The IRS has increased the maximum threshold for expensing certain capital items under the De Minimis Safe Harbor from $500 to $2500. The increase is in reponse to CPA comments that the $500 limitation was too low to effectively reduce the adminitrative burden of capitalizing the cost of many commonly purchased items such as furniture, computers, phones, and small equipment. This rule goes into effect tax years on or after January 1, 2016. Furthermore, if taxpayers are using a threshold higher than $500 but less than $2500 for tax years beginning after December 31, 2011 and ending before January 1, 2016 the IRS will not focus on this issue in an examination. Please contact us if you have questions or want specifics to your situation. This post is designed to provide a basic overview.
As we review current tax law for late year changes we will be doing a series of blog posts to remind taxpayers that there are a few income sources which might impact your personal tax situation which remain completely tax-free to you (although some are reportable but not taxable)
How many people have heard about an urban legend in the tax code called “The Masters Exemption”? (think Augusta, GA) The good news is this legend is true! Situations where your property (primary or vacation home) is rented for 14 or fewer days is completely tax-free to the taxpayer (without any depreciation or maintainance deductions though) regardless of the amount! Between the hot film industry in Georgia, combined with major sporting and music events these opportunities provide a major possible windfall to the homeowner.
Please note that the title of the blog post only mentions the IRS unfortunately. Generally any short-term rental has state and local tax obligations and state governements continue to use better techonology to track these types of rentals.
Just a reminder these are rentals of your primary home or second/vacation home not considered an investment property
Next blog post we will talk about when selling your primary residence will result in a zero federal tax bill.
We just wrapped up tax extension season for 2014 partnership and corporate returns. I thought it would be a good time to remind our readers common “themes” we see each year with business tax preparation.
- All Start-Up Costs are Immediately Deductible- Costs incurred before your business opens their doors range from advertising, travel, training etc. These costs include organizational matters such as legal fees and state licensing. Since tax year 2011, you are only allowed to deduct up to $5,000 of business start-up and $5,000 or organizational costs incurred after October 2004. Each of these $5,000 amounts are reduced when your total start-up or organizational costs exceed $50,000. All remaining costs must be amortized Additionally, equipment costs are recovered through depreciation or Section 179 expensing.
- Requesting an extension on your taxes includes an extension to pay- This is one of our firm favorites, tax payments are always due April 15 of each tax year (or March 15 for C Corps). Extensions are for paperwork only, penalties and interest accrue accordingly
- Incorporation enables the most deductions- The answers here remain in understanding your business structure in the first place. Countless clients walk in our doors and don’t have any clear rationale on why their business is a Schedule C, S Corp or LLC. The plot thickens when we inform them that IRS doesnt recognize LLCs and through lack of planning, can potentially increase your accounting and tax expenses with little benefit e.g. have you factored in your future plans of adding members or shareholders and how profits and losses will be split?
- S Corps with no salary- IRS code requires shareholders to take “reasonable compensation” as an employee of your corporation. All distributions are a red flag for an audit. Additionally track capital contributions and have paperwork for all loans booked accordingly on your software
- Business Use of your Auto- A travel log of business miles must be maintained during the calendar year and this includes commuting and personal use of the auto/truck. Second, you typically get to select between business mileage reimbursement under IRS guidlines or deductions of actual expenses (gas, deprecation, brake job) based on pro rata business use of your vehicle. It matters whether your lease and typically its best to use the mileage allowance in year one for reasons beyond the scope of this blog post.
Contact us with questions and start getting organized if your personal return is on extension!
As we roll into the final couple months of the year one common theme has been interest in our CFO clients either wanting to sell their businesses or getting the “itch” to consider this. We think there are many reasons why business owners want to consider selling but the biggest reasons of late are the “pop” they are receiving after coming out of the “Great Recession” and the flow of “cheap money” that makes business purchases easier to fund (if you can get the money). There are however, a few key things to consider before putting your business on the market:
- Stock vs asset sales – Typically sellers prefer, all things being equal, stock sales for capital gains treatment and buyers often prefer asset sales to maximize depreciation deductions, plus there are double taxation considerations based on your company structure.
- Selling less than 100% of your stock – Often some level of equity wants to be retained by the seller. Do you understand the tax impact on this transaction? There are also cultural and management concerns that need to be dealt with as well along with employment or consultant contracts.
- Installment Sales – Cash Flow issues on the buyers side along with deferring the tax bill (seller) create an opportunity for a better sales price with performance contingencies set in place
- Cash Down – Typically sellers want 100% cash upfront and buyers want to put down as little as possible. The truth is very few deals are all cash these days- they are often notes over an extended period of time.
