How to Create Projects in QuickBooks Online

You already know how to determine whether your business is making or losing money overall: you run a Profit and Loss report. But what if you want to break this data down further? How can you tell whether the specific jobs you do for customers, with all their related income and costs, are profitable?

This kind of insight can have an enormous impact on future business decisions about product and service pricing, worker costs, and expenses. It can even signal whether or not you should take on specific jobs.

If you’re using QuickBooks Online Plus or Advanced, you can use their Project tools to calculate profitability. The theory is simple. You assign all relevant sales, time, and expenses to the project. QuickBooks Online will do the rest.

Getting Started

First, you’ll need to make sure that QuickBooks Online is ready to track projects. Click the gear icon in the upper right and select Account and Settings. Click on the Advanced tab and go down to the Projects section. If this feature is turned Off, click the pencil icon over to the right, click in the box to turn it On, and Save this option.

To create a project, click on Projects on the home page and then on the New Project button over to the right. This panel will slide out from the right:

Before you begin tracking a Project in QuickBooks Online, you’ll have to create a master record for it.

Enter a Project name in that field and select a Customer from the drop-down list (or ). Notes are optional but recommended. Click Save and your new project will appear in a list on the Projects page. QuickBooks Online stores that information along with the customer in your company file and makes it available when you create, for example, invoices, checks, expenses records, and time activities.
Linking Projects in Forms

Your project will appear in different places in different forms. On an invoice, it appears in the Customer drop-down list as a sub-item under the linked customer. You’ll select the project name rather than the customer to make sure the invoice was “tagged” to the project and wasn’t just a one-off bill. If you’re recording an expense, you’ll see a column for Customer/Project with other line item details.

There’s also another way to connect transactions to their related projects. On the Projects home page, click on a project name in the list. Click the Add to Project button in the upper right and select the correct transaction from the list that drops down. In some cases, like invoices, the project will already have been selected and will appear in the Customer field.

If you enter a transaction and realize later that you forgot to connect it to a project, you can correct this in most cases (like expenses and bills) by going back to the original transaction and adding (or changing) the Customer/Project name. Invoices are tricky, though, depending on their status. We’d recommend you consult with us about this.

Understanding Profitability


You can see what your profit margin is on any project at any time.

After you’ve been entering project-related income and expenses for a while, you’ll probably be curious about whether or not you’re making money – even if the project is still in progress. To do this, open the Projects home page and click on the project name. The screen that opens (like in the image above) will be devoted to that one project. You can click on tabs to see:

  • An Overview that lists your income and costs, as well as your profit.
  • A list of related Transactions.
  • Time Activity records.
  • Project Reports (Project profitability, Time cost by employee or vendor, and Unbilled time and expenses).

We encourage you to use QuickBooks Online’s Project tools but would caution you about making changes to some existing transactions, especially invoices. To ensure that you are on the right track with this feature, please contact us to set-up a consultation.

Deducting the Costs of Modifications for Senior-Proofing a Home

Article Highlights

  • Improvements for Medical Care or Treatment
  • Improvements That Increase the Home’s Value
  • Improvements That Do Not Increase the Home’s Value
  • Medical AGI Limitations

While Americans may argue about any number of hot-button political topics, there’s no disagreement on one issue: the country’s population is aging fast. According to the Social Security Administration, 10,000 baby boomers a day are reaching the age of 65. Many individuals, for either themselves or an older family member, are senior-proofing their homes. To make the home safer and more accessible for elder occupants, homeowners add grab bars in showers, modify stairways, and adjust areas of the house to accommodate for wheelchairs. If you are planning to make such home improvements, you may be wondering whether any of the costs will be tax-deductible.

Generally, the costs of home improvements are not deductible except to offset home gain when the home sells. However, you may claim a medical expense deduction when the primary purpose of the home modification is for a medical reason. The tax law says that deductible medical expenses are those paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body.”

So, if you are modifying because you, your spouse, or a dependent has a medical need for doing so, then the modification expense may be deductible as a medical expense, but only to the extent that it exceeds any resulting increase in the property’s value. For example, a doctor recommends that a taxpayer with severe arthritis have daily hydrotherapy. The taxpayer has a hot tub installed at the cost of $21,000. A certified home appraiser determined the hot tub addition increased the home’s value by $20,000. The taxpayer’s medical deduction for installing the hot tub will only be $1,000. The other $20,000 of expenses will increase the home’s basis, meaning that it will add to the home’s cost and will offset the sales price when the house goes on the market.

While the tax rules don’t require a prescription from a doctor for most medically-related home modifications, the taxpayer, if questioned by the IRS, needs to be able to demonstrate how the expenditure is related to his or her medical care or that of a spouse or dependent. And having a letter from the individual’s doctor that explains the type of modifications that would be medically beneficial would help to prove a medical need.

Not all improvements result in an increased home value. Some, such as lowering cabinets for an occupant who uses a wheelchair, could actually decrease the home’s resale value.

