Tax Reform Framework Released

President Trump announced a nine-page framework for tax cuts on September 27, 2017. The Framework capitalizes on many ideas previously presented in the President’s Tax Outline and in the House Republican Blueprint. Congressional tax-writing committees have a lot of work to do in refining the details, but it gives us an idea of where tax reform may be headed.

Individual Tax Rates

The current rates now fall into seven brackets, ranging from 10% to 39.6%. The proposed plan would consolidate the current individual tax brackets into three: 12%, 25% and 35%. An additional top tax rate may be added and apply to the “highest-income taxpayers,” but it fails to mention the income level at this might take effect, or the rate that would be imposed.

The plan also does not specify which income levels would be taxed at each rate— and if the highest rate is set at 35 percent—it would greatly benefit the wealthiest taxpayers, who currently pay a top rate of 39.6 percent on income greater than $418,400 for single filers.

Child and Dependent Care Credits

Although the rate applied to the lowest income bracket would increase, typical families in the existing 10 percent bracket may be better off because of a larger child tax credit as well as an increase in the standard deduction. The child tax credit would be “significantly” increased, including a refundable portion offered to taxpayers who have higher levels of income than current law allows.

A new, non-refundable credit of $500 for those caring for non-child dependents (such as an elderly parent) would be added.

Standard and Itemized Deductions

Most itemized deductions would be eliminated, meaning that large medical expenses, state and local income taxes, real estate taxes, investment expenses and investment interest expense would no longer be deductible. However, home mortgage interest, charitable contributions, and tax benefits encouraging work, higher education and retirement savings would be retained.

The standard deduction and personal exemptions would be combined into one larger standard deduction: $12,000 for single filers and $24,000 for married taxpayers filing jointly. Home mortgage interest, charitable contributions, and tax benefits encouraging work, higher education and retirement savings would be retained. This means that Such a revision of the tax code, if enacted, would greatly increase the number of taxpayers choosing the standard deduction. The new, single deduction would be higher for many filers, except those who claim multiple children

The Alternative Minimum Tax (AMT) and the federal estate tax and generation-skipping transfer tax would be repealed under this framework. It is suspected that that the repeal will apply to gift taxes, as well.

Business and Corporate Taxes

The tax rate would be reduced for regular or “C” corporations from 35% to 20%. The corporate Alternative Minimum Tax (“AMT”) would be eliminated along with other methods to reduce the double taxation of corporate earnings.

Many small businesses are structured as “S” corporations, partnerships, limited liability companies (LLCs), or sole proprietorships; all of which pass through business profits and losses to their owners’ personal tax returns. Thus, “C” corporation income taxes may be avoided but the owners face personal tax rates as high as 39.6%. Pass-throughs now make up about 95 percent of businesses in the country and the bulk of corporate tax revenue for the government.

Under the proposed framework, business income from these “pass-through entities” would be taxed at a rate no higher than 25%. Such a measure would need to be drafted carefully in order to prevent personal income of wealthy individuals from being reclassified into lower-taxed business income. Whether these distributions would then be subject to a second level of tax at the individual owner level also needs to be addressed.

Deductions and Tax Credits

Most special deductions and tax credits, other than the R&D credit and the low-income housing tax credit, would be eliminated. It’s not clear which deductions will be eliminated; however, the Section 199 deduction was specifically mentioned as being eliminated.

Replace system of taxing companies’ worldwide income with a 100% exemption for dividends from foreign subsidiaries in which U.S. parent has a 10% stake or more. Reduce tax rate and tax on a global basis the foreign profits of U.S. multinational corporations.

Tax Write Offs for Depreciable Assets

Businesses that invest in depreciable assets, other than buildings, after September 27, 2017 would write them off immediately. This tax benefit, with no upper limit, would be in place for at least five years. As a tradeoff, the tax-deductibility of interest expense incurred by most taxable corporations would be partially limited.

If you have questions about how the proposed tax reform might affect you, please call us.

 

Enhance Your Cash Flow, Enhance Your Business: The Top Tips You Need to Know

We’ve discussed at length in the past about how cash flow is ultimately one of the most important factors of a business that far too many people just aren’t paying enough attention to. Cash flow maintenance is about more than just knowing how much money is coming in versus how much money is going out. Even if your business is very close to true profitability, this ultimately won’t mean a thing if you’re dealing with clients who are slow to pay. This can seriously impact your momentum, and worse — your chances at long-term success.