- Books & Records – Solid and organized books and records are the foundation of any due diligence process – any smart buyer will want clean and accurate financial statements, and depending on size might request audited or reviewed financial statements. If your accounting isn’t clean it will probably kill any potential deal or reduce your selling price.
These are some things to consider before you consider selling your business. Whether you sell your business or not, We would also use this time to remember why you chose the business structure you did when you first started and to make sure this still makes sense. Everyone loves LLC status but often they don’t know why? additionally there are good reasons to chose C Corp status as well. Understand your structure – and your personal situation.
Being generous to your favorite charitable organization typically can yield substantial tax benefits to you. There are various types of donations and various requirements to substantiate the gift you choose to give. Are you giving cash or property? Contributions are limited by your AGI (adjusted gross income) between 20 and 50%. (Consult your CPA). Here are some general rules to remember as you prepare for donations:
- Cash donations of less than $250 can be supported by canceled check or credit card receipt, donations in excess of $250 must be substantiated by the charity
- Appreciated property typically provides the most tax savings however proper planning is required
- Understand the differences between ordinary income property and long-term capital gains property during your planning
- Tangible personal property (like art or antiques) is treated for tax deduction purposes based nature of property and the end use by the charity
- Personal property valued at more than $5,000 (except securities) must be supported by a qualified appraisal
- If this property isn’t used by the charity in its tax-exempt function your deduction is limited to your basis in the property
- If the property is related to the charity’s tax-exempt function you can deduct the property’s fair market value
Here are some other key rules to remember for charitable deductions:
- Donation of Services- you may only deduct your out-of-pocket expenses, not the fair market value of your services
- Donating the use of property- No deduction is allowed, because it isnt considered a gift of your interest in the property to the charity
- Driving for charitable purposes- You may deduct only 14 cents for each mile driven related to charity
- Donating a car- The deduction is now limited to what the charity receives when it sells the vehicle unless its used directly by the charity in its tax-exempt function
- Donation of clothing or household goods- they must be in at least “good used condition” to be deductible
- Donating appreciated property to charity is smart because you avoid paying tax on the long-term capital gain you would incur if you sold the property plus you get to donate the fair market value. However, with depreciated property do the opposite, sell it, take the capital loss and then use the charitable deduction.
August is here, and while you are at the beach or relaxing we want to remind you that business owners and start-ups have a common theme to six typical problems worth reviewing. Whether you do $100,000 in sales or $ 5 million, these might apply to you regardless of your growth mode:
- Not having enough cash reserves – Entrepreneurs know they’ll need money to start up operations, but most don’t realize it might take a least a year to realize a steady income from the company. The more advanced company needs to realize that payroll is probably growing and what if a few clients pay late? Start with adequate cash and maintain an appropriate level of working capital. Don’t fool yourself with wishful thinking that the money will somehow be there.
- Credit Cards – We all have heard the story about the business owner who funded their initial operations on credit cards for early stage survival, especially when they were tight on cash early on. Sometimes there is no choice, but small business loans, SBA products or best, a business line of credit (even personally guaranteed). The economy is now somewhat better and my banking community folks are telling me lines are now more available.
- Mixing personal and business finances – For clarity and potential business liability, do not mix personal and business funds. Distributions and salary should be on business accounts only and will make your accounting easier.
- Compensation – Lots of psychology around this one. Do not take too much out of your company and don’t reinvest all your profits- tax calculations can be complicated and we have heard it many times about not owing taxes because it’s all in the company. New owners need to remember you are no longer an employee getting your direct deposit.
- Accounts Receivable – What is your process to collect these? What are terms? Do you know that some clients are required to accept any cash discount you offer by their own finance department? This can be an incredible help with cash flow, trying to meet payroll for that new client you expanded for, and much cheaper than factoring.
- Poor Accounting – Numerous clients come in and their financials just don’t make any sense. Typical causes are lack of knowledge of accounting, software, or not having the time or interest to do it right. The problem is more visible when you are in growth mode and nothing can be analyzed or your banker has declined your credit application because you have “negative cash” or you decided to expense through all your fixed assets.
Business owners underestimate the true costs of launching a business, and many firms close their doors during growth mode. Why? usually the problem is cash flow and a lack of true understanding of where they are making (or losing) money because the time was not put in to build an accounting system that tells the story. Do you know your story?
Learn from others! Happy August
Rob and Rick