Not All Interest Is Deductible For Taxes

A frequent question that arises when borrowing money is whether or not the interest will be tax deductible. That can be a complicated question, and unfortunately not all interest an individual pays is deductible. The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:

  • Personal interest – is not deductible. Typically this includes interest from personal credit card debt, personal car loan interest, home appliance purchases, etc.
  • Investment interest – this is typically paid on debt incurred to purchase investments such as land, stocks, mutual funds, etc. However, interest on debt to acquire or carry tax-free investments is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by investment expenses (other than expenses related to investments that produce non-taxable income). The investment interest deduction is only allowed to taxpayers who itemize their deductions.
  • Home mortgage interest – includes the interest on a taxpayer’s primary home and a single second home. However, the debt for which the interest is deductible is generally limited to $1 million of home acquisition debt (debt used to purchase or substantially improve the home(s)) and $100,000 of equity debt between the first and second homes. Both the acquisition debt and the equity debt must be secured by the home(s) to be deductible as home mortgage interest. In addition, home mortgage interest is only deductible by those who itemize their deductions. Tax Tip: Equity debt can be used to purchase personal use items, and thereby a tax deduction for the interest paid on that loan is allowed.
  • Passive activity interest – includes interest on debt that’s for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active but not necessarily material participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
  • Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., “follow the money.”

These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:

Example 1: A taxpayer takes out a loan secured by his rental property and uses the proceeds to refinance the rental loan and buy a car for personal use. The taxpayer must allocate interest expense on the loan between rental interest and personal interest for the purchase of the car, and even though the loan is secured by the business property, the personal loan interest portion is not deductible.

Example 2: The taxpayer borrows $50,000 secured by his home to be used in his consulting business. He has no other equity debt on his home. He deposits the $50,000 into a checking account he only uses for his business. He cannot deduct the interest on his business and must instead deduct the interest as home equity debt interest on his Schedule A (if he itemizes his deductions), as the debt is secured by his home and is less than the $100,000 limit for equity indebtedness.

Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.

As you can see, it is very important to plan your financing moves carefully, especially when equity in one asset is being used to acquire another. Please call us for assistance in applying the various interest limitations and tracing rules to ensure you don’t inadvertently get some unexpected results.

The Ultimate Cheat Sheet on Growing Your Business

Every business must have a constant eye on growth. If your company is not growing, it is losing key opportunities and longevity. Yet, growth does not always come from increased sales. In many cases, it’s important to take an inside look at how you are operating, what costs you have, and how you can better manage day-to-day operations. To stimulate growth in your business – no matter the sector – focus in on these key areas specifically. It could mean improving your company’s ability to compete at a higher level.

Using KPIs to Guide Growth and Budgeting
Key Performance Indicators (KPIs) help you know how your company is performing. They should be used as a compass and guiding point for every decision you make within the company. KPIs such as profit, cost, sales by region, customer lifetime value, and product defects are just some of the areas to focus on. To achieve clarity here, you need an efficient way of managing all of this data. Cloud computing makes it possible along with implemented automation. These metrics can provide you with key opportunities for:

  • Growth
  • Cost-cutting
  • Better employee management
  • Better customer management
  • Scaling limitations and much more

Use KPIs to help guide every one of your company’s decisions about growth from this point out. Invest the time in learning what these figures are to get started.

Real-Time Cloud Accounting and Improving the Books
A good place to focus attention is on your accounting. Here’s what to look for:

  • Are you in the cloud yet? This provides the most effective and efficient way to manage your business’s books.
  • Real-time access means you can pull up reports and profit margins to get a clear understanding of opportunities.
  • Put more attention into accuracy and bottom lines. If you are not working with a professional service to improve your accounting clarity, what every dollar means, it is time to do so.

Use Reviews and Social Proof to Convert More Clients
Social proof and reviews are insights into what your customers are thinking, expecting, and desiring. They provide an opportunity for you to get more info on what your customers want. Social proof indicates that someone “says” your product or service is good. That means other people are going to flock toward this. Learn what reviews are out there. Amplify your marketing to focus on them. Build strong customer relationships through this process.

Shoring Up Cash Flow by Reducing Costs and Boosting Efficiency
Next, take a look at your efficiency. Using your KPIs, you can provide more insight into key areas of cost. For example, spend the time examining the various costs your company has and work to reduce them. Then, find more efficient methods to improve production, employee productivity, and customer service.

Extend Market Reach by Honing in on Your Target Market or Expand Your Reach
Establish who is your target market. Instead of marketing to the masses, reach people where they are. For example, if you are targeting Millennials as your ideal client, marketing on social media and connecting digitally is essential. For seniors, television and local ads still reign as ideal.