To put it simply, enhancing your cash flow isn’t just about enhancing your accounting — it’s also about enhancing the very organization you’ve already worked so hard to build. With that in mind, there are a few key tips you’ll absolutely need to know about moving forward.

Technology Is Your Friend. It’s Time to Start Acting Like It
Perhaps the most important tip that you should start using to enhance your cash flow (and thus, your entire business) is to start leveraging the power of modern technology to your advantage. There are a wide range of different financial solutions that allow you to not only submit invoices to clients electronically, but that then allow those clients to pay you in exactly the same way.

Not only will this make it far, far easier for you to track money that is still “in play” so to speak, but it will also significantly help shorten the time it takes to get you paid for your products and services in the first place. This means that money will be coming in at a much faster rate, helping to make sure that you have the cash on hand necessary to take advantage of certain opportunities as they develop.

Use Your Credit Cards in the Right Ways
Another key tip that you can use to enhance your cash flow actually involves using your company credit card for purchases that you may otherwise pay for by check. Using your company credit card gives you an extra grace period to pay off the card in full each month. This essentially allows you to “push” that cash payment down the road, giving you a bit more breathing room than you’d have rather than the net 15 or net 30 that you’d be dealing with for check-based payments.

Get Organized and Stay That Way
Perhaps the most important step that entrepreneurs can take to enhance their cash flow involves not just getting organized, but doing anything that they have to in order to stay that way as long as possible. Consider creating different types of tier groups in your records, clearly separating people based on when they absolutely need to be paid.

Order everyone by who must be paid first — meaning that you’re definitely going to want to prioritize the government, payroll and certain vendors that may shut off your access to resources before anyone else. Certain others, on the other hand, can easily be paid later without too much undo fuss. Sure, you’d love to be able to pay everyone at the same time — but in the event that you can’t, this information will be invaluable to have when making strategic decisions regarding where your available funds should go.

This itself can also help identify certain trends and patterns that make the next six, 12 and 24 months of essential decisions far easier to predict.

Never Be Afraid to Consult a Professional
At the end of the day, the most important tip that you need to not just understand but truly believe in with regards to cash flow is that you should never be afraid to enlist the help of a trained professional. You’re a business leader and you’re good at what you do. You wouldn’t have gotten this far if you weren’t.

However, that doesn’t make you a financial expert and it certainly doesn’t mean that you’ll have the time necessary in a day to devote to something as mission-critical as proper bookkeeping and other financial tasks. In certain cases you might, sure — but if you start to feel like this is getting overwhelming, it is in your own best interest to pick up the phone and find someone who can lend you a much-needed helping hand. Find an accounting expert who doesn’t just have experience in terms of cash flow, but who understands your niche and knows exactly how a business just like yours needs to perform.

Not only will this help put you in a better position to make positive cash flow gains moving forward, but it’ll also give you the essential peace of mind that only comes with knowing your financial needs are being properly (and actively) taken care of.

A Novel Way to Make Hurricane Relief Donations

As they have done before in the wake of disasters, including Hurricane Katrina and Superstorm Sandy, the Internal Revenue Service is providing special relief that allows employees to donate their unused paid vacation, sick leave, and personal leave time to recent hurricane relief efforts.

Here is how it works: if your employer is participating, you can relinquish any unused and paid vacation time, sick leave and personal leave for cash payments which your employer will give to qualified hurricane relief charitable organizations. The cash payment will not be treated as wages to you and your employer can deduct the amount donated as a business expense. However, since the income isn’t taxable to you, you will not be allowed to claim the donation as a charitable deduction on your tax return. Even so, excluding income is often worth more as tax savings than a potential tax deduction, especially if you generally claim the standard deduction or you are subject to AGI-based limitations.

This special relief applies to all donations made before January 1, 2019, giving individuals over a year to forgo their unused paid vacation, sick and leave time and have the cash value donated to a worthy cause.

This is a great opportunity to provide sorely needed help in the aftermath of the recent hurricanes without costing you anything but time. Contact your employer to make a donation. If your employer is unaware of his program refer them to IRS Notice 2017-48 for further details.

If you have questions related to donating leave time for hurricane relief efforts or other charitable contributions, please contact us.

Are Your Important Tax Documents Safe in Case of a Disaster?

You may think a natural or man-made disaster will never happen to you, but it can be a nightmare when it does. The 2017 hurricane season is a good example, not to mention the wildfires in the West, the tornados in the Midwest, plus the potential for inevitable earthquakes.

You could lose all of your tax records, business records, insurance policies, birth certificates, and other key documents.