The IRS has identified specific improvements as not usually increasing a home’s value and for which the cost can be included in full as a medical expense. These improvements include, but are not limited to, the following items:

  • Constructing entrance or exit ramps for the home;
  • Widening doorways at entrances or exits to the house;
  • Widening or otherwise modifying hallways and interior doorways;
  • Installing railings, support bars, or other modifications;
  • Lowering or modifying kitchen cabinets and equipment;
  • Moving or modifying electrical outlets and fixtures;
  • Installing porch lifts and other forms of lifts (but generally not elevators);
  • Modifying fire alarms, smoke detectors, and other warning systems;
  • Modifying stairways;
  • Adding handrails or grab bars anywhere (whether or not in bathrooms);
  • Modifying hardware on doors;
  • Modifying areas in front of the entrance and exit doorways; and
  • Grading the ground to provide access to the residence.

Only reasonable costs to accommodate a home to a disabled condition or an elderly individual are considered medical care costs. Additional fees for personal motives, such as for architectural or aesthetic reasons, are not medical expenses (but could be additions to the home’s tax basis).

Unfortunately, the total of all medical expenses can be deducted only to the extent that they exceed 10% of the taxpayer’s adjusted gross income (AGI) and only if the taxpayer itemizes deductions. With tax reform’s higher standard deduction, only between 5% and 12% of taxpayers are expected to itemize their deductions in the years through 2025, down from 30% before 2018. So even if a medically needed home improvement is made and qualifies to be deducted, only a small percentage of taxpayers will end up with a tax benefit as a result of the expenditure.

However, all is not lost. To the extent that the taxpayer doesn’t claim the expense as an itemized deduction, the improvement costs, including those that might not meet the medically necessary standard, can be added to the home’s purchase cost to determine the home’s tax basis. Thus, when you sell your home, the capital gain from the sale will be lower.

Either to substantiate the currently deductible improvements or with a future home sale in mind, taxpayers should be sure to keep records of the home improvements they make, including the receipts for the costs.

Please contact us if you have questions related to this deduction and whether you will benefit, tax-wise, from any medically related home modifications.

Employer-Offered Benefits That Can Save You Money and Taxes

Article Highlights:

  • Health Insurance
  • Retirement Plans
  • Qualified Transportation Fringe Benefits
  • Flexible Spending Accounts (FSAs)
  • Group Term Life Insurance
  • Qualified Employee Discounts
  • Employer-Provided Education Assistance
  • Adoption Expenses
  • Child and Dependent Care Benefits
  • Health Savings Accounts

Tax law includes several tax- and financially favored benefits that employers can offer or provide to their employees. This article is intended to make you aware of these perks, with the caveat that all employers, especially small businesses, may not provide all, or perhaps any, of these covered perks. But whichever of these benefits your employer offers, you should seriously consider taking advantage of them, if you haven’t already.

Health Insurance – The Affordable Care Act (also known as Obamacare) requires businesses with over 50 employees to offer at least 95% of its full-time employees, and their dependents, with affordable minimum essential health care coverage. Companies that do not meet this requirement are subject to penalties. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the prices of health insurance coverage have risen dramatically over the last few years. More likely, you may have to pay part of the premium costs, and the plan may have a high deductible or co-pays. Even so, the tax-free benefit of what the employer covers is valuable. While not required to, businesses with fewer than 50 employees may offer health care coverage, often for competitive purposes in retaining employees. The health insurance premiums paid on your behalf by your employer are tax-free to you. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage. You can claim the part of the coverage that you pay for with post-tax dollars as a medical expense if you itemize your deductions.

Retirement Plans – Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions up to $19,000 for 2019. If the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,000, bringing the total to $25,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.

Qualified Transportation Fringe Benefits – Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee. Before the passage of the tax reform in late 2017, employers were able to provide employees with tax-free reimbursement for parking, transit passes, commuter transportation, and bicycle commuting, subject to certain limits, and the employer could deduct the cost. The tax reform had a significant impact on these benefits. It eliminated the $20-per-month bicycle benefit and no longer allowed the employer to deduct reimbursements made to employees for other transportation benefits, making some employers less likely to offer any transportation fringe benefits. However, they remain tax-free to the employee; for 2019, the limit on tax-free employer reimbursements is $265 per month each for qualified parking, transit passes, and commuter transportation.

Flexible Spending Account (FSA) – This is a unique account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. This allows employees to pay for individual out-of-pocket health care costs with pre-tax dollars. The health care expenses can be used for health plan deductibles, co-payments, and even some over-the-counter-medications. The annual limit on contributions is inflation-adjusted and is $2,700 for 2019. However, if you don’t use the money in your FSA, you will lose it.

Group Term Life Insurance – The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group-term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it (i.e., it is “phantom income”). So, while the tax-free coverage of the first $50,000 is a good perk, an employee shouldn’t automatically sign up for more than $50,000 of GTLI coverage without considering whether they genuinely need the coverage and what the extra cost will be. In some cases, an employee who wants more than $50,000 in coverage may be able to privately acquire a policy that will cost less than the tax on the imputed income for the extra coverage through the employer’s plan.

Qualified Employee Discounts – A certain amount of an employee discount on purchases from an employer or on services provided by an employer is excludable from the employee’s income. The exclusion is limited to the employer’s gross profit percentage for property or 20% of the price at which the employer sells services to non-employee customers for services.

