BIDaWIZ Blog » TAX BREAKS

Can Real Estate Professionals Deduct Losses Without Limits?

The BIDaWIZ Team — Tue, 06 Jan 2015 22:40:02 +0000

The tax code provides details on how to determine whether rental property losses are passive or non-passive. Real estate professionals should understand the differences between the two as it impacts their ability to reduce their taxable income.

Real estate professional criteria
The treatment of the losses depends whether or not you’re a qualified real estate professional. This means that you meet the following requirements:

50%+ of your professional services are provided in the real estate

Spend more than 750 hours each year in managing real estate

Not an employee of the business (unless you own at least 5% of the biz)

You must also materially participate in the rental activity

Passive losses
If you do not meet the qualified real estate professional criteria, then by default the losses are treated as passive (IRC Section 469). They can offset other income, such as wages, up to $25,000 per year via Form 8582. Any losses over $25,000 that are not allowed in the current year are carried forward and can only be used when you have net income from the passive rental or when you entirely dispose of the rental property.

Non-passive losses
If you meet the real estate professional criteria, you will have non-passive losses which can be carryforward as NOLs. Generally, if you have an NOL you must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period), and then carry forward any remaining NOL for up to 20 years after the NOL year (the carryforward period). You can, however, choose not to carry back an NOL and only carry it forward. To choose to elect to only carryforward the NOL, attach a statement to your original return filed by the due date (including extensions) for the NOL year. This statement must show that you are choosing to waive the carryback period under IRC section 172(b)(3) and IRS Publication 536.

More Questions? Ask your real estate tax questions or find a cpa online.

Lawmakers Approve Key Small Business Tax Extenders

The BIDaWIZ Team — Sat, 20 Dec 2014 03:12:45 +0000

As we predicted earlier this week, the Senate and President Obama did in fact approve the tax extenders for both individuals and businesses. The Tax Increase Prevention Act reinstates expired 2013 tax breaks as well as extends key tax provisions that were scheduled to expire at the end of 2014. Despite the overall positive news, the new law only provides a temporary one year solution. These same tax breaks are now set to expire on December 31, 2014.

The Section 179 Election & Bonus Depreciation Reinstated to 2013 Levels
The maximum Section 179 deduction is once again $500,000. What’s more, the bonus depreciation deduction, which expired all together in 2014, has be reinstated to 50% of the cost of eligible property.

As a refresher, the Section 179 deduction applies to the purchase of new and used property, while bonus depreciation is only applicable to new purchases. Furthermore, a business must carry-forward a Section 179 deduction in excess of a net operating loss, whereas bonus depreciation may still be deducted in the current year.

Other key provisions that were reinstated include:
– Research and experimentation credit (Code Sec. 41);
– Work opportunity tax credit (Code Sec. 51, Code Sec. 52);
– Special 100% gain exclusion for qualified small business stock (Code Sec. 1202);
– Reduction in S corp recognition period for built-in gains tax (Code Sec. 1374)

Planning for the 2015 tax year
As expected, Congress elected to pass a temporary solution. As such, we will be in in the same situation next December. Thus, businesses will likely have to wait it out again in terms of tax planning for 2015 purchases.

Managing income and expenses
Most businesses that are pass-through entities can easily manage their income and deductible expenditures through year-end. If your business is relatively stable or softening, consider deferring income into next year and accelerating deductible expenses into this year. Alternatively, if your business is flourishing and you expect to be in a higher tax bracket in 2015, accelerate income into 2014 and defer expenses to 2014. In this regard, more income will be taxed this year at lower rates than in 2015, when your tax bracket will be higher.

C Corporation tax liability management
If you own a closely held C corporation, you may want to pay bonuses and make profit-sharing contributions in 2014 if you have had a profitable year. Making these decisions now will help to reduce your corporate income tax. In addition, you may also avoid exceeding the $250,000 threshold that triggers a 20% accumulated earnings tax penalty.

More questions? Browse answers or ask business tax questions online.

Claiming The New Standard Mileage Rate For Business

The BIDaWIZ Team — Tue, 16 Dec 2014 04:41:24 +0000

The IRS released the new standard mileage rates to calculate deductible costs for the 2015 tax year. This impacts those using a vehicle for business, charity, or medical and moving purposes. With the exception of costs related to business, the standard mileage rates all stayed the same or were slightly down from 2014 due to lower gas and oil costs. Still, should you even claim the standard mileage deduction for business?

