect sales taxes … notably with significant exemptions to protect small businesses. The Senate passed the MFA with a bipartisan vote of 69 to 27, but it was never brought to a vote in the House.

With this recent SCOTUS ruling and pressure building from the online selling community, perhaps this will be the year when the MFA is reconsidered and passed in some final form that clarifies the current confusion.

Takeaways

Our crystal ball is as cloudy as anyone else’s, but we’re convinced of two things:

  • It is likely with the current change as desired by larger online sellers and the potential financial burdens it imposes on the smaller players, Congress will act to resolve the inequities while maintaining a fair and just commercial climate for all.
  • Consumers will not be fazed by an added sales tax. They are used to it when going to a bricks-and-mortar store and the convenience plus savings in time and money will continue to accelerate online sales initiated by consumers.

 

 

31 Jul 2018
Estate Planning, Tax Credits, Tax Law Pearson & Co, PC 0 comment

VACATION RENTAL HOME BENEFITS & TAX BREAKS

VACATION RENTAL HOME BENEFITS & TAX BREAKS
Personal Use and As a Rental Unit

Well here we are half way through the summer and many of us have taken a vacation … maybe at a pricey resort or just day trips to the beach, lakes or the mountains. In this article, we’ll take a look at a vacation destination that could deliver more than just rest and relaxation, i.e.:

  • Less cost;
  • Added revenue stream;
  • Tax breaks; plus
  • Potential for capital appreciation.

That briefly outlines the advantages of a second home when employed as a vacation rental. So if you own a second home, or the boost in the economy prompts you to consider a purchase, then this article is for you.

OK, so let’s get a few basic definitions out of the way and examine tax treatment based on the mix of personal and rental use of a property.

Vacation Rental Home Benefits & Tax Breaks

A Vacation Rental Home … Not Necessarily a House

When it comes to vacation rental homes, the Internal Revenue Service makes the distinction that the property is used as a residence as opposed to a property used for businesses, such as an office building or retail center. Perhaps surprisingly, the IRS considers a “dwelling unit” to be a home, apartment, condo, mobile home, boat, or any other structure containing sleeping space, toilet, and cooking facilities. So that expands your potential investment choices in vacation rentals.

Note: If the property is used on a transient basis, as a hotel room would be, the IRS does not recognize it as a dwelling unit.

Personal Use vs. Rental – Effect on Tax Benefits

Pearson & Co. CPAs Blog Post - July 2018There are limits on the type and amount of expenses that you can deduct depending on how often you use the property for personal use and how often you rent it to others.

In general, there are two types of expenses associated with a vacation home – trade or business (or production of income) expenses and deductible personal expenses. Deductible personal expenses are items that are deductible in their entirety, regardless of whether the vacation home is personal use or rental property. Expenses in this category include casualty losses, state and local property taxes, and interest.

The first limitation on the deductibility of expenses is that the expenses related to a trade or business or the production of income (rental expenses) are only deductible to the extent you do not use the home for personal use. Basically, that is the number of days the unit is rented divided by its use for any other purpose during the taxable year – excluding days for repairs and maintenance. The resulting number is the amount of expenses tentatively deductible as rental expenses. There is more to the story, but these are the basics.

A second limitation also applies if your personal use is so extensive that the dwelling unit is treated as your “residence” for tax purposes. If the number of personal use days exceeds the greater of (1) 14 days or (2) 10% of the number of days the unit was rented at fair rental value, then the dwelling unit is a “residence” and you may not deduct any rental expenses that exceed the gross rental income from the property. Any deductible personal expenses not deducted because of the gross income limitation are allowed as itemized deductions.

In a few cases you must treat someone else’s use as your own. These include any day in which the home was used by a(n):

  • Member of your family,
  • Co-owner,
  • Member of a co-owner’s family,
  • Individual who is renting for less than fair rental value, or
  • Individual who is using your house under a “switching arrangement” that enables you to use another dwelling unit (such as switching a beach house and a mountain cabin).