Employer-Provided Education Assistance – An employee doesn’t have to include, in his or her income, amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational support that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.

Adoption Expenses – An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the costs are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,080 for 2019 per child, for both non-special needs and special needs adoptions. The exclusion phases out when the employee’s modified adjusted gross income is between $211,160 and $251,160 for 2019. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion. Still, any employer-paid excludable expenditures can’t be used for the credit.

Child and Dependent Care Benefits – Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers. Still, no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.

Health Savings Accounts – Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2019, can be up to $7,000 for families and $3,500 for a single individual. When you make distributions for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.

If you have questions on how job-related benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact us.

3 Common Personal Income Tax Problems and How to Respond

Common tax problems can go far beyond the numbers that you report, and they can require additional evidence that your bank statements and paychecks can’t provide. Additionally, the IRS isn’t the only source of those problems. State tax authorities are hungry for revenue, and if you divide your time among different states, you may find it challenging to establish nexus and may even have to file taxes in multiple states.

Below are some of the most common personal income tax issues people are likely to face.

1. You didn’t make (or underpaid) estimated tax payments.

Self-employment is the most common cause of this. When you’re used to having taxes withheld from your paychecks at work, it can be a shock to have to pay taxes yourself. You can end up owing not just a large amount of self-employment and income taxes, but also penalties for not making tax payments on time. Estimates must be deposited quarterly, or you will face an underpayment penalty.

If your total tax due when you go to file is under $1,000, you won’t have to worry about getting smacked with an underpayment penalty. However, it’s a good idea to set aside at least 25%-30% of your income for estimated tax payments and commit to paying this amount every month if quarterly taxes are too complicated to figure out.

Other situations like freelancing on the side or rental income while you’re still employed can also cause you to fall short at tax time, so make sure to have extra taxes withheld from your paycheck if you don’t want to make estimated payments. State tax payments also shouldn’t be neglected.

2. You didn’t correctly file state tax returns after moving.

Moving to a state with little or no income taxes like Nevada or Florida can be appealing if your bank account feels squeezed in high-tax states like New York or California. Many people divide their time between multiple states for work or personal reasons. If it’s not just a two- or three-week creative retreat or corporate assignment, it can make nexus challenging to determine in some cases.

With the prospect of a lower tax burden becoming even more appealing, it seems logical to move to the tax-haven state you’ve been eyeing. But even after you file for a change of address with the postal service, change your voter registration, and get recognized as a resident by your new state, the high-tax state that you left is likely to also still treat you like one.

Typically, you must spend at least 183 days of the year in the other state and maintain a primary residence there. Merely owning property in another state won’t do if your family doesn’t also live there while you work or travel. Where you spend time outside of work also matters because where you sleep every night is what ultimately matters.

If your move is indeed permanent and your residency is valid, you may have to file a part-year resident tax return for the final months you stayed in the old state. You won’t need to worry about it for following years, but keep track of how many days you spent in each state before and after moving day.

3. You neglected to file state income tax returns as a non-resident.

If you have a business or rental income in another state, you may be required to file state tax returns as a non-resident. If this income is significant, it can end up producing a large tax bill if you’re unprepared.

If you have an out-of-state job, your payroll provider may also be incorrectly withholding taxes for the appropriate state or city. In concentrated regions like the tri-state area, especially for New York City and Philadelphia residents, ensure that city taxes are being correctly withheld if you are a resident, and that withholding curtails if that is no the longer the case. There are usually reciprocity agreements among states and municipalities in areas where state lines cross. Still, you should carefully check to make sure you don’t owe non-resident taxes in addition to what you owe your home state.

Failure to make tax payments on time, and to the right agency, are income tax problems that are often overlooked and can quickly spiral out of control. To avoid these issues and many more, please contact us so we can consult you on your state and local taxation, as well as rules for establishing nexus.

Are Solar-Powered Batteries the Answer to Power Outages?

Article Highlights:

  • Wildfires
  • Planned Power Outages
  • Solar Batteries
  • Solar Tax Credit

Over the past few years, several wildfires have been blamed on power lines downed during periods of low humidity and gusty winds, which typically occur in the fall. The 2018 Camp Fire, sparked by downed power lines, was the deadliest in California history, claiming 85 lives and causing more than an estimated $16 billion in damages.

Wind events can last for days, and the loss of power for extended periods can result in spoiled food and other inconveniences for homeowners who lack other power sources. Planned power outages are already being implemented by some utility companies. They may become commonplace in the future, since gusty weather comes every year, and power companies must consider their financial liabilities if a downed line sparks a wildfire.

As a result, homeowners and businesses in fire-prone areas will need to be proactive in planning for these emergency power outages and decide whether they need to provide themselves alternate power sources during outages or ride out the powerless periods. Of course, alternative power sources come with a price tag, which will play into that decision.

Even if you do not live in a wildfire-prone area, you may be in an area that is susceptible to power outages and may want to consider alternative power sources during outages.