The standard mileage rate
For 2015, the standard mileage rate increases to $0.575 for business miles driven, up from $0.56 in 2014. While the IRS expects fuel prices to be lower in 2015, an annual study indicated higher fixed and variable costs for operating an automobile, including depreciation, insurance, repairs, tires, and maintenance.

The rate will be $0.23 per mile for medical or moving purposes, down $0.005 from 2014, and $0.14 per mile driven in service of charitable organizations. The medical and moving expenses are based on the lower expected price of oil, while the charitable rate is set by law.

Not Familiar with the Standard Mileage Rate Deduction?
Essentially the standard mileage rate deduction is for instances in which you drive your personal car for business, medical reasons, or in support of a charitable organization. The mileage rate deduction is claimed as an itemized deduction on your tax return if you are itemizing for the year. Remember, you can either itemize deductions or take the standard deduction. Also, please note that you likely cannot take this same deduction if you are using a business vehicle for these purposes; it is just for personal vehicles.

Should you even claim the standard mileage rate deduction?
The business mileage rate may not always be the most tax advantage method for claiming your vehicle costs. Rather, claiming the actual expenses can yield greater tax savings. To do this, the taxpayer must maintain an accurate and detailed mileage log of business, personal and commuting mileage as well as all of the costs for operating the vehicle.

More Questions? Ask your tax deduction questions or find a cpa online.

Small Business Tax Extenders Likely To Be Approved

The BIDaWIZ Team — Mon, 15 Dec 2014 20:56:03 +0000

The House of Representatives voted in favor of passing a slew of notable small business tax benefits that expired at the end of last year. The Senate and President Obama have yet to approve the proposed tax legislation, but all indications are that they will follow the House’s lead. This should be welcoming news for businesses that have waited for confirmation before moving forward on 2014 capital purchases. Which tax breaks are likely to be reinstated?

The Section 179 Election & Bonus Depreciation
The maximum Section 179 deduction is likely to return to $500,000 from its current $25,000 level. What’s more, the bonus depreciation deduction, which expired all together in 2014, should be reinstated to 50% of the cost of eligible property.

Other provisions that are likely to be reinstated
– Research and experimentation credit (Code Sec. 41);
– Work opportunity tax credit (Code Sec. 51, Code Sec. 52);
– Exceptions under Subpart F for active financing income (Code Sec. 953, Code Sec. 954);
– Look-through treatment of payments between controlled foreign corporations (Code Sec. 954(c)(6));
– Special treatment of certain dividends of regulated investment companies (RICs) (Code Sec. 871(k));
– Employer wage credit for activated military reservists (Code Sec. 45P);
– Special expensing rules for film and television production (Code Sec. 181(f));
– Special 100% gain exclusion for qualified small business stock (Code Sec. 1202);
– Reduction in S corp recognition period for built-in gains tax (Code Sec. 1374);
– Election to accelerate alternative minimum tax (AMT) credits (Code Sec. 168(k));
– Low-income housing 9% credit rate freeze (Code Sec. 42);
– Military basic allowances under low-income housing credit (Code Sec. 42, Code Sec. 142);
– 15-year straight line cost recovery for qualified property/improvements (Code Sec. 168(e)(3)(E));
– Deduction for domestic production activities in Puerto Rico (Code Sec. 199);
– Tax treatment of certain payments to controlling exempt organizations (Code Sec. 512);
– Accelerated depreciation for business property on Indian reservations (Code Sec. 168(j)); and
– Indian employment credit (Code Sec. 45A).

Planning for the 2015 tax year
While it is highly probable that lawmakers will reinstate the small business tax extenders for 2014, it’s also equally as likely that Congress will kick the can down the road as it relates to 2015 tax breaks. We may very well be in the same situation next December. Thus, businesses will likely have to wait it out again in terms of tax planning for 2015 purchases.

More questions? Browse answers or ask business tax questions online.

Important Year-End Tax Planning Tips For Small Businesses

The BIDaWIZ Team — Fri, 28 Nov 2014 20:29:29 +0000

Businesses are running out of time to implement and act on year-end tax planning strategies. In addition, most companies have a few variables added to the mix this year. Mainly, the nineteen notable expired tax benefits from the prior year and those that are set to expire at the end of this year. How should your business prepare?