You can help yourself by storing duplicates of important or irreplaceable documents in a waterproof container away from the original set. If you think this will be too difficult, at least keep the original documents in a waterproof container.

If you are computer savvy, an easier way to keep your records out of harm’s way is to store digital copies of the documents on a remote server (i.e., in the cloud). It may cost a few bucks, but the digital files will be there when you need them, regardless of what happens to your home or business location.

Most financial institutions these days provide all of their documents digitally, and you can store those documents on your remote server or even retrieve them from the financial institution’s website. However, before relying on the financial institutions, make sure they retain your records for long enough to meet your needs.

For example, you generally need to keep individual tax records for up to 3 years after the tax return due date for the tax year or the date when you filed the return, if it was filed after the due date. For example, your 2016 return was due April 18, 2017. If you filed it on or before April 18, the statute of limitations for the 2016 return would not run out until April 15, 2020. So, you would have to keep the records until then for the 2016 tax return. (The statute of limitations runs for 4 years for some states, and some records need to be kept longer for both federal and state purposes.) If some of your files are not already available digitally, you can always scan the originals to create digital copies.

Another very important thing to everyone is family photos. Modern-day pictures are digital, so you can save them on a remote server, or many photo services will save them online for you. For the older important ones, you can scan them or take digital pictures of them with your camera.

Another important document to have is a list of your home’s and business facility’s contents for insurance purposes. The quick and easy way is to take a video or pictures throughout the house or business showing the furnishings and equipment. A better method is to take the pictures or video and back them up with a detailed list of the items in each room.

Self-Help Publications:

Please give us a call if you have questions about retaining records or if we can provide any other assistance.

Avoid Being Scammed by Fake Hurricane Charities

Whenever there is a disaster such as the recent hurricanes, the lowlifes show up and try to scam generous individuals out of money intended to go to victims of the disaster. Don’t you be another victim of the disaster – watch out for scammers claiming to represent charitable organizations who will pocket the donations for themselves instead. Besides fraudsters soliciting on behalf of bogus charities, some so-called charities aren’t entirely honest about how they use contributions.

You may receive phone calls, emails, snail mail, or appeals on social networking sites for donations to help the victims of the recent hurricanes;  some of these appeals may be coming from fraudsters and not legitimate charities. Unfortunately, this happens often after natural disasters such as earthquakes and floods.

So before writing a check or giving your credit card number to a charity that you aren’t familiar with, check them out so you can be assured that your donation will end up in the right hands. Follow these tips make sure that your charitable contributions will actually go to the cause you are supporting:

  • Donate to charities that you know and trust. Be alert for charities that seem to have sprung up overnight in connection with current events.
  • Ask if a caller is a paid fundraiser, who he/she works for, and what percentages of your donation go to the charity and to the fundraiser. If you don’t get clear answers – or if you don’t like the answers you get – consider donating to a different organization.
  • Don’t give out personal or financial information – such as your credit card or bank account number – unless you know for sure that the charity is reputable.
  • Never send cash. You can’t be sure that the organization will receive your donation, and you won’t have a record for tax purposes.
  • Never wire money to someone who claims to be from a charity. Scammers often request donations to be wired because wiring money is like sending cash: once you send it, you can’t get it back.
  • If a donation request comes from a charity that claims to help a local community group (for example, police or firefighters), ask members of that group if they have heard of the charity and if it is actually providing financial support.
  • Check out the charity’s reputation online using Charity Watch, or other online watchdogs.

Contributions you make to legitimate charities may be tax-deductible, but only if the donations are to religious, charitable, scientific, educational, literary, or other institutions that are incorporated or recognized as organizations by the IRS. These organizations are sometimes referred to as 501(c)(3) organizations (after the code section that allows them to be tax-exempt). Gifts to federal, state, or local government; qualifying veterans’ or fraternal organizations; and certain nonprofit cemetery companies may also be deductible. Gifts to other kinds of nonprofits, such as business leagues, social clubs, and homeowner’s associations, as well as gifts to individuals cannot be deducted.

To claim a cash contribution, you must be able to document that contribution with a bank record, a receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization and the date and amount of the contribution. Valid types of bank records include canceled checks, bank or credit union statements, and credit card statements. In addition, to deduct a contribution of $250 or more, you must have an acknowledgment of your contribution from the qualified organization; you’ll also need certain payroll deduction records instead if you made your donation through work.