Businesses can, of course, write off the cost of providing themselves alternate power sources. Still, the tax law doesn’t allow homeowners to deduct the expenses of a generator or other outage-mitigation measures. However, one tax credit applies to homeowners who install solar power property, and that credit extends to batteries that are charged solely by solar power. (1)

Even if you only have a standard solar power system without a battery back-up, you will still lose power during an outage because of how most panels are connected to the electric grid. However, if you have a battery incorporated into your solar system, your home can run off the solar energy stored in your battery when there is a power outage.

Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery. (1) Those who do not already have a solar system may want to consider the cost of installing a solar system with a battery.

Installing a solar system with a battery or adding a battery to an existing system may be a convenience item for some and worth the cost. However, the costs can be substantial, and a household’s energy needs may not justify the price of a solar system, much less the cost of a battery. Carefully consider your needs before deciding whether to invest in a solar system. Although it will not qualify for a solar credit, a battery system attached to the electric grid may be another option.

If you want to take full advantage of the solar tax credit, you need to act soon, as it is being phased out. Note that 2019 is the last year that the credit is equal to 30% of the cost of a solar system. The credit amount drops to 26% in 2020 and 22% in 2021, the final year of the credit. The credit is nonrefundable, which means it can only reduce your tax to zero, and any excess is carried over to the subsequent year. During periods of possible outages, keep your car’s gas tank filled, as service stations can’t pump gas without power. Keep some cash handy, since without power, your credit/debit cards will not work, and ATMs won’t be able to distribute cash. External batteries to charge cell phones will come in handy as well.

If you have questions related to how the solar credit might apply to your particular circumstances, please contact us.

(1) A battery attached to solar panels is qualified solar electric property if it’s charged only by solar energy. A software-management tool is an eligible solar electrical property where the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. Earlier installations of qualifying property don’t affect the availability of the solar for qualifying property in later years. Thus, where a qualifying solar panel system was installed in Year 1, an additional solar credit could be claimed in Year 2 for the installation of a battery that was connected to the system and was qualified solar electric property. (IRS Letter Ruling 201809003)

Crowdfunding Can Have Unexpected Consequences

Article Highlights:

  • Crowdfunding Sites
  • Gifts
  • Charitable Gifts
  • Business Ventures
  • SEC Registration

Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. Several sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign.

Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.

On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax-deductible.

A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $15,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.

Gifts to specific individuals, regardless of the need are not considered a charitable contribution under tax law. An example is raising funds to help pay for someone’s funeral expenses. Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.

Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:

  • Contribution Less Than $250 – To claim a deduction for a contribution of less than $250, the taxpayer must have a canceled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
  • Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
    • The amount of cash contributed;
    • Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and
    • A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.

Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.

  • No Business Ownership Interest Given – This applies when the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
  • Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment. When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations carve out a special exemption for crowdfunding:
  • Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC is $1.07 million in 12 months. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate.
  • Contributor Maximum – The amount an individual can invest through crowdfunding in any 12 months is limited:
  • If the individual’s annual income or net worth is less than $107,000, his or her equity investment through crowdfunding is limited to the greater of $2,200 or 5% of the investor’s annual net worth.
    • If the individual’s annual income or net worth is at least $107,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $107,000.

On the bright side, even if the money raised is income to the business, it will probably net out to zero taxable if it is spent on tax-deductible business expenses.

Does the IRS Track Crowdfunding? – The answer is, maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. The question is, will the third party follow the de minimis rule?

If you have questions about crowdfunding-related tax issues, please contact us

Is It Better to Have a Tax Credit or a Deduction?

Article Highlights:

  • Itemized Deductions
  • Above-the-Line Deductions
  • Business Deductions
  • Asset-Sale Deductions
  • Refundable Credits
  • Nonrefundable Credits
  • Carryover Credits
  • Business Tax Credits

People often say that an expense is a tax write-off and interpret this to mean that the expense will have a tax benefit. Generally, such a benefit takes the form of either a deduction or a credit.  The effects of these benefits are quite different; however, and each type has various categories. As a result, the tax implications may not be as expected. This is especially true when the write-off claim comes from a salesperson who is touting the tax benefits of a product or service, as such individuals often leave out key details. In general, a deduction reduces taxable income, whereas a credit reduces the tax itself.

Tax Deductions – In one way or another, tax deductions reduce the taxable portion of an individual’s income, which thus reduces the tax on that income.

Itemized Deductions – When taxpayers think of deductions, they typically think of the itemized deductions that are claimed on Schedule A. This is the only way to deduct personal expenses such as medical costs, state and local tax payments, investment and home-mortgage interest, charitable contributions, disaster-casualty losses, and various rarely encountered expenses. In some cases, itemized deductions are limited. For instance, medical expenses are only deductible to the extent they exceed 10% of the taxpayer’s adjusted gross income (AGI). Similarly, state and local tax payments (including those for income, sales, and property taxes) are capped at $10,000. On top of that, itemization only reduces taxable income to the extent that the total of the itemized deductions exceeds the standard deduction. When the sum does not exceed the standard deduction, the itemized deductible expenses provide no tax benefits at all.