Large equipment write-offs
The Section 179 and Bonus Depreciation deductions are not as generous as they were in 2013. Beginning in 2012 and 2013, the Section 179 deduction dollar limitation was $500,000, and the investment limitation was $2 million. For the 2014 tax year, the Section 179 dollar limit fell to $25,000. Even worse, bonus depreciation expired all together at the end of 2013. Businesses were able to write-off 50% of eligible expenses through the bonus depreciation provision.

The question now is whether or not these two tax provisions will be retroactively reinstated at 2013 levels for 2014. Congressional leaders seem to be in agreement as to the economic benefits for doing so. However, how exactly they will be reinstated is the sticking point as they are being packaged together with other more contentious tax provisions.

We do believe that Congress will reinstate these tax benefits before the end of the year or by early next year. We would recommend though that you wait as long as possible to make your year-end purchases.

What are the other business tax provisions that may be reinstated?
– Research and experimentation credit (Code Sec. 41);
– Work opportunity tax credit (Code Sec. 51, Code Sec. 52);
– Exceptions under Subpart F for active financing income (Code Sec. 953, Code Sec. 954);
– Look-through treatment of payments between controlled foreign corporations (Code Sec. 954(c)(6));
– Special treatment of certain dividends of regulated investment companies (RICs) (Code Sec. 871(k));
– Employer wage credit for activated military reservists (Code Sec. 45P);
– Special expensing rules for film and television production (Code Sec. 181(f));
– Special 100% gain exclusion for qualified small business stock (Code Sec. 1202);
– Reduction in S corp recognition period for built-in gains tax (Code Sec. 1374);
– Election to accelerate alternative minimum tax (AMT) credits (Code Sec. 168(k));
– Low-income housing 9% credit rate freeze (Code Sec. 42);
– Military basic allowances under low-income housing credit (Code Sec. 42, Code Sec. 142);
– 15-year straight line cost recovery for qualified property/improvements (Code Sec. 168(e)(3)(E));
– Deduction for domestic production activities in Puerto Rico (Code Sec. 199);
– Tax treatment of certain payments to controlling exempt organizations (Code Sec. 512);
– Accelerated depreciation for business property on Indian reservations (Code Sec. 168(j)); and
– Indian employment credit (Code Sec. 45A).

More questions? Browse answers or ask business tax questions online.

Tax Deductions For the Self Employed

The BIDaWIZ Team — Fri, 21 Feb 2014 23:12:02 +0000

Whether you worked on a few side-jobs during the year or have your own business, it’s important to make sure that you don’t miss any tax deductions that are available for the self-employed. Make sure you review these key tax breaks.

Do you have a home office?
If so, you may able to claim the home office deduction. You must meet certain requirements though. Specifically, the office must be allocated to the portion of the home that you regularly and exclusively use for your business (reference: IRS Publication 587). Generally, you can deduct the business portion of these expenses: real-estate taxes, qualified mortgage-insurance premiums, deductible mortgage interest, rent, casualty loss, utilities, insurance, depreciation, security systems, and repairs. You can also deduct expenses associated with a separate free-standing structure that you use exclusively and
regularly for business (IRC Section 208A(c)(1) & IRS Publication 587).

It’s important to note that there is also a new method for the home office deduction. However, it’s not best for every small business owners. First, businesses will only be able to use this simple option if their home expenses do not exceed $1,500 or 300 square feet. In addition, small businesses that opt to use this method won’t be able to claim any depreciation expense as an itemized deduction, which is allowed under the regular method.

Do you have business travel expenses during the year?
If so, your business travel expenses for plane/train tickets, cabs and rental cars as well as hotel costs are deductible. If you traveled by car, you may be able to claim the standard mileage deduction of $0.565 per mile. In order to claim the standard mileage deduction, it’s best to have a daily log detailing your business travel with pertinent information related to the client site, miles traveled, date/time etc. However, if you haven’t been very diligent, you can still go back and estimate your mileage according to your daily route. For instance, when traveling from your home office to other temporary business locations or client sites, you can deduct the actual travel expenses or claim the standard mileage rate ($0.565 per mile). If you traveled a total of 10,000 miles to various business locations, you could deduct $5,650 (10,000 * $0.565). The total tax deduction would result in a $1,977 reduction to your overall tax liability, which assumes a 35% tax rate.

Are you deducting your cell phone bill?
IRS and tax court rulings support deducting 100% of cell phone expenses as long as you have at least one home phone dedicated to personal calls. This can easily add up to over $1,000 in tax deductions as monthly fees for many smartphone users are at or near $100 a month.