At the same time, consider the value and potential possible if you expand into other markets. Carefully consider other markets that fit your product perhaps in a different way. For example, if you are marketing just to Millennials right now, consider how your product or service could impact the up and coming younger generation. Do you need to make modifications? Should you use different marketing to capture the early lead in this generation?

Provide More Services to Existing Customers
Expand through your existing customers. Perhaps one of the best ways for today’s company to increase sales without having to expand on services or customer acquisition costs is to focus on increasing sales to existing customers. What else can you offer? There are several solutions here:

  • Offer more products and services you already provide to existing customers. For example, introduce them to a secondary service you provide that they have yet to purchase.
  • Build relationships with complementary service providers and market those services to your existing customers.
  • Build on your existing products and services to provide more comprehensive options. Grow the company by expanding what you offer.

In these situations, the goal is clearly to get more money from existing customers. Provide them with quality, value, and opportunity to achieve these key opportunities.

Understand Which Products Are “Losers” and Should Go
Do you have “loser” products? These are products that never really capture enough sales to make them a profit point for you. It’s important to target these products with careful insight. To grow your business’s bottom line, you need to know how effective every product is. Are you putting a lot of money into marketing a product that only has a very limited customer base? Does it yield a very small profit margin? Determine if you have these products in your lineup and then work to eliminate them, improve them, make them less expensive, or pull at least some of your marketing and labor hours away from them.

Get Better Control Over Employee Costs and Reduce Turnover
How much do you spend on managing your employees? From payroll to taxes to human resources, there are many costs that go into managing your employees. Reducing those costs is always a good thing. Automation and software can help you to reduce your human resource department to create massive savings that you could put toward scaling. The key here is to ensure you are using the most up-to-date resources and tools available.

Alongside this is the goal to reduce employee turnover. Don’t create a bad experience for your employees. Provide them with support. Be sure they have constant guidance and the ability to achieve your company’s goals. Retaining employees is essential. It costs much more to have to find, hire, train, and manage new employees than it does to keep well-performing, talented, or employees with potential on staff. Find that balance within your HR department for the best results.

Improve Customer Retention to Reduce Costs
It’s hard (and expensive) work to get new customers. Every dollar you spend on marketing and bringing in new customers and clients needs to be money well spent. While you cannot stop marketing, you should do what you can to improve customer retention. To do this, consider:

  • Speak to customers one-on-one to ensure they are satisfied.
  • Ask for feedback and respond to it routinely.
  • Meet with customers to gather more insight. Conduct market research routinely.

Most importantly, listen to the negative. These are areas where you’ll be able to improve and grow specifically. Fixing a customer’s problem is also a surefire way to keep them as a lifelong customer. Are you doing what you can to improve customer retention?

Get a Clear Picture of Profit Margins of All Products and Services
How much does each product cost to make, buy, produce, market, and sell? Every service needs a clear understanding of the costs to acquire and provide that service to your customer base. These costs will change over time, especially as many companies see significant changes in production and logistics costs. You’ll need a method for monitoring these costs on an ongoing basis. That’s not always easy. With proper software and accounting tools, you should be able to gain insight into costs in real time or at least over the course of several months. This gives you the ability to know where to move prices, where to place your marketing dollars, and where to focus your efforts to scale your business.

What Steps Can You Take Now?
Business growth is always necessary, but there are many ways for your company to expand. Don’t always focus on just increasing sales and growing locations. Also look at ways to monitor the financials within your company. This will give you more leverage and power to achieve more of what you want long term.

If you have questions, please call us.

Unique Charitable Giving Options

The end of the year and holiday season is the time of the year when everyone is feeling charitable, and a time when you are likely flooded with solicitations for charitable contributions. Before deciding about your charitable giving for the year, you may benefit from reading this article and learning ways to contribute that will help you tax-wise.

Some recent special tax deduction changes make 2017 a unique year for charitable giving. This article provides you a guide to these special provisions in addition to those that have historically provided tax benefits.

Normally, deductible charitable contributions are limited by a percentage of your income, more specifically your adjusted gross income (AGI), which is the number on your tax return before your deductions and exemptions are subtracted. For most charitable contributions the tax deduction limit is 50% of your AGI, but it can drop to 30% or even 20% in certain situations. Additionally, overall itemized deductions, including those for charitable contributions, are phased out for high-income taxpayers.