Above-the-Line Deductions – Certain deductions reduce income. These are commonly called above-the-line deductions because, when applied, they reduce the income figure that is used to calculate AGI. Thus, their benefits apply regardless of whether the taxpayer uses itemized deductions. Above-the-line deductions include educators’ expenses; contributions to health savings accounts, traditional IRAs, and certain qualified retirement plans; deductible alimony payments; and student-loan interest. Most of these deductions have annual maximums.

Business Deductions – Taxpayers who operate noncorporate businesses can deduct from their business income any expenses that they incur when operating their businesses. These deductions (which cover advertising fees, employee wages, office-supply costs, etc.) are used to reduce profits, which in turn reduces taxable income and, ultimately, income tax. In addition, most self-employed taxpayers pay Social Security and Medicare taxes on their net business income, so any reduction in their business profits also reduces their Medicare taxes and possibly their Social Security taxes.

Asset-Sale Deductions – An individual who sells an asset is allowed to deduct that asset’s cost from the sale price to determine the taxable profit. Good recordkeeping is helpful here because the original expense may have been incurred years prior, even though it is only deductible when the asset is sold. For example, any improvements that an individual makes to a home over years of ownership are not deductible until the home is sold. At that point, the individual can reduce the taxable gain from the sale by counting the improvements as part of the home’s cost.

Tax Credits – Tax credits come in several varieties, and the amount of benefit can vary:

Refundable Credits – A refundable credit offsets current tax liability; it is so-called because any amount of unused credit is refunded to the taxpayer. Refundable credits include the Earned Income Tax Credit, the Additional Child Tax Credit, and the Premium Tax Credit (net of any advances received), as well as the American Opportunity Tax Credit (an education credit that is 40% refundable). As a matter of general interest, these credits are subject to significant filing fraud because of their refundability. The IRS also considers prepayments such as income-tax withholding and estimated tax payments to be refundable credits.

Nonrefundable Credits – A nonrefundable credit only offsets tax liability; any unused amount is lost (unless it can be carried over to another year; see below). Over time, Congress has become more generous with credits; most credits that are not refundable now carry over for a given period. Nonrefundable credits include the Saver’s Credit, the Lifetime Learning Credit, and the personal portion of the Electric Vehicle Credit.

Carryover Credits – For some nonrefundable credits, any unused current-year credit can be carried over to the next tax year (or for a longer period) until the carryover amount is used up. These credits include the Adoption Credit (which can carry over for up to five years) and the Home-Solar Credit (which carries over through at least 2021; tax law is unclear on whether it will expire then).

Business-Tax Credits – Numerous business-tax credits are available; however, they are grouped into the General Business-Tax Credit, which is nonrefundable but which carries forward for twenty years and back for one year. (This allows a business owner to amend the prior year’s return to claim the credit.) This category includes the business portion of the Electric Vehicle Credit.

If you have questions related to how you might benefit from tax credits or deductions, please contact us.

Child Daycare and Taxes

Article Highlights:

  • Daycare Providers
  • Simplified Food Deduction
  • Special Rules for Business Use of the Provider’s Home
  • Home Sale Consequences
  • Other Expenses
  • Other Daycare Provider Issues
  • Daycare User Credit
  • Employer Dependent Care Benefits
  • Other Credit Criteria

When discussing daycare for children so their parents can work, there are two primary areas of discussion: one from the viewpoint of the individual providing the daycare services and another from the parents using a daycare provider’s services. Tax law provides exclusive benefits for both.

DAYCARE PROVIDERS

Daycare providers are generally self-employed individuals who provide care in their home, and like other self-employed individuals conducting a business, they are allowed to deduct business expenses, including the following:

  • Business Use of a Vehicle – Examples of business-related use of a personal vehicle by a daycare provider include taking the kids to the park, on field trips, or the movies. Also eligible are miles used to purchase supplies and other business-related travel. What’s deductible is the standard mileage rate of 58 cents per business mile (2019) or the prorated business portion of the actual operating expenses for the vehicle. In either case, daycare providers should maintain a contemporaneously prepared log detailing all business-related trips.
  • Food – Daycare providers can deduct the cost of meals provided to the children, not including meals for their own children. The simplest method, which does not require documenting food purchases, is to use the simplified meal deduction. The simplified meal deduction does not preclude a care provider from using the actual expenses if the actual cost is higher, and the provider is willing to document the costs without including food purchased for his or her own family’s use. The simplified meal deduction amounts for 2019 are illustrated in the table below. 
Year States Breakfast Lunch Dinner Snack
2019 Contiguous States
Alaska
Hawaii
$1.31
$2.09
$1.53
$2.46
$3.99
$2.88
$2.46
$3.99
$2.88
$0.73
$1.19
$0.86

The rates do not include the cost of nonfood supplies (e.g., utensils), which may be deducted separately. The number of meals per day per child is limited to the amounts below. (The table uses the amounts based upon the rates for contiguous states and will be higher for Alaska and Hawaii.)