It is important to note that family members’ use counts as your personal use even if they are paying fair rental value (unless they use the home for their primary residence). This is also true for the switching arrangement.

 

Rental Income and Tax Deductible Offsets

 

As previously mentioned, rental income generates an added revenue stream. Of course, that added income must be appropriately reported at tax time along with rent-related expense deductions.

Rent-related expenses may include such items as utilities, maintenance, upkeep, mortgage interest, real estate taxes and insurance. Additionally, the landlord may claim a depreciation deduction that relates to rental use. Interestingly, and often overlooked, is a deduction for the owner’s costs to travel to the vacation home on business connected to the rental.

Note: The Tax Cuts and Jobs Act include provisions that limit deductibility for acquisition debt and deductions for state and local taxes. There may be additional tax issues that could affect your unique tax status.

Takeaways

This article provides a basic overview of the definition of a dwelling unit and rules regarding vacation home rental expenses. There are other details to be considered. That said, if you own a second home and are thinking about using it as a rental property, or contemplating becoming a second home vacation rental landlord, I encourage you to call me to discuss your situation in more depth.

Pearson & Co. stands ready to help. Call or email … we’ll respond promptly!

 

 

31 Jul 2018
Tax Law Pearson & Co, PC 0 comment

FOUR TAX TIPS FOR SMALL BUSINESSES

FOUR TAX TIPS FOR SMALL BUSINESSES
The New Tax Law – Much to Applaud by Small Business

Here we are better than halfway through the 2018 tax year and small businesses have much to be happy about as a result of the Tax Cuts and Jobs Act (TCJA). That said, while there is much to applaud, there is also much to be aware of as we approach the upcoming tax season. In this article we’ll touch on some of the highlights plus 4 key tax tips for small businesses.

Pearson & Co. CPAs

Tax Changes and Net Effect on Small Businesses

Of course the biggest news was the dramatic reduction in taxes for both pass-through and corporate entities. Some taxes were reduced permanently for corporations and through 2025 for pass-through businesses.

Pass-Through Businesses: The one provision that is the object of the most discussion is the 20 percent deduction for so-called pass-through businesses, i.e. enterprises’ income that is taxed on the firm-owners’ personal tax return. These entities include partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors. Notably, this provision has far-reaching positive implications as about 95 percent of U.S. businesses are pass-through entities.

All taxpayers who earn less than $157,500 and file singly ($315,000 for a married couple) can now deduct from their overall taxable income 20% of the income they receive via pass-through businesses.

Note: The only limitation is on some service-based firms making more than the above income thresholds.

Corporations: The corporate tax rate is now 21 percent … a significant saving from the former 35 percent rate. Additionally, the Alternative Minimum Corporate Tax has been scrapped starting in 2018. In combination, this should have a positive effect on both capital formation and job creation.

First Year Bonus Depreciation: This is major for businesses that make eligible equipment and property purchases. The cost of these purchases may now be deducted 100 percent in the year made … up from 50 percent in past years. The incentive should result in the purchase of vehicles, computers and equipment that will further accelerate business growth and employment.

Transportation and Entertainment: Often offered as employee perks, tax-free employee commuter plans and reduced-rate entertainment plans will no longer be tax deductible expenses to employers. These fringe benefits may still be offered, but the expense deduction has been eliminated.

Pearson & Co. CPAsTips

Deadlines: Keep these dates in mind:

  • S-corporations – file business taxes by March 15.
  • 2018 tax returns due April 15, 2019.
  • Quarterly estimated tax deadlines are April 17, June 15, September 17 and January 15.

Taxes – Not a One-Time Event: Keep in mind that tax planning is a year-round process, not a one-time event at tax time. Maintain top-of-mind awareness regarding your tax situation.

Be Alert to Tax Law Changes: Even when working with a tax professional, make an effort to keep abreast of tax news. This will enrich your partnership with your tax preparer and potentially save you considerable tax dollars.

Ignore Taxes as Your Primary Decision Driver: Make your business decisions based on the best course of action for your enterprise. And never make your company judgments betting that reported tax breaks will be enacted.