  • 2017 Hurricane Relief – After the devastation inflicted by Hurricanes Harvey, Irma and Maria, Congress passed a provision that allows taxpayers to donate money to hurricane relief charities without any percentage-of-AGI limitation. Further, the phaseout of itemized deductions for high-income taxpayers will also not apply to hurricane relief contributions. So, for example, if your AGI is $100,000 and you contribute $70,000 to a qualified hurricane relief charity in 2017, the full $70,000 will be deductible instead of being limited to $50,000. However, if you made other contributions during the year, they will be subject to the normal percentage-of-AGI limitations, and then the hurricane relief donation will be deductible for the balance of your AGI.To qualify, the contributions must have been made in cash between August 23 and December 31, 2017, and the donation documentation must verify that the donation is for Hurricane Harvey, Irma or Maria relief. If you contribute more than is deductible for 2017, the excess will carry forward to your tax returns for up to the next five years.
  • Donate Unused Employee Time Off – As it has 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 Hurricane Harvey, Irma and Maria 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, and your employer will then donate the cash equivalent to Hurricane Harvey, Irma and Maria relief charities. Your employer can deduct the amount donated as a business expense. You don’t get a deduction for a charitable contribution, but better yet, you won’t have to report the income, which is beneficial for both individuals who itemize deductions and those who use the standard deduction. This special relief applies to all leave-based 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.If your employer is unaware of this program, refer them to IRS Notice 2017-48 (related to Hurricane Harvey) for further details. Note: Notices 2017-52 and 2017-62 were later released, adding Irma and Maria, respectively, to the list. Your employer will also benefit from not being liable for payroll taxes on the money contributed.
  • Contributions of Appreciated Assets – Although this is not a new strategy, taxpayers can donate appreciated long-term capital gain assets to a charity and deduct the fair market value (FMV) of the assets as a charitable deduction. For example, suppose you donate to your church’s building fund a stock that is worth $10,000 but that only cost you $2,000. Your charitable contribution would be $10,000, and you do not have to pay tax on the $8,000 appreciation in the stock. This strategy can also apply to land, homes, rentals, equipment, etc. Determining the FMV for listed stock is easy since the value of the stock can be determined from quoted stock prices on the day of the contribution. For other capital assets, a certified appraisal is generally required. It would be good practice to contact this office before making a gift of appreciated property to make sure that it is appropriate for your tax bracket and that the appraisal is properly performed and documented.
  • IRA to Charity Contributions – For some time this unique method of making charitable contributions was a temporary provision of the tax law, but Congress made it permanent in 2016. This charitable contribution provision is limited to taxpayers age 70.5 and older. They can directly transfer up to $100,000 a year from their IRA to a qualified charity. So if you are 70.5 or older and make an IRA-to-charity transfer you won’t get a charity deduction, but instead and even better, you will not have to pay taxes on the distribution, and because your AGI will be lower, you can benefit from other tax provisions that are pegged to AGI, such as the amount of Social Security income that’s taxable and the cost of Medicare B insurance premiums for higher-income taxpayers. As an additional bonus, the transfer also counts toward your annual required minimum distribution.
  • Cash Contributions – Cash contributions include those paid by cash, check, electronic funds transfer, or credit card. To claim a cash contribution, you must be able to document that contribution with a bank record, receipt, or a written communication from the qualified organization; this record must include the name of the qualified organization, the date of the contribution, and the 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 certain payroll deduction records or an acknowledgment of your contribution from the qualified organization.
  • Non-cash Contributions – This is a type of contribution with which you can easily run afoul of the IRS because the contribution deduction is based on the FMV of the item being contributed, not the item’s original cost, and most used items such as clothing and household goods depreciate substantially.Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they are specifically not allowed. It is not uncommon to see taxpayers over-valuate their contributions. That is why the IRS has four levels of verification and documentation requirements for non-cash contributions, with each becoming more stringent as the valuation increases:
    Caution: The value of similar items of property that are donated in the same year must be combined when determining what level of documentation is needed. Similar items of property are items of the same generic category or type, such as clothing, household goods, coin collections, paintings, books, jewelry, privately traded stock, land and buildings.A. Deductions of Less Than $250 You must obtain and keep a receipt from the charitable organization that shows:

    1. The name of the charitable organization,
    2. The date and location of the charitable contribution, and
    3. A reasonably detailed description of the property.

    Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). This exception only applies if all the non-cash contributions for the year are less than $250.

    B. Deductions of At Least $250 But Not More Than $500 You must provide the same information as in the previous category and add:

    4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits).

    If the deduction includes more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each donation or a single acknowledgment that shows the total contribution.

    C. Deductions Over $500 But Not Over $5,000 You must provide the same acknowledgment and written records that are required for the two previous categories plus:

    5. Attach a completed IRS Form 8283 to the income tax return that reports:

      • a. How the property was obtained (for example, purchase, gift, bequest, inheritance, or exchange),
        b. The approximate date the property was obtained or—if created, produced, or manufactured by the taxpayer—the approximate date when the property was substantially completed, and
        c. The cost or other basis, and any adjustments to this basis, for property held for less than 12 months and (if available) the cost or other basis for property held for 12 months or more.

