Author Archives: c12463908

Health Insurance for Your Business: A Simple Error May Deny Your Deduction

As a business owner, you most likely provide health benefits for you and your employees. Even if you do not have employees, having a health insurance policy in your business may save you money.

As a self-employed taxpayer, you are allowed to deduct from your adjusted gross income, 100% of the cost of the health insurance policy. While this may not save in self-employment tax, the deduction will reduce your overall tax liability. You can title the policy in your name or in the name of your business.

If your business is a C corporation, the policy must be established by the business and in the business name. C corporations are allowed to deduct the cost of health insurance provided to the shareholders while remaining tax-free to the shareholder.

If your business is an S corporation, the policy must be established by the business, but not necessarily in the business name. A plan providing medical care coverage for the 2% shareholder in an S corporation is established by the S corporation if: (1) the S corporation makes the premium payments for the policy covering the shareholder (including a spouse or dependents, if applicable); or (2) the 2% shareholder makes the pre­mium payments and furnishes proof of payment to the S corporation, and then the S corporation reimburses the shareholder for the premium payments in the current taxable year. If the insurance premiums are not paid or reimbursed by the S corporation and included in the shareholder’s income, a plan providing medical care coverage for the shareholder is not established by the S corporation and the shareholder is not allowed the deduction. Provided these two conditions are met, and the payment for the premiums is included as wages to the shareholder, the shareholder is allowed a deduction on Form 1040, line 29, against income.

Exchanging Business Property: New Rules Limit Options

There’s a rule in the tax code that allows you to exchange property you hold for business use or investment for other like-kind property and defer any tax on the gain. This was a popular strategy for business owners who wished to acquire new property without incurring a large tax liability from selling similar property.

For tax years beginning after 2017 and before 2026, the rules for exchanging property have tightened. While you are still permitted to defer tax on the gain by acquiring like property, exchanges are limited to real property only. While you can still exchange unimproved real property for improved property and vice versa, you cannot exchange machinery, equipment or vehicles for like property.

Saving for College: Qualified Tuition Plans Provide Options

Many of you are already aware that contributing to a qualified tuition plan, commonly referred to as a 529 plan, can be a tax-free way to save for your child’s college education. But did you know that the Tax Cuts and Jobs Act added a provision that also allows you to use a 529 plan to pay for the enrollment costs for your child to attend an elementary or secondary public, private or religious school?

There is one catch, however. While distributions from a 529 plan for college expenses are unlimited provided they are used to pay for qualified educational expenses, distributions for elementary or secondary education expenses are limited to $10,000 per year per designated beneficiary.

Renting Your home: A Hidden Source of Tax-Free Income

Have you ever thought of your home as a source of untapped income? Consider this: Your home is located in an area that has a lot of tourism or large events that attract many people. Sometimes hotel space is limited or fills quickly. You prefer to be out of town while these events are taking place. If you rent your home for less than 15 days during the year, you just earned some tax-free income.

If you itemize deductions, your mortgage interest and real estate taxes are deducted on your Schedule A. None of the income you collect is taxable, nor is it reported on your tax return. The key to keeping the income tax-free is the number of days you rent your home. You must keep it to less than 15 days during the year. If you rent your home for 15 days or more, tax reporting becomes a bit more complex. Since you also use your home for personal purposes—meaning you live there—you must divide your expenses between the rental use and the personal use based on the number of days used for each purpose. If, after you reduce your rental income by allowed expenses, you have a profit, that profit is taxable. Deductions are limited to rental income.

If you are considering renting your home to others, regardless of the number of days, consult with me first so we can discuss all potential tax consequences.

Section 179 vs. Bonus Depreciation: Which Is Better?

The Tax Cuts and Jobs Act made some significant changes to how business owners deduct the cost of certain property. In the past, the cost of business assets was recovered through bonus depreciation, by regular depreciation or by expensing it under §179, depending on the type of property.

Prior to the change in the law, taxpayers were allowed to deduct 50% of the cost of most new tangible property (other than buildings and some building improvements) and most new computer software in the year placed in service. This was referred to as 50% bonus depreciation. Currently, for property placed in service and acquired after Sept. 27, 2017, the 50% bonus rate increases to 100%, appropriately called 100% bonus depreciation. Additionally, property eligible for bonus depreciation can be new or used.

Beginning in 2018, taxpayers can immediately deduct the entire cost of qualifying §179 property up to an annual limit of $1 million. Qualifying property for §179 expensing has been expanded to include certain depreciable tangible property used in connection with lodging, such as appliances and furniture in a residential rental activity and improvements to non-residential real property such as roofs, heating, ventilation, air conditioning, and fire and alarm protection systems.

While on the surface it may not look like there is much of a difference between 100% bonus depreciation or §179 expensing, which method you choose depends on several factors such as your income, the type of property you purchase and when it is placed in service.

Leasing Assets to Your Corp: A simple strategy

A business doesn’t have to own all its operating assets. Leasing your personally owned property, such as a building, vehicle, or equipment, to your incorporated business may be a good tax-savings strategy. Similarly, another corporation, a partnership, or a family business in which you have an ownership interest may lease assets to your corporation. In addition to possible tax savings, you may not want your corporation to own a lot of assets if you are in a business where lawsuits are common. Leasing instead of owning is one way to insulate assets from potential creditors.