Meal Rate 2019 Allowance
One Breakfast $1.31 $1.31
One Lunch $2.46 $2.46
One Dinner $2.46 $2.46
Three Snacks $0.73 $2.19
2019 Daily Maximum Per Child $8.42

If the provider receives some form of reimbursement or subsidy, then the provider may deduct only the part of the simplified rate that exceeds the reimbursed amount.

Business Use of the Home – Self-employed individuals may take a business deduction for the business use of a portion of their home if that portion is used exclusively for business. Daycare facilities are not subject to the exclusive use requirement that applies to other home offices. However, that special rule only applies to providers who:

  1. Are licensed, certified, registered, or approved as a daycare provider under state law;
  2. Have a pending application for licensing, certification, registration, or approval under state law as a daycare provider that has not been denied; or
  3. Are exempt from licensing, certification, registration, or approval under state law.

Any daycare provider not meeting one of these three requirements is still subject to the exclusive use rules. These rules will generally preclude them from the deduction unless they use some portion of the home exclusively for daycare purposes, such as a bedroom or a storage area. The daycare facility exception does not apply if the services performed are primarily educational or instructional (e.g., musical instruction). However, the limitation does apply if the services are mostly custodial and if the educational, developmental, or enrichment activities are only incidental to the custodial services. The services must be provided for individuals age 65 or older, children, or individuals who are physically or mentally incapable of caring for themselves.

When calculating the percentage of the business use of the home, both the space used to operate the daycare business and the amount of time that space is used to provide daycare, including preparation and cleaning time, are factors.

Example: Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week, to provide licensed daycare services. The home is 2,400 square feet, and the living room, kitchen, and bathroom are a combined 1,400 square feet. The exclusive use requirement doesn’t apply. Edna’s percentage use of her home for business is determined as follows:

Once the percentage is established, all of the home expenses, including interest, taxes, home insurance, maintenance, utilities, and depreciation, are summed up and multiplied by the percentage to determine the deduction for the business use of the home. If an individual rents the home, the rent expense replaces the interest, taxes, and depreciation. After determining the deduction, it is further limited to the gross income from the daycare. If limited by the total income, there is a specific order in which the home expenses can be used (not discussed in this article).

Claiming the business use of the home deduction will also impact any future sale of the home. For taxpayers who own and use their home for two years out of the five years before the sale, they can generally exclude up to $250,000 ($500,000 if married filing jointly) of any resulting gain. However, any depreciation claimed, or that could have been claimed after May 15, 1997, cannot be excluded and, as a result, will be taxable to the extent of any gain from the sale.

Example: A care provider is entitled to claim $1,000 per year of home depreciation, and she operates that business for ten years, claiming a total of $10,000 in depreciation. Whenever she ultimately sells her home, the $10,000 cannot be included in the excluded gain and will always be treated as a taxable capital gain to the extent of any home sale gain.

  • Other Expenses – Other expenses include just about any cost that has to do with operating the daycare facility, including, for example:
    • Advertising
    • Business banking account fees
    • Daycare licensing
    • Daycare organization membership expenses
    • Seminars and education related to managing a daycare center
    • Business insurance
    • Games and toys
    • Supplies, diapers, wipes, and cleaning supplies
    • Phone services
    • Prorated internet service
    • Field trip expenses
    • Payroll for employees
    • Additional important tax issues apply to daycare providers:

Self-Employment Tax – Like all self-employed taxpayers, daycare providers must pay self-employment tax, which is made up of the Social Security tax of 12.4% on the first $132,900 (2019) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is an additional 0.9% Medicare tax on the extent to which the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. Also, daycare providers can deduct half of the self-employment tax from their gross income.

Retirement Plan Contributions – Profits from a daycare business qualify for IRA contributions and self-employed retirement plans, allowing daycare providers to put away substantial amounts for their future retirement.

Medical Insurance Above-the-Line Deduction 

While most taxpayers must itemize their deductions to deduct the cost of their medical insurance, self-employed taxpayers, including daycare providers, can deduct the premiums from their adjusted gross income and avoid the 10% medical expense haircut when itemizing deductions.

Employer Identification Number – Most daycare clients can claim a tax credit for the cost of daycare. However, to do so, they must include either the daycare provider’s Social Security number (SSN) or an employer identification number (EIN) on their tax returns. It is a best practice in this age of ID theft not to use the SSN and instead obtain an EIN.

DAYCARE USERS 

Individuals who use the services of daycare providers may qualify for a tax credit if the expense is an “employment-related” expense. For example, it must enable a taxpayer or spouse, if married, to work, and it must be for the care of a child, brother, sister, or stepsibling (or a descendant of any of these) who is under 13, lives in the taxpayer’s home for more than half the year, and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.

The qualifying expenses are limited to the income from working and, in the case of a married couple, are limited to the lower of the spouse’s income from working. However, under certain conditions, when one spouse has no actual income from working and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (for two or more qualifying children). This means the income limitation is mostly removed for a spouse who is a student or disabled all year.

The qualifying expenses can’t exceed $3,000 per year for those who have only one qualifying child, while the limit increases to $6,000 per year for those with two or more qualifying persons.