    D. Deductions Over $5,000 These donations require time-sensitive appraisals by a “qualified appraiser” in addition to other documentation (this requirement, however, does not apply to publicly traded securities). When contemplating such a donation, please call this office for further guidance about the documentation and forms that will be needed.

To help you document some of these noncash contributions, you can download a fillable Noncash Charitable Contribution statement. The statement includes an area for the charity’s agent to verify the contribution and a check box denoting whether the qualified organization provided any goods or services as a result of the contribution. Although not specifically endorsed by the IRS, this statement includes everything needed for noncash contributions of up to $500—provided, of course, that you and the charitable organization’s representative accurately complete the form.

Unfortunately, legitimate charities face competition from fraudsters, so if you are thinking about giving to a charity with which you are not familiar, do your research so that you can avoid swindlers who are trying to take advantage of your generosity. They show up in droves after disasters like the hurricanes and the California firestorms. Here are tips to help make sure that your charitable contributions actually go to the cause that you support:

  • 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.
  • Don’t make a contribution if it is solicited in an email claiming to be from the IRS. The IRS does not send emails to individuals and does not ask for donations to organizations related to natural disasters. Scammers are using this ploy to extract money from taxpayers who think their contributions will go for hurricane relief or to wildfire victims.
  • Check out the charity’s reputation using the Better Business Bureau’s Give.org or Charity Watch.

Remember that if you want to deduct a charitable contribution on your tax return, the donation must be to a legitimate charity. Contributions may only be deducted if they are to religious, charitable, scientific, educational, literary or other institutions that are incorporated or recognized as organizations by the IRS. Sometimes, these organizations are 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 also may 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.

Be aware that, to claim a charitable contribution, you must also itemize your deductions. If you only marginally itemize your deductions, it may be beneficial for you to group your deductions in a single year and then to 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.

Year-End Tax Planning To Take Advantage Of Possible Tax Reform

With the prospect of major tax reform on the horizon, some strategies can be employed before the end of the year that can substantially reduce your 2017 tax bill.

Itemized deductions under current law include 5 major categories: medical, taxes, interest, charitable gifts and miscellaneous deductions. Under the proposed tax reform, these deductions would be limited or eliminated. If that is the case, then taxpayers who itemize in 2017 should take the following actions before the year’s end to maximize their 2017 deductions:

  1. Medical – The House version of tax reform does away with medical deductions beginning in 2018 while the Senate version retains them. So to be on the safe side you may want to consider paying all outstanding medical bills, but keep in mind that the total amount of unreimbursed medical expenses is only deductible to the extent that it exceeds 10% of your adjusted gross income (AGI). Some anticipated medical expenses can be prepaid. An example would be a dental bill, if you have a child receiving orthodontic treatment for braces and you are on an installment payment plan. You can pay off the bill and increase your medical deductions for 2017, and the dentist might even give you a discount for paying early. But if you can’t reach the 10% of AGI threshold, don’t make a special effort to pay any outstanding medical bills.
  2. Property Tax – The Senate version of tax reform eliminates all property tax itemized deductions beginning in 2018, while the House versions retains a limited deduction. If the property taxes on your home, second home or vacant property are being paid in installments with an installment due in 2018, it may be appropriate pay that balance in 2017 to increase your tax deductions for this year.
  3. State Income Tax – Both the House and the Senate versions of tax reform eliminate the deduction for state and locale income taxes beginning in 2018. If you reside in a state that has a state income tax, estimate your 2017 state tax liability and make sure your full liability is paid before the year’s end. You can ask your employer to boost the amount of your state withholding by a reasonable amount, or if you are self-employed, pay your 4th-quarter estimate due in January in December and increase your deduction.
    A word of caution: taxes are not deductible for alternative minimum tax (AMT) purposes. The tax-maximizing strategy could trigger the alternative minimum tax (AMT).
  4. Miscellaneous Deductions – This deduction category includes unreimbursed employee business expenses, investment expenses, certain legal fees, casualty losses, gambling losses and others. Generally, few of these expenses would support payments other than when they occur, and this category is only deductible to the extent that the deductions exceed 2% of your AGI.

Even though the strategy of prepaying tax-deductible expenses this year may yield tax savings, be thoughtful about borrowing money to execute this strategy. Interest on borrowed money can dampen the tax benefits.

Three Other Strategies
If you are an investor, a popular year-end strategy is to review your stock portfolio and sell off losers to offset your gains. Also remember: you are allowed to deduct a loss of up to $3,000 ($1,500 for married filing separate taxpayers) from the sale of investments. However, your investment strategies should take precedent over selling stocks to develop a loss.