Be aware that you must also itemize your deductions to claim a charitable contribution. It may also be beneficial for you to group your deductions in a single year and then skip deductions in the next year. Please contact us if you have questions related to the tax benefits associated with charitable giving for your particular tax situation.

QuickBooks Tip – Using QuickBooks’ Income Tracker

You can get an enormous amount of useful information from QuickBooks’ reports – especially if you customize them to isolate the precise data you want. Reports included with the software range from the very simple, like Open Invoices, to output that’s exceptionally complex, like Trial Balance and Profit & Loss.

Warning: Standard financial reports like Trial Balance are easy to run in QuickBooks, but very difficult to understand and analyze. You should, though, be aware of what they’re telling you at least once a quarter – even once a month in some cases. We can help with this.

Sometimes, especially first thing in the morning as you’re planning your day, you just want to cut to the chase and get a quick overview of your company’s finances. That’s where QuickBooks’ Income Tracker comes in. It not only provides that overview, but it also contains links to related screens where you can do the work that’s needed there.

A Simple Layout
Click the Income Tracker link in the toolbar to open the tool’s main screen. If you’ve been using QuickBooks for a while, you’ll see a framework like this with your own company’s data already filled in.

QuickBooks Income Tracker displays both summaries of income types and the specific transactions that contribute to those totals.

Look first at the top of the screen. You’ll see six horizontal bars, each of which represents groups of transactions that either require immediate attention or will at some point in the future. Besides identifying the type of transaction, each block displays the number of transactions involved and their total dollar amount. They are:
  • Estimates – estimates that have been created and shared with customers, but haven’t yet turned into sales
  • Sales Orders – orders that have been entered but have been neither fulfilled nor converted to invoices
  • Time & Expenses – hours that have been recorded for customers but not yet invoiced
  • Open Invoices – invoices that have been created and sent to customers, but no payments have been received
  • Overdue – open invoices that have passed their due dates
  • Paid Last 30 Days – payments that have been received within the last 30 days

Modifying the View
Click on any of the colored bars, and the list of transactions below will change to include only those that meet that particular criteria. To get back to the default display of all transactions, click the Clear/Show All link in the upper right of the screen.

QuickBooks also lets you display a user-defined subset of the transactions. Click on one of the four drop-down lists above the transaction grid itself to change the view of:

  • Customer: Job – choose just one from the complete list
  • TypeSales Orders, Invoices, Received Payments, etc.
  • StatusAll, Open, Overdue, or Paid
  • Date – multiple ranges available

You can also modify the toolbar if your company doesn’t use all the sales forms/transaction types supported. To do so, click the gear icon in the far upper right of the screen and click in the boxes in front of Estimates, Sales Orders and/or Time & Expenses to remove them.

Taking Action
QuickBooks’ Income Tracker provides a great way to get a quick look at your finances. But it also serves as a launching pad for related activities.

Click the down arrow in the Action column to take care of tasks related to that transaction.

Highlight a transaction by clicking in the row, then click the down arrow at the end of the row in the Action column. The options that appear there depend on the type of transaction you selected. Choose a Sales Order, for example, and you can Convert to Invoice, Print Row, or Email Row. Options for an invoice are Receive Payment, Print Row, or Email Row.

As we said before, QuickBooks offers numerous reports that can give you more insight about your accounts receivable. If you understand the software’s robust customization tools, you can create reports about your income that will answer questions you may have. If you don’t, let us know. We’ll be happy to work with you on pulling together just the data you need.

When is a Charitable Contribution Appraisal Required?

A commonly overlooked requirement of taking a tax deduction for donating clothing and household goods to charity is the substantiation requirement, for both what is donated and the value placed on the donation. Because the IRS has encountered so much abuse in this area, it has increased the donation verification requirements over the years, and taxpayers risk losing the deduction if their donations are not correctly documented and reasonably valued.

Fair Market Value – Generally, it is up to you, the donor, to reasonably determine the fair market value (FMV) of the items you donate. If your return is reviewed, the values you claimed can be challenged. A deduction for household goods or clothing is not allowed unless they are in good used condition or better. The FMV of used household goods, furniture, appliances, linens, used clothing and other personal items are usually worth far less than the price they sold for new. Valuing these items as an arbitrary percentage of the original cost or by using another fixed formula is not appropriate – the condition of each item, whether it is still in style and other factors need to be considered. The value of the donated item(s) will determine the type of verification needed. The documentation and verification requirements are broken down into four categories:

  • Deductions of less than $250 – These donations require a receipt from the charity that includes the date and location of the contribution and a reasonably detailed description of the donated property.
    CAUTION – Don’t always rely on door hangers as a valid acknowledgment, since they generally do not include all of the required information (especially the reasonably detailed description of the donated item), and their use as documentation has been denied in tax court.
  • Deductions of $250 to $500 – Such deductions require a written acknowledgement from the charity that includes the date and location of the contribution and a reasonably detailed description of the donated property, whether the qualified organization gave you any goods or services as a result of the contribution, and if goods and/or services were provided to you, a description of the goods/services and an estimate of their value.
  • Deductions of over $500 but not over $5,000 – You must have the same acknowledgement and written records as for contributions of at least $250 but not more than $500, as described above. In determining whether your deduction is worth $500 or more, combine your claimed deductions for all similar property items donated to any charitable organization during the year. In addition, the records must also include:
    • How the property was obtained – for example, by purchase, gift, bequest, inheritance, or exchange.
    • The approximate date when the property was obtained or, if you created, produced, or manufactured it, the approximate date when the property was substantially completed.
    • The cost or other basis, and any adjustments to the basis, of property held for less than 12 months and, if available, the cost or other basis of property held for 12 months or more. However, this requirement does not apply to publicly traded securities. If you are unable to provide either the date the property was obtained or the cost basis of the property and there is reasonable cause for not being able to do so, you need to attach a statement to your return with an explanation.When your total deduction for all noncash contributions for the year is over $500, Form 8283 must be completed and attached to your Form 1040.
  • Deductions over $5,000 – You must have the same acknowledgement and written records as for contributions of at least $250 but not more than $500, as described above. In addition, if the contribution exceeds $5,000 for a single property item or group of similar items, then a qualified appraisal is required, and IRS Form 8283 must be completed, signed by the qualified appraiser and attached to the return. The exception to this rule is publicly traded securities.

Example: Jay and Emily made three donations of used clothing during the year: $2,500 worth to the Salvation Army, $1,500 worth to the Vietnam Veterans of America and $2,000 to Goodwill, for a total of $6,000. Because the items were all similar in nature (clothing) and because the total exceeded $5,000, Jay and Emily will need to obtain a qualified appraisal.

Qualified Appraisal – A qualified appraisal of any property is an appraisal that’s treated as qualified under IRS regulations. This means that the person doing the appraisal is generally someone who earned an appraisal designation from a recognized professional appraiser organization, has met certain education or experience requirements relative to the type of property being appraised, regularly prepares appraisals for a fee and has not been prohibited from practicing before the IRS.

Appraisal Timing– You must obtain the appraisal no earlier than 60 days before the appraisal property’s contribution date and no later than the extended due date of your tax return.

CAUTION – If you don’t bother to obtain an appraisal and the IRS later challenges your deduction, it will be too late to get the appraisal, and the deduction will most likely be denied.

Donations of vehicles, boats and airplanes have a special set of rules not covered in this article if the claimed deduction exceeds $500. Please give us a call about the documentation requirements for vehicle donations and any questions you might have related to any charitable contribution. Click here to download a special non-cash contribution form.

How to Identify When the Time Is Right to Bring an Accounting Pro Into the Fold

Running your own business is a complicated affair with a wide range of different “moving parts” to concern yourself with, but many people don’t realize how many of them ultimately lead back to your finances until it’s far too late.

A large part of your ability to be successful in the long-term will ultimately come down to the rate at which you expand. Grow your business too quickly and you might spread yourself too thin. Grow too slowly and you’ll be passing up opportunities that are rightfully yours, leaving a lot of money on the table at the same time. Your control over your finances will dictate whether you’re able to strike that perfect balance the way you need to.

Marketing, paying vendors, paying employees, managing client relationships – all of it depends on the quality of your bookkeeping (or lack thereof). To that end, a large part of your success will ultimately come down to your ability to identify when the time is right to stop doing things yourself and bring a professional accounting provider into the fold. To do this, you’ll need to keep a few key things in mind.

The Warning Signs You Need to Know
As it does every year, Intuit recently released a survey outlining the state of small business accounting in the United States. The results are very telling in terms of when people should bring a financial professional into the fold – and what the consequences are of inaction.

Asset tracking, for example, is something that you may not immediately think impacts your bookkeeping, but it does in a fairly significant way. Ghost assets are fixed assets that have either been rendered unusable or are physically missing. However, “out of sight, out of mind” does not apply in this case – they still count toward a business’s tax and insurance liability, thus making it difficult to properly reconcile their books every year.