If there are two children, the care expenses are not divided equally. For example, if the taxpayer paid $2,500 in qualified expenses for the care of one child and $3,500 for the care of another child, the $6,000 can be used to determine the credit. The credit is computed as a percentage of qualifying expenses, in most cases, 20%. See the table below for the credit percentages based on the taxpayer’s adjusted gross income.

AGI Adjusted Applicable Percentage

AGI
Over
But Not
Over
Applicable
Percent
AGI
Over
But
Not Over
Applicable
Percent
0 15,000 35 29,000 31,000 27
15,000 17,000 34 31,000 33,000 26
17,000 19,000 33 33,000 35,000 25
19,000 21,000 32 35,000 37,000 24
21,000 23,000 31 37,000 39,000 23
23,000 25,000 30 39,000 41,000 22
25,000 27,000 29 41,000 43,000 21
27,000 29,000 28 43,000 No Limit 20

 

Example: Al and Janice both work with combined earned income in excess of $50,000 for the year. Janice has a part-time job, from which she earns $10,000 for the year. Her work hours coincide with the school hours of their 11-year-old daughter, Susan, so while school is in session, Al and Janice incur no childcare expenses for Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their childcare credit would be $600 (20% of $3,000).

The credit reduces a taxpayer’s tax bill dollar for dollar. Thus, in the above example, Al and Janice would pay $600 less in taxes by the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The credit cannot be used to reduce self-employment tax if a taxpayer is self-employed, or the taxes imposed by the Affordable Care Act.

Employer Dependent Care Benefits – Some employers provide dependent care assistance programs to help their employees with the cost of daycare. Payments under these plans used by employees to pay dependent care expenses are excludable from employees’ income, up to the lower of:

  1. The employee’s earned income (for married employees, this is the earned income of the lower-paid spouse) or
  2. $5,000 ($2,500 for married filing separate).

Because reimbursement up to these limits is excludable from income, the benefits the employee receives are treated as reimbursement for daycare expenses that reduce the expense limits of $3,000 for one child and $6,000 for two or more children. Compensation above these limits is taxable to the employee and does not reduce qualified expenses for the credit.

Other Credit Criteria:

  • Age of the Child – If the qualifying child turned 13 during the year, count only the care expenses paid for the child for the part of the year when he or she was under age 13.
  • Day Camps – Many working parents must arrange for care for their children under 13 years of age (or any age if disabled) during school vacation periods. A popular solution, with a tax benefit, is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. However, it’s essential to note that fees for overnight camps do not qualify. Also, not eligible are expenses paid for summer school or tutoring programs.
  • Both Parents Working in an Unincorporated Business – When both spouses of a married couple are jointly involved in an unincorporated business, it is relatively common, but incorrect, for all of that business’s income to be reported as just one spouse’s income. As a result, they lose the benefits of the childcare credit, which requires both spouses to have income from working.
  • School Expenses – Only school expenses for a child below the kindergarten level are considered qualifying expenses for this credit.
  • In-Home Care Providers – If a taxpayer provides daycare in their home, the daycare provider is considered a household employee.

This article provides an overview of the various tax issues related to daycare from the perspectives of both the provider and the recipient of daycare services. However, as in everything taxes, many more rules and issues exist than could be included in this article. For additional information about daycare and how it impacts your taxes, please contact us.

Don’t Overlook These Essential Small Business Tax Credits

At their core, tax credits are a very particular type of benefit designed to offset the actual tax liability associated with small businesses around the country. Tax credits are not the same thing as a tax deduction, which lowers that business’s actual income. Tax credits are typically offered to incentivize everything, from hiring more workers to stimulate the economy, to making meaningful contributions to specific industries.

While some tax credits are apparent, others are decidedly less so. This is why proper tax planning is essential as a small business owner. It is important to be proactive about getting the money that is owed to you. There are several crucial small business tax credits in particular that you’ll want to take advantage of when tax season rolls around.

The General Business Tax Credit

As the name suggests, this is something of a “kitchen sink” tax credit made up of many smaller, individual credits. Collectively, they are designed to act as a way to motivate savvy business owners, such as yourself, to participate in certain activities. If you purchased a qualified electric vehicle for your business, branched out into a new market, or retained a certain number of employees, you may very well be qualified.

Paid Family and Medical Leave

This particular tax credit is relatively new, having only just been authorized in 2017. It’s intended to motivate small business owners to provide paid leave to all employees who are covered by the Family and Medical Leave Act. Employees who qualify are entitled to up to 12 weeks of totally unpaid, job-projected leave — all while still retaining access to their group health benefits as well. Note that this is something that happens every year.

The credit itself is equal to a percentage of the wages that an employer pays to those qualified employees while they’re on leave for things like unexpected medical emergencies or even giving birth. 

The Alternative Motor Vehicle Credit

This credit is a sizable one of up to $8,000, so it is absolutely in your own best interest to claim it if you qualify. As the name suggests, it’s a way to incentivize small business owners to purchase an “alternative fuel source” vehicle. Note that the cars that fall into this category would be those that use hydrogen fuel-cell technology, not hybrids or electric cars since those are still considered to be “traditional” types of fuel.

Yes, the list of qualified vehicles is currently small — but that doesn’t mean it won’t expand in the future, and the credit itself is still worth keeping an eye on. 