Make the most of post-secondary education tax credits. Both the Lifetime Learning Credit and the American Opportunity Credit allow qualified taxpayers to prepay tuition bills in 2017 for an academic period that begins by the end of March 2018. This means that if you are eligible to take the credit and you have not yet reached the 2017 maximum for qualified tuition and related expenses paid, you can bump up your credit by paying the tuition for early 2018 before the end of 2017. This strategy may not apply to you if you’ve been paying tuition expenses for the entire 2017 tax year, but if your student just started college this fall, it will probably provide you with some additional help.

If you own a business and are considering purchasing equipment before the end of the year, take note that most equipment purchased by a small business can be expensed and will provide a substantial tax deduction. Keep in mind that just purchasing the equipment will not give you a tax deduction. You also must place the equipment in service before the end of the year, so you need to plan ahead and not wait until the last minute.

If you would like to make an appointment to develop a year-end tax strategy, please give us a call.

Year-end moves to make in light of tax reform legislation

Dear Client:

Congress appears poised to enact a major tax reform law that could potentially make fundamental changes in the way you and your family calculate your federal income tax bill, and the amount of federal tax you will pay. This letter is designed to help you cope with the changes Congress is hammering into shape right now-to take advantage of tax breaks that may be heading your way, and to soften the impact of any crackdowns. Keep in mind, however, that while most experts expect a major tax law to be enacted this year, it’s by no means a sure bet. So keep a close eye on the news and don’t swing into action until the ink is dry on the President’s signature of the tax reform bill.

Lower tax rates coming. Both the tax bill passed the House of Representatives and the one before the Senate would reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, businesses may see their tax bills cut, although the final form of the relief isn’t clear right now.

The general plan of action to take advantage of lower tax rates next year would be to defer income into next year. Some possibilities follow:

  • If you are an employee who believes a bonus is coming your way before year end, consider asking your employer to delay payment of the bonus until next year.
  • If you are thinking of converting a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and hopefully have it taxed at lower rates.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year-or until so late in the year that no payment can be received this year-you will succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a job until 2018, or defer deliveries of merchandise until next year. Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing deductions, larger standard deduction. Beginning next year, both the House-passed tax reform bill and the version before the Senate would repeal or reduce many popular tax deductions in exchange for a larger standard deduction. Here’s what you can do about this right now:

  • The House-passed tax reform bill would eliminate the deduction for nonbusiness state and local income or sales tax, but would allow an up-to-$10,000 deduction for real estate taxes on your home. The bill before the Senate would ban all nonbusiness deductions for state and local income, sales tax, and real estate tax. If you are an employee who expects to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding on those taxes. That way, additional amounts of state and local taxes withheld before the end of the year will be deductible in 2017. Similarly, pay the last installment of estimated state and local taxes for 2017 by Dec. 31 rather than on the 2018 due date, or prepay real estate taxes on your home.
  • Neither the House-passed bill nor the bill before the Senate would repeal the itemized deduction for charitable contributions. But because most other itemized deductions would be eliminated in exchange for a larger standard deduction (e.g., in both bills, $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The House-passed bill, but not the one before the Senate, would eliminate the itemized deduction for medical expenses. If this deduction is indeed chopped in the final tax bill, and you are able to claim medical expenses as an itemized deduction this year, consider accelerating “discretionary” medical expenses into this year. For example, order and pay for new glasses, arrange to take care of needed dental work, or install a stair lift for a disabled person before the end of the year.

Other year-end strategies. Here are some other “last minute” moves that could wind up saving tax dollars in the event tax reform is passed:

  • The exercise of an incentive stock option (ISO) can result in AMT complications. But both the Senate and House versions of the tax reform bill call for the AMT to be repealed next year. So if you hold any ISOs, it may be wise to hold off exercising them until next year.
  • If you’ve got your eye on a plug-in electric vehicle, buying one before year-end could yield you an up-to-$7,500 discount in the form of a tax credit. The House-passed bill, but not the one before the Senate, would eliminate this credit after 2017.
  • If you’re in the process of selling your principal residence and you wrap up the sale before year end, up to $250,000 of your profit ($500,000 for certain joint filers) will be tax-free if you owned and used the property as your main home for at least two of the five years before the sale. However, under the House-passed bill and the bill before the Senate, the $250,000/$500,000 tax free amounts would apply to post-2017 sales only if you own and use the property as your main home for five out of the previous eight years.
  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the House-passed tax bill but not the version before the Senate, alimony payments would not be deductible by the payor or includible in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017. So if you’re in the middle of a divorce or separation agreement, and you’ll wind up on the paying end, it would be worth your while to wrap things up before year end if the House-passed bill carries the day. On the other hand, if you’ll wind up on the receiving end, it would be worth your while to wrap things up next year.
  • Both the House-passed bill and the version before the Senate would repeal the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), so if you’re about to embark on a job-related move, try to incur your deductible moving expenses before year-end.