Did you have self-employed health insurance costs
You can deduct health insurance costs for yourself and your family when calculating self-employment taxes. The catch is that the benefit doesn’t apply to those with a secondary business and a full-time job in which their employer provides for a subsidized health plan. Those with spouses that have an employer subsidized health plan are also disqualified from the deduction.

Did you make retirement plan contributions?
You can personally contribute up to the lesser of $17,500 or your earnings plus 20% of your net self-employment income for a total of $51,000 and if you’re 50 or older, your limit is raised by $5,500 to $56,500. One of the best features of this plan is that the cost to setup is minimal at $0 to $100 or so and the annual fee is only $10 to $250 depending on the provider. The limits are similar for SEP-IRA contributions, however, there is no catch-up provision for those 50 or older.

Don’t be afraid to deduct business dinners
You can deduct 50% of meal and entertainment related expenses that serve a business purpose as referenced in Section 274 of the Internal Revenue Code. Please note though that there are two types of entertainment expenses as defined by the IRS: those that are 1) directly and 2) indirectly related to the business. Directly related means that the sole purpose of the entertainment was for business and the expectation was for money to be generated during the meeting. Indirectly means that there was entertainment associated with business such as attending a sports contest or a theatrical performance. In this instance, generally you can only deduct the expense if there was a significant business discussion that occurred during the entertainment event. Of course, you will need to document what was discussed and how it relates to the business.

Are you claiming your technology tools?
We live in a business world that relies heavily on technology. If you use a computer, tablet (iPad), or other technology device to further your business productivity that is ordinary and necessary in your industry, then it’s likely a deductible expense. These items are fully deductible expenses as long as you can find a business purpose for it.

More Questions? Ask your self-employed tax deductions or find a cpa online.

Can S Corporations Deduct Employee Medical Expenses?

The BIDaWIZ Team — Fri, 07 Feb 2014 21:16:10 +0000

Many S Corporations pay for employee medical expenses. This may be for employees that are also shareholders. The tax guidelines for deducting such expenses will depend on whether the medical expenses are for employees that are shareholders owing more or less than 2% of the company.

S Corp shareholder-employees owning less than 2%
These medical expenses can be deductible by the S-Corporation on Line 18 of form 1120-S if they have a MERP plan in place. The medical expenses would not be included as taxable wages for the employees. Please note that a MERP plan can be established at any time during a fiscal year, which can be made effective retroactive to the beginning of the fiscal year.

S Corp shareholder-employees owning more than 2%
These medical expenses are generally not deductible by the S-Corporation on Line 18 of form 1120-S as is the case with payments to employees owning less than 2% of an S Corporation that are covered by a plan. The correct procedure to account for the medical expenses is to report it as wages on Form W-2 (box 1). However, this is not subject to FICA and are not reported in box 3 or 5 of the W-2 Form. The health insurance costs can be listed in Box 14. The 2% plus shareholder then may deduct the cost of health insurance premiums paid as an adjustment to income on their individual tax form, Form 1040. The result is the corporation shows a wage expense for the health insurance, reducing net income. The shareholder reports higher wages, and then offsets the wages with the health insurance deduction as an adjustment to income. This is referenced in IRC Sections 3121(a)(2), 105(g), 1372(a), and 702(b).

More Questions? Browse Answers or ask your business tax questions online.

Can Businesses Write-Off Holiday Party Costs?

The BIDaWIZ Team — Fri, 29 Nov 2013 21:43:54 +0000

The holiday season is finally upon us. As is customary each year, many businesses will begin announcing their plans for the annual company holiday party. In addition to finalizing their budgets, business owners need to understand what costs they can and cannot deduct as the IRS is known to scrutinize these expenses.

Are entertainment expenses deductible?
Similar to meals and lodging, entertainment expenses are generally fifty percent deductible. However, there are two types of entertainment expenses as defined by the IRS: those that are 1) directly and 2) indirectly related to the business. Directly related means that the sole purpose of the entertainment was for business and the expectation was for money to be generated during the meeting. Indirectly means that there was entertainment associated with business such as attending a sports contest or a theatrical performance. In this instance, generally you can only deduct the expense if there was a significant business discussion that occurred during the entertainment event.

What about holiday parties?
Holiday parties may fall under one of the exceptions which allow businesses to deduct more than the 50% limit. If the party is for the employees of the business and their families, it is actually 100% deductible per IRS publication 463. Even if members of the general public are invited, it is still fully deductible. However, friends invited to the party won’t qualify. Also, customer related party expenses will still only be deductible at the maximum 50% rate.