Do It Yourself (DIY) is “Chancy”

OK.  The above is by no means a full rendition of all there is to know about the TCJA and small businesses. The net effects for small businesses are generally positive … but with enough twists and turns that really point to finding a tax pro that specializes in small business taxes.

If you choose a DIY path in monitoring your company’s tax status, here are a couple of resources that may help.

  • The U.S. Small Business Administration maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner. Click here for more information.
  • The IRS also maintains its own information center on self-employed and small business taxes. You can find the guide here.

Alternatively, if DIY does not appeal to you or appears risky …

Pearson & Co. stands ready to help. Call or email … we’ll respond promptly.

 

27 Apr 2018
Health Coverage
News, Tax Law Pearson & Co, PC 0 comment

QSEHRA: NOT A WORD … AN ACRONYM

QSEHRA: NOT A WORD … AN ACRONYM
Health Benefit Option for Employers with 50 or Fewer Employees

Health Coverage

 

If you are an employer with 50 or fewer employees and have not heard of or participated in QSEHRA, this article is for you. First let’s flesh out the acronym QSEHRA … Qualified Small Employer Health Reimbursement Arrangements.

In straightforward terms, these plans allow small employers to reimburse employees to help pay for medical expenses … including individual insurance premiums. Reimbursed expenses are tax deductible to the employer and received tax-free by employees.

Note: QSEHRA is welcome news for employers that offered Health Reimbursement Arrangements (HRAs) prior to health care reform legislation which significantly restricted the use of such plans with heavy penalties imposed for violations. QSEHRAs are an exception to the Patient Protection and Affordable Care Act (PPACA) of 2010 HRA requirements.

Since the QSEHRA benefit was passed in December 2016 as part of the 21st Century Cures Act, literally thousands of businesses now offer these plans across the country. Notably, a majority of companies that chose this route did so to offer employee health benefits for the first time.

Reception by participating employees has been noteworthy with employees using nearly 80 percent of the tax-free money available to them through plans in 2017.

Small business decision-makers are particularly attracted to QSEHRA. The average employee count by companies adopting a plan in 2017 was six. That would indicate that many, if not most of these companies are least likely to afford traditional group health benefits. QSEHRA offers an appealing and affordable option.

As you likely suspect, there are requirements and limitations that apply to both employers and employees under the QSEHRA regulations. Here’s a brief rundown.

Employers

  • With 50 or fewer employees qualify if not considered an Applicable Larger Employer (ALE) under the PPACA.
  • The employer does not offer a group health plan.
  • Reimbursements in 2018 are limited to $5,050 for single coverage and $10,250 for family coverage.
  • The plan must be offered to all employees under the same terms with few exceptions.
  • Notifications to employees of their participation requirements.

Employees

  • Must demonstrate they have minimum essential coverage through another source as required by the PPACA.
  • Reduce their premium tax credit by the monthly reimbursement received from their company if the allowance doesn’t comply with the PPACA definition of “affordable coverage.”

Summary

QSEHRAs provide a valuable benefit to employers in attracting and retaining quality talent. Additionally, employees may enjoy tax-free dollars as reimbursement for medical expenses for themselves and their families. That said there are requirements that must be maintained by employers adopting these plans, with significant negative tax consequences for non-compliance. Business owners be sure to seek assistance from a tax professional.

This article is meant as a summary of the QSEHRA provisions. There is more to the story, especially as it may apply to your specific circumstances.

As ever, Pearson & Co stands ready to help you determine the applicability of QSEHRA for your company. A call or an email will be met with a rapid response!

30 Mar 2018
Tax Law Pearson & Co, PC 0 comment

SO YOU GOT MORE MONEY IN FEBRUARY!

SO YOU GOT MORE MONEY IN FEBRUARY!
Caution: The Bump In Your Paycheck May Not Be All Yours!

Pearson Co. CPAs - March Newsletter

The reason your check was bigger last month is because income tax brackets under the new tax law have changed. That means that the vast majority of American workers are enjoying more money in their pocket this year over last.