Please keep in mind that we’ve described only some of the year-end moves that should be considered in light of the tax reform package currently before Congress—which, it bears emphasizing, may or may not actually become law. If you would like more details about any aspect of how the proposed legislation may affect you, please call us.

Very truly yours,

Tarlow & Co., CPA, PC

 

QuickBooks Tip: Setting Up Sales Tax in QuickBooks Online

Sales tax is one of the more complicated concepts supported by QuickBooks Online.

QuickBooks Online was designed for you, the small businessperson. You’ve probably discovered that many of its features are fairly easy to use from the start.

But just because QuickBooks Online can do something doesn’t mean you should attempt it on your own. Sales tax is one of those things. Depending on your geographical location, you may have to charge not only state sales tax, but also county and city/municipality taxes (and sometimes special taxes). If you’re selling products or services to customers in other states, your situation can get very complicated.

We’ll show you some of the mechanics involved, but we strongly recommend that you let us help you with this.

Setting Up Sales Tax
We’ll describe the process of setting up sales tax rates so you can see how it will work. Click the Taxes link in the toolbar. The new screen should open to the Sales Tax Center; if it doesn’t, click its link in the toolbar above. In the right vertical pane, under Related Tasks, click Add/edit tax rates and agencies. Then click New to open this window.

 

You can define either a Single tax rate or Combined tax rate in this window.

You’d enter the Tax name, Agency name, and Rate in the designated fields if you’re just creating a Single tax rate. In some cases, you may have to enter a Combined tax rate. If so, click the button in front of that label. The window that opens contains fields that are similar to the ones in the above image, except that Tax name is replaced by Component name. You’ll choose this option when you have to record individual elements of the tax separately. For example, Ft. Myers | Lee County| Florida State.To muddy things up even more, some items in some situations are exempt from sales tax.

Questions about the Combined tax rate? Contact us.

When you’re done, click Save. You’ll see the tax you just created in a table in the window that opens. To define a New tax, Edit an existing one, or Deactivate one in the list, click the appropriate button. If you’ve entered all you’ll need for now, click Return to Sales Tax Owed and Recent Payments.Your Responsibilities
Once you’ve set up all the sales tax rates required for you, QuickBooks Online will calculate them for you in transactions where they need to be collected. You can see the running tally in the Sales Tax Center, but it’s up to you to create and record payments on the prescribed schedule. You can also run related reports here.

The site bases its calculations on three things:

  • The state(s) where you have obtained a sales tax permit(s),
  • Your company’s physical location, and,
  • The customer address on the sales form.

But QuickBooks Online can’t know the exact tax situation for all its users. You have to do some detective work before you even approach us for help setting up sales taxes. You’ll need to know, for example, whether your state taxes the products or services you sell. Also, what’s the sales tax rate(s) for the affected states? What agency collects it? When are the payments you’ve collected from your customers due?

Your state government’s website should cover all of this.

Sales Tax Settings
Before you start working with sales tax, you’ll also need to make sure your settings are correct. Go back to the Sales Tax Center and click Edit tax settings on the right side of the screen to open this window.

To save time, QuickBooks Online lets you set some default sales tax actions.

Click the button in front of Yes after Do you charge sales tax? if it’s not already selected. If most of your transactions will use the same sales tax, you can set it as the default (but change it during transactions if necessary). If the majority of customers, products, and services will be subject to sales tax, you can check the boxes in front of the Mark all…statements (these designations, too can be edited in individual transactions).You can see that using QuickBooks Online’s sales tax tools requires research, decisions, and extreme accuracy (state revenue departments run occasional audits). We have to stress again the importance of consulting with us if you need to take this on. It’s an exceptionally complex element of accounting, and we want to make it work for you.

A Beginner’s Guide to Bookkeeping

If you’re a new business owner, you might not remember the last night you slept more than four or five hours. Your days may be filled with developing marketing strategies, screening potential employees and trying to figure out how to set up a bookkeeping system. If working with numbers isn’t your favorite pastime, the latter activity may be posing quite a challenge. If you can relate to this common scenario that new entrepreneurs face, the following beginner’s guide to bookkeeping might calm your frayed nerves and set you on the right course.

Cash Versus Accrual Basis of Accounting
A pivotal first step when setting up a bookkeeping system is deciding whether to use the cash or accrual basis of accounting. Cash accounting requires you to record transactions at the time cash changes hands. Both actual money and electronic funds transfers constitute cash. If you’re a sole proprietor working from home or at a one-person office, opting for cash accounting can make sense. However, if you’re going to extend credit to your customers or request credit from your suppliers, you must utilize accrual accounting. Accrual accounting dictates that you record sales or purchases immediately, even if you receive cash from a customer or pay cash to a creditor at a later date.