Of the people who responded to Intuit’s survey, 74% indicated that they didn’t understand this, and 49% said that they didn’t even know what ghost assets were in the first place. If you are among those numbers, congratulations on arriving at one of the biggest indicators that you need to bring a financial professional into your business (and also that you’ll likely want to conduct inventory on a regular schedule moving forward).

Other signs that the time is right to bring a accounting professional into the fold ultimately come down to the most pressing financial issues that most businesses face. 51% of people who responded to Intuit’s survey said that accounts receivable and collections were their most significant business challenge. 44% said that cash flow was always something they were concerned about, and getting a better handle on “money in vs. money out” was always a top priority.

Cash flow troubles, it is important to note, is the number one reason why most small businesses fail within the first four years of existence.

Other pressing issues included properly managing paperwork on a regular basis, accurately closing the books each month, and managing payroll. The major thing to understand is that a financial professional will be able to help with ALL of these things, taking the stress off your plate so that you can focus simply on running your business like you should be. If ANY of these things are ones that keep you awake every night, or you feel these issues are significantly affecting your ability to grow and evolve, guess what? It’s time to contact a professional to do as much of the heavy lifting as possible.

Never Underestimate the Power of Trust
Consider it from another perspective. Recently, small business owners responded to a survey outlining all of their most pressing accounting issues. The survey, conducted by Wasp Barcode Technologies, spoke to 393 small business leaders of nearly every organization size and industry that you can think of.

When asked to rank the professionals that they worked with on a regular basis in the order of importance, these business leaders overwhelmingly agreed that accounting experts were one of the single most valuable assets they had. They outranked attorneys, insurance agents, technology firms and even staffing services.

This is how important tax professionals are: Business leaders know that much of what they’re trying to do each day, along with what they hope to be able to accomplish in the future, would be impossible without the stable foundation that only an accounting professional can provide.

When It Comes to Accounting, Knowledge Is Power
At the end of the day, it’s important to remember what may be the single most important piece of advice for small business owners when it comes to accounting: It is far, far cheaper to hire an accounting professional today before things get out of hand tomorrow.

Think about it this way: A large part of the reason why you got where you are today is because you took the initiative and started to do things for yourself. You have a “can do” attitude that just won’t quit, and you’ve built something incredibly successful from the ground up as a result. But there are certain situations where you cannot let pride get in the way of making the right decision, and accounting is absolutely one of them.

You already have a full-time job: running your business. You don’t have the time to take on another one, let alone the expertise to guarantee that you’re making the best decisions at all times. Yet this is exactly what business accounting is – a heavily specialized, full-time job that requires a careful hand and attention to detail that is second to none.

Bringing in a professional sooner rather than later will not only help make sure that you have cleaner books and other records, it will also significantly reduce the chance that you’ll get hit with penalties for things like late taxes and allow you to be much, much more successful in the long term. These types of benefits, to say nothing of the peace of mind that only comes with knowing your accounting is taken care of, are things that you literally cannot put a price on.

Hurricane Harvey Tax Ramifications and Casualty Loss

With the historic flooding and damage caused by Hurricane Harvey, President Trump has declared the affected area a disaster area. If you were an unlucky victim and suffered a loss as a result of this disaster, you may be able to recoup a portion of that loss through a tax deduction. When you suffer a casualty loss within a federally declared disaster, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.

Income Tax Casualty Loss – By taking the deduction for a 2017 disaster area loss on the prior year (2016) return, you may be able to get a refund from the IRS before you even file your tax return for 2017, the loss year. You have until six months after the original due date of the 2017 return to make the election to claim it on your 2016 return, in most cases by filing an amended 2016 return to claim the disaster loss. Before making the decision to claim the loss in 2016, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.

If you elect to claim the loss on either your 2016 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.

If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2016 or 2017 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more than 20 years), or you can elect to only carry the unused loss forward.

Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.

Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.

For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster. As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.

Extension of Filing and Payment Due Dates – The IRS has announced that Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments.

This tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes:

  • The Sept. 15, 2017 and Jan. 16, 2018 deadlines for individuals making quarterly estimated tax payments.
  • The 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief and may be subject to late payment penalties.
  • The Oct. 31 deadline for quarterly payroll and excise tax returns by certain businesses. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the IRS web site related to disaster relief.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.

If you need further information on filing extensions, casualty and disaster losses, your particular options for claiming a loss, or if you wish to amend your 2016 return to claim your 2017 loss, please give our office a call.