What documentation do you need to justify the expense?
You need to keep a copy of the invitation and make sure that the business purpose is indicated. It’s also helpful to videotape the party to provide an audit trail to the IRS. In addition, maintain a copy of the guest list with information related to attending customers, employees, and friends. The bookkeeper accounting for the expense should be up to speed on the deduction rules as stated above.

More Questions? Browse Answers or ask your business tax questions online or learn how to find an accountant online.

The Top Three Most Tax-Friendly States For Businesses

The BIDaWIZ Team — Fri, 11 Oct 2013 21:29:53 +0000

We recently highlighted the most attractive places for individuals to retire for the tax savings. Our analysis may have surprised many folks nearing retirement. We believe this may also be the case for businesses considering a relocation to a new state. As is the case for individuals, states taxes for businesses aren’t all equal.

Our approach
We reviewed all of the states that do not impose a corporate, gross receipts or individual state tax. We identified three states that fit that criteria: Wyoming, Nevada and South Dakota.

1 – Wyoming is the most tax-friendly state for businesses
Similar to retirees, Wyoming is the most tax friendly state for businesses. The state doesn’t charge a personal or corporate tax. In addition, the state sales tax is one of the lowest in the country at 4% with exemptions in entirety for certain items. We would just note that some counties will impose an additional 3% tax. Property taxes are also very low.

2 – South Dakota is the second most tax-friendly state for businesses
Similar to Wyoming, there is no state income or corporate tax. The sales tax is fairly low at 6.5% and counties may only tax an additional 1.25%. Property tax rates are attractively low with assessed values at 35% of the fair market value, but not as low as Wyoming.

3 – Nevada is the third most tax-friendly state for businesses
Nevada doesn’t have an individual or corporate tax. However, there is a sales tax that is certainly higher than in Wyoming or South Dakota.

More Questions? Browse Answers or ask your business tax questions online.

Will Changing Tax Legislation Favor C Corps Over S Corps?

The BIDaWIZ Team — Tue, 25 Jun 2013 20:17:22 +0000

Dramatic changes to the tax code were initiated in the beginning of this year and more can be on the way for 2014. The highest marginal personal tax rate of 39.6% now tops the corporate rate of 35%. Does this change signal a trend going forward and should small business owners start to re-think their S Corporation tax structure?

The Tax-Friendly S Corporation versus a C Corporation
An S Corporation is treated similar to a partnership or sole proprietor in which the income and expenses flow to the partners or owners of the entity. Conversely, a C Corporation is taxed both at the corporate level and any profits distributed to the stockholders in the form of dividends are generally taxed at qualified dividend tax rates.

The one caveat to S Corporation tax treatment is the reasonable salary test. S Corporation owners that work in the business must be paid a reasonable salary which is taxed at personal tax rates or as high as 39.6%. Therefore, the tax rate for S Corporation profits may not necessarily always be treated as dividends. It’s actually an IRS red flag if the business owners never pay themselves a salary.

The new personal and corporate tax rates
Small business owners with C Corporations may be subject to a 35% corporate tax rate on profits in addition to a 23.8% rate on dividends. Joint filers with taxable income over $450,000 and single filers above $400,000 are subject to a 39.6% personal tax rate. They also will be subject to the new 3.8% medicare investment income tax. This tax is levied on joint filers with a taxable income above $250,000 and $200,000 for single filers. Thus, those dividends paid to C Corporation owners will be subject to 35% in corporate taxes and then 23.8% in dividend taxes for an effective tax rate of 50%. Even if the taxpayer is in a lower income tax bracket or taxed at 15% on dividends, the effective tax rate is still nearly 45%. This compares to a 39.6% maximum tax rate for S Corporation owners or 43.4% for those that aren’t actively managing the company.

What if corporate tax rates decrease in 2014?
Lawmakers are certainly discussing the idea of reducing the corporate tax rate to compete better against the other world economies, among other reasons. The idea of a corporate tax rate at or below 28% may soon become a reality. If this were to occur, there may be some compelling reasons to favor a C Corporation over an S Corporation for the more competitive effective tax rate. However, it’s likely that lawmakers would cut individual rates as small businesses entities would loose favor. Thus, we believe that S Corporations will remain to be one of the better entities of choice for small businesses.

Browse answers or ask business tax questions or explore our tax research service online.