Single- Versus Double-Entry Accounting System
Single-entry bookkeeping is similar to maintaining a check register. You record transactions when you make deposits into your business account or pay bills. This method only works if you own a small company with a low volume of transactions. If you own a mid-size or large business that is complex, a double-entry bookkeeping system is needed. With this type of system, at least two entries are made for every transaction. One account is debited, while another one is credited. A simultaneous debit and credit system is the key to a double-entry bookkeeping system.

Balance Sheet Basics
Before you can successfully develop a bookkeeping system, you must understand the basic balance sheets accounts: assets, liabilities and equity. If you don’t carefully track these items and ensure the transactions that deal with them are recorded in the right place, your books won’t balance. The accounting equation is a simple formula you can use to ensure your books always balance. This handy equation is: assets = liabilities + equity.

Assets
Assets are things your business owns, such as accounts receivables and inventory. On the balance sheet, assets are typically listed in order of their liquidity. For instance, the assets section of a balance sheet might begin with cash followed by marketable securities, inventory and accounts receivables. These accounts are referred to as current assets. Fixed assets, or tangible assets, round out the first portion of the balance sheet. They include things you can touch such as land, buildings and equipment.

Liabilities
Liabilities are things a company owes to third parties such as suppliers and banks. The liabilities section of the balance sheet comprises both current and long-term accounts. Current liabilities, those expected to be paid within a year, typically include accounts payable and accruals. Accounts payable contains amounts owed to suppliers. This account may also encompass credit card and bank debt. Accruals consist of taxes owed, including:

  • Sales taxes
  • Social security taxes
  • Medicare taxes

Long-term liabilities, such as bonds and mortgages, aren’t expected to be paid off during the next year.

Equity
Equity represents the ownership a business owner and other investors have in a company. If you’re the only person who has put money into your business, the equity section of the balance sheet will only have one account in it.

Income Statement Basics
In addition to being familiar with balance sheet accounts, understanding income statement basics is critical to setting up a superb bookkeeping system. The income statement consists of revenue and expense accounts.

Revenues
Revenue represents all the income received when selling goods or services. On the income statement, revenues are classified as either “operating” or “non-operating.” Operating revenues stem from your business’s main operations. Sales is an example of this type of revenue. Non-operating revenues are earned from some other activity such as rent or interest revenue.

Expenses
Expenses are the costs incurred to run your business. On the income statement, expenses are classified as either cost of goods sold, operating or non-operating. Cost of goods sold represents the cash a company spends to manufacture or buy the products or services it sells to customers. Operating expenses are the costs a company incurs as part of its regular business activities excluding cost of goods sold.

Examples of operating expenses include:

  • Supplies expense
  • Wages expense
  • Rent expense
  • Utilities expense

Non-operating expenses are incurred for reasons outside the scope of normal business activities such as interest expense.

Benefits of Working With a Bookkeeping Professional
Besides familiarizing yourself with the aforementioned beginner’s guide to bookkeeping, working with a professional accounting expert is a smart idea. Numerous details go into managing your enterprise’s bookkeeping. Even a trivial mistake such as putting a decimal point in the wrong place can wreak havoc on your books. In addition to assisting you in setting up and managing a bookkeeping system, our professionals can help you raise financing, develop a pricing structure for your goods or services, and discover ways to save money on operations, which may decrease your stress levels and increase your odds of long-term business success.

They Are Phishing You. Don’t Take the Bait!

You are probably as tired of hearing about ID theft, phishing, phone scams and other schemes as you are of the political infighting in Washington. However, for most people, protecting themselves against these fraudsters is a far more serious issue than the congressional rhetoric we have to endure.

Just about every day the IRS issues notices to taxpayers and tax preparers warning of new scams seeking access to individuals’ financial information and ID information, which the scammers want to use to file fraudulent tax returns, gain access to bank accounts, or steal credit card information to make fraudulent purchases. I know of one fall update instructor who lectures to hundreds of CPAs, Enrolled Agents, and tax preparers. Each year for several years, he has asked his students if they have encountered ID theft or false returns being filed using their clients’ IDs. At first, just one or two raised their hands in each class. Each year the number has increased, and last year close to half the students in the various classes raised their hands.