Credits for Qualified Research Expenses

Depending on the specific type of small business you’re running, you may have to engage in a significant amount of research and development to better serve your customers. The United States government would like to encourage you to do as much of that as possible, which is how the qualified research expenses credit (otherwise known as the “Increasing Research Activities Credit”) came into being.

To qualify for this credit, you need to engage in domestic research and development for things like certification testing, environmental testing, developing or applying for patents, prototype and model development, and more. Research associated with the development of new or even improved products, processes, and formulas would also qualify.

This credit can cover up to 20% of all of your related expenses that fall under this umbrella. 

The New Markets Credit

Last but not least, we have the New Markets Credit — one designed to encourage investment in Community Development Enterprises and Community Development Financial Institutions, otherwise known as CDEs and CDFIs, respectively. These are the types of organizations that assist lower-income communities around the country.

The vast majority of all qualified projects involve either purchasing, renovating, or constructing real estate in areas that have a 20% poverty rate or with median family incomes that don’t exceed 80% of that of the larger area. This means building or renovating hospitals, for example, or industrial buildings that go on to create jobs. 

Note that while all of these small business tax credits are critical, they represent just a small fraction of those that may be available to you. For the complete list, be sure to review the IRS’s official website devoted to that very topic. As always, you should also enlist the help of your qualified Tarlow tax professional to prepare your business taxes. Not only can we help ensure you’re taking full advantage of these and other critical credits, but we can also help you avoid the types of costly mistakes that small business owners and the self-employed often make. Contact us for more information today.

Should You Have an Identity Protection PIN?

Article Highlights:

  • Taxpayer First Act
  • Taxpayer Notification when a SSN is Fraudulently Used
  • Purpose of an IP PIN
  • Obtaining an IP PIN
  • Is an IP PIN Right for You?

With the passage of the Taxpayer First Act in mid-2019, the Treasury Department (i.e., the IRS) is required to establish a program to issue an identity protection pin (IP PIN) to any U.S. resident who requests one. For each calendar year beginning after the date of enactment, the IRS must also expand the issuance of IP PINs to individuals residing in such states as the IRS deems appropriate, provided that the total number of states served by the program continues to increase.

Victims of identity theft and refund fraud are often unaware that their identity had ever been used fraudulently. If they become aware of the situation, they’re not always aware of the outcome of their case. 

The Taxpayer First Act addresses this situation by requiring that the IRS notify a taxpayer if it determines any of the following: 

  • there has been suspected unauthorized use of a taxpayer’s identity or of that of the taxpayer’s dependents; 
  • an investigation initiates; 
  • whether the investigation substantiated any unauthorized use of the taxpayer’s identity; 
  • and whether any action has been taken on an open investigation (such as a referral for prosecution). 

Furthermore, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving the victim the ability to pursue civil action against the perpetrators.

An IP PIN is a six-digit number assigned by the IRS to eligible taxpayers. This pin helps prevent the misuse of taxpayers’ SSNs on fraudulent federal income tax returns.

The IP PIN was initially established several years ago to aid taxpayers whose SSNs were compromised, and there was a concern their SSNs could be used to file a fraudulent return. Recently, as a result of the Taxpayer First Act, the IRS has opened the IP PIN system to a variety of taxpayers.

In addition to taxpayers whose SSNs the IRS has determined are compromised for tax-filing purposes, IP PINs now are available to those who

  • filed their federal tax return last year as a resident of Florida, Georgia, the District of Columbia, Michigan, California, Maryland, Nevada, Delaware, Illinois, or Rhode Island, or
  • received an IRS letter inviting them to “opt-in” to get an IP PIN.

Requesting an IP PIN is strictly voluntary. If you choose not to participate in the program, you can file your return as you normally would. If you are assigned or if you request an IP PIN, you must use it along with your SSN, to confirm your identity on any tax returns filed electronically during the calendar year. A new IP PIN is generated for each filing season and can be retrieved starting in mid-January of each year by logging into the account you create with the IRS. At this time, if you choose to receive an IP PIN, you must use your IP PIN on all 1040 (current year and delinquent) returns filed during the calendar year.

To obtain an IP PIN, you must pass the IRS’s identity verification secure access process. To do that, you must register with the IRS and set up an online account that is only accessible with a username and password established during the registration process. This can require a substantial amount of verification information so the IRS can make sure you are not trying to obtain an IP PIN for someone with a stolen identity. Next, you have to log into the IRS IP PIN Section, which requires double authentication: a password plus a 6-digit code that the IRS sends to your cell phone. Once you complete this process, you can retrieve your IP PIN.

Is an IP PIN right for you? That depends; the process is quite complicated, and you get a new number every year. When deciding, it can help to weigh the inconvenience it creates when your SSN has not been compromised with knowing you can always obtain an IP PIN if your SSN is compromised in the future. The decision is up to you.

Of course, if the IRS has already sent you a CP01A Notice, the annual communication from the IRS containing your unique 6-digit IP PIN and instructions on how to use it, you are already in the system.

If you have questions about IP PINs, please contact us