OK.  So definitely cause to celebrate, but do so with a reality check to be sure there are no hidden surprises awaiting you this time next year … when you file your 2018 tax return. The surprise may be that you owe taxes rather than be “even” or anticipate a refund.

Reality Check

Your objective is to be sure that your employer is withholding the correct amount of federal taxes from your paycheck. The idea is to have your withholdings at least match your anticipated tax bill, thereby avoiding owing taxes or a penalty.

On a more positive note, you may find that it is more advantageous to have less withheld and enjoy more take-home pay.

Reality Check Tool – IRS Withholding Calculator

The IRS has made your reality check simple. Just use the newly released IRS Withholding Calculator. Here’s what to do.

Take just a few minutes to assemble the following information.

  • Your W-2
  • Most recent pay stubs.
  • Your 2017 income tax return, Form 1040.

Then click here Withholding Calculator and answer a few questions.

Your Withholding Calculator results will tell you whether you should ask your employer to revise your W-4 information to minimize or eliminate any negative impact on your tax liability. Alternatively, you may find that you will continue to enjoy more take-home pay.

If you need to have your employer change your deductions, you’ll need to provide a new Form W-4, Employee’s Withholding Allowance Certificate, you can use your results from the Calculator to help fill out the form and adjust your income tax withholding.

Note: If your circumstances change during the year, revisit the Calculator to make sure your withholding is still adequate.

Questions: Pearson & Co. will respond promptly. Give us a call or drop an email.

 

30 Mar 2018
2018 Tax Law Insights from Pearson & Co. CPAs
Tax Law Pearson & Co, PC 0 comment

NEW TAX LAW AND THE GIG ECONOMY

NEW TAX LAW AND THE GIG ECONOMY
Attractions and Aversion for Workers and Employers

Pearson CPAs New Tax Law and the Gig Economy

The 21st Century worker landscape is rapidly gaining altitude in the gig economy sector … that’s the increased motivation and availability by both employers and workers, respectively, to hire and be hired as independent contractors.

The percentage of workers that make up the gig economy is reported in wide swings depending on the source. Even the Bureau of Labor Statistics has admitted difficulty in counting the exact number of independent contractors and contingent workers. That said, one reliable statistical resource, Intuit, estimates that gig workers represent 34 percent of the workforce, and will grow to be 43 percent by 2020.

Driving this growth is the internet and its capability to support workers functioning remotely from their employer. Additionally, successes such as Uber and Airbnb has called attention to many who had not considered the potential to perform as contingent workers either as their primary occupation or, in current vernacular, as a side-hustle.

The Tax Cuts and Jobs Act

Now the new tax law may accelerate that trend by rewarding workers who convert their status as employees to that of independent contractors. A distinct benefit under the new tax law is the “20% pass-through” tax deduction. In simplest terms, this allows sole proprietors, partnerships and S Corporations to deduct 20 percent of their “qualified business income” from their taxable income … meaning only 80 percent would remain taxable.

Admittedly, it’s difficult to predict how many workers will choose this route. For couples filing jointly, $315,000 is the cap above which the deduction is phased out. That said, joint filers who approximate that figure could find it to be a compelling option to make the change. Estimates are that the tax savings could approximate $15,000 per year in this scenario.

Many employers may benefit from this new provision in the tax law as well … particularly those who are seeking to reduce their payroll costs. Often independent contractors tend to be cheaper, plus payroll taxes that are the employer’s responsibility are passed on to the contingent worker.

Consider This

So caution to workers is the prudent route before taking steps to convert from employee to gig worker. Here are just a few considerations:

  • Loss of unemployment insurance;
  • No longer covered by workers compensation;
  • No predictable, steady income – subject to peaks and valleys of assignments;
  • Need to pay both the employer and employee portion of federal payroll taxes;
  • The Department of Labor and IRS have increased scrutiny in determining a workers status as truly being an independent contractor or must be treated as an employee.

As ever, we stand ready to help. A phone call or email to Pearson & Co. is all it takes.

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