ID thieves are both domestic and foreign and are very creative (or should I say devious?). I could write a small book about all the schemes that are out there, and the number increases daily. So while it is impossible to detail them in this article, the following tips can help you avoid being scammed, regardless of the scam or phishing premise:

  • Emails from unknown sources that request you to click on a link (for any number of reasons, some of which may sound legitimate) may be tricking you into installing malware on your computer or device that would then allow the scammers access to it and all the financial information on it. Don’t get hooked!
  • The IRS and most state taxing authorities never contact taxpayers by email. Their standard method of contact is U.S. mail. So simply delete any email claiming to be from the IRS. But if you feel uncomfortable ignoring the email, contact us and forward it to us so we can double-check it for you. It is always wise to have us to review any tax agency correspondence. One simple mistake can result in an enormous amount of grief that could take years to straighten out. Always be suspicious.
  • Some scammers, as bait, will contact you and tell you that you are entitled to a prize, jackpot, lottery winnings, tax refund, foreign or domestic inheritance, or something of value (the scammers can be very creative) to trick you into taking some action that will allow them to scam you out of your hard-earned money or steal your identity. Remember the old saying: If it is too good to be true, it most likely isn’t!
  • If you receive email, mail or a phone call from an unknown source with a message that provokes your curiosity, think twice before responding. By responding, you validate your contact information and invite further contact. The best action to take may be to take no action at all. Don’t let your curiosity get the best of you. That’s what scammers are counting on.
  • Try to avoid forwarded emails from friends or associates that contain jokes, links and pictures they have downloaded from the Internet. Unbeknownst to the sender, these emails may include embedded links that can install malware on your computer.

Elderly individuals seem to be the most susceptible to phishing, scams and ID theft. They may be unfamiliar with modern modes of communication and can easily be taken advantage of. If you have an elderly parent or relative, it may be appropriate to sit down with them and make them aware of the dangers of modern-day communications and the Internet.

The IRS has special provisions for victims of ID theft, so if you ever believe your identify has been compromised, call us immediately so steps can be taken with the IRS to protect your tax filings. Always call us before acting on or responding to the IRS or other taxing authorities. It’s better to be safe than sorry.

Converted Your Traditional IRA to a Roth IRA? Worried You May Have Done It Too Soon if Tax Reform Passes?

When you convert a traditional IRA to a Roth IRA, you have to pay the tax on the conversion. However, individuals frequently do this so they can take advantage of future tax-free accumulations. Distributions from Roth IRAs are generally tax free, including any earnings (accumulations) while the account is a Roth account.

Are you considering converting your traditional IRA to a Roth IRA in 2017? Are you hesitant to do so because of uncertainty about the timing and specifics of the Administration’s and Congress’ proposal to cut tax rates for individuals? Have no fear, because you can convert your traditional IRA to a Roth IRA this year, and if tax reform passes with lower tax rates effective next year, you can undo the conversion for 2017 and then re-convert for 2018.

Tax law allows individuals who convert in one year to undo that conversion by a procedure referred to as recharacterization. The procedure has been used for years, primarily by individuals whose IRA funds are invested in stocks and who converted from their traditional IRA funds to a Roth IRA only to see the value of their Roth IRA decline after the conversion due to stock market fluctuations. Recharacterizations are also used by individuals who converted their traditional IRA to a Roth IRA and then found they could not or did not want to pay the conversion tax.

This same process can be used by anyone for any purpose. So, for example, if you converted your regular IRA to a Roth IRA in 2017 and tax reform is enacted effective in 2018, you can recharacterize (undo) your 2017 conversion back to a traditional IRA. However, the recharacterization must be accomplished by the extended due date of your 2017 tax return, which is October 15, 2018. If you choose to, you then can then reconvert the traditional IRA to a Roth IRA in 2018 and take advantage of the new lower tax rates.

Generally, you must wait at least 30 days to make the reconversion. However, if you make the recharacterization of the Roth IRA back to your a traditional IRA in 2017, you may not reconvert that amount from the traditional IRA to a Roth IRA before the beginning of 2018 or, if it is later, the end of the 30-day period beginning on the day on which you transferred the amount from the Roth IRA back to a traditional IRA by means of a recharacterization.

Example: For years, Jack has been making deductible traditional IRA contributions. Then, during the summer of 2017, Jack decided to convert $25,000 of those traditional IRA funds into a Roth IRA. After the conversion is completed, late in 2017, Congress passes and the president signs a tax reform bill that reduces Jack’s marginal tax rate in 2018. To take advantage of the lower tax rate, Jack recharacterizes (undoes) the conversion back to a traditional IRA for 2017 and then reconverts it back to a Roth IRA in 2018. To do that, Jack first transfers the $25,000 (plus earnings or minus losses since the original conversion) back to a traditional IRA by way of a trustee-to-trustee transfer (it’s OK for the transfer to be with the same financial institution). He could make the recharacterization as late as October 15, 2018, but chooses to do so on January 15, 2018. Then, after making the transfer back to the traditional IRA, Jack reconverts the amount back to a Roth IRA on Feb. 20, 2018.

For more information on recharacterizations and conversions, and how they might fit into your tax planning, please give us a call.