To avoid potential problems with the IRS, lease terms between you and your corporation must be fair to both sides. The contract should be legally binding and the payments should be set at the same rate you would charge anyone else. Lease payments are deductible expenses to the corporation, while lease income is taxable to you. In turn, you’ll get to deduct costs of ownership, such as mortgage interest, maintenance, repairs, depreciation, acquisition interest, insurance and administrative costs.

Tax-Planning Tips

• Up to $2,500 of interest you paid on a student loan is deductible if your income is below $65,000 if single ($135,000 for joint filers).
• Beginning in 2019, the penalty under the Affordable Care Act for failing to have minimum essential health care coverage is suspended.
• In 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
• Deductions for personal exemptions for yourself, a spouse and any dependents are no longer allowed.
• Charitable contributions of cash to certain charities are limited to 60% of your income.
• Once you convert a regular IRA contribution to a Roth IRA, it can no longer be converted back into a regular IRA contribution. In other words, you can no longer undo a Roth conversion.
• State and local income tax, property tax and sales tax are limited to an aggregate $10,000 deduction.
• In 2018, medical expenses are allowed as an itemized deduction to the extent they exceed 7.5% of adjusted gross income for all taxpayers.
• The deduction for job-related moving expenses and the exclusion for moving expense reimbursements have been eliminated, except for certain military personnel.
• For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.

Employee or Independent Contractor?

It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS looks at the distinction closely.

Tax Obligations

For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $128,400 and 1.45% of earnings exceeding that amount). The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.

Employees Versus Independent Contractors

To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:

  • Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
  • Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
  • Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay or sick pay, etc.

In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.

If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Year-end Statements

Generally, if a business has made payments of $600 or more to an independent contractor for services, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Consequences of Misclassification

Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Correcting Mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

  • Workers improperly classified as independent contractors are treated as employees going forward.
  • The employer pays 10% of the most recent tax year’s employment-tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
  • The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.

Please contact us today for an appointment if you need help sorting through the IRS rules and fulfilling your tax reporting obligations.

Business Owners Beware: Scammers Are After Your Data

Business scammingFor years, we have heard stories about how identity thieves hack into computers and steal personal information. We have been assaulted with phishing scams where thieves impersonate IRS employees and intimidate innocent taxpayers into paying large sums of money for taxes they don’t owe. No one is immune to this threat. Individuals in all 50 states have been targeted.

Now the thieves are targeting business owners. To put things into perspective, through June 1, 2017, the IRS identified approximately 10,000 business returns as potentially theft-related compared to about 4,000 for calendar year 2016 and 350 for calendar year 2015.

This coming filing season, the IRS will be asking tax professionals to gather more information on their business clients. All the data being collected assists the IRS in authenticating that the tax return being submitted is the legitimate return and not an identity theft return. Some of the new information people may be asked to provide when filing their business, trust or estate client returns include:

• The name and social security number of the individual authorized to sign the business return. Is the person signing the return authorized to do so?
• Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
• Is there a parent company? If yes, what is its name?
• Additional information based on deductions claimed.
• Has the business filed Form(s) 940, 941 or other business-related tax forms?

Now is a good time to determine if you need an employer identification number. If you are required to have one, the IRS will ask for it.

An Age To Remember: Quick Tips

Tax birthdayKnowing key tax birthdays can help trim your annual tax bills. Below are some ages worth noting.

Age 0
If your child is born during the year, even as late as 11:59 p.m. on December 31, you can claim a dependency exemption for your child. This comes with one catch. You need to file for the child’s social security number (SSN) and include it on your tax return. If you don’t, the dependency exemption is denied, along with any potential for certain tax credits. If your dependent doesn’t have and can’t get an SSN, you must show the individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) instead of an SSN.

Ages 0-12
The good news is you gain tax advantages by contributing to your employer’s flexible spending account to cover child care expenses, or you may qualify for a child care credit on your tax return. The bad news is that any investment income over $2,100 in your child’s name is taxed at your rate until the child reaches age 27.

Age 13 Once your child reaches age 13, you no longer qualify to take the child care credit. Eligibility is determined on a daily basis.

Age 16
This is the last year your child qualifies you for the $1,000 child tax credit.

Age 18
If you own a business, you can pay your children to work for you and avoid paying Social Security and Medicare taxes on their wages. Once they reach age 18, you are required to withhold payroll taxes like any other employee.

Age 27
At this age, children are taxed at their own rates on investment income. In addition, they are no longer eligible for their parents’ health insurance benefits.

Age 50
Congratulations. Not only have you reached the half century mark, you can contribute an additional $1,000 to your IRA, bringing the total contribution limit to $6,500.

Age 55
You and your covered spouse are eligible to make an additional $1,000 contribution to your HSA.

Age 59.5
This is the magic age when you may take money from IRAs and retirement plans without incurring the additional 10% penalty for early distributions. There are exceptions to the penalties if you are younger, but this is the age when you may take penalty-free distributions for any reason.

Age 65
Once you reach age 65, you qualify for an additional standard deduction and, if certain conditions exist, a tax credit. For tax purposes, you are considered to reach age 65 on the day before your 65th birthday.

Age 70.5
At this age, you are required to begin distributions from your traditional IRA. If you have a Roth IRA, this rule doesn’t apply. If you have a retirement plan with your employer, you are still working, and you do not own more than 5% of the company, you can delay distributions even if you reach age 70½.