Extender from PATH Act means you can take bonus depreciation on your 2015 returns – but should you?
Once again, bonus depreciation has been extended allowing taxpayers to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended 50% bonus depreciation through 2017. Many taxpayers may benefit from claiming this break on their 2015 returns however some might save more tax in the long run if they elect out of bonus depreciation.
What type of assets qualify for bonus depreciation?
For 2015, new tangible property with an IRS stipulated depreciable life of 20 years or less (such as computers, office furniture or equipment) qualifies for bonus depreciation. Off-the-shelf computer software, water utility property and qualified leasehold-improvement property also qualifies. The new assets must also have been put in to use in 2015 in order to qualify for any depreciation deduction.
To bonus or not to bonus, that is the question…
Typically, taxpayers always want to maximize their tax deductions in the current year. But wise tax planning calls for considering the effects of this year’s choices on future year’s tax burdens. If a taxpayer has assets that are eligible for bonus depreciation and they expect to be in the same or a lower tax bracket in future years, taking Section 179 deduction first, then bonus depreciation is most likely a good tax strategy. Doing so will defer tax, which generally is beneficial and usually the goal of tax planning.
However, if a business is growing and expects to be in a higher tax bracket in the near future, it may be better off forgoing bonus depreciation altogether. Why? Because it makes sense to decrease deductions in years when a taxpayer is in a lower tax bracket, when they expect to have a higher taxable income in future years. They will need the depreciation deductions more in the years they have higher taxable income, so electing out of bonus depreciation and not taking Section 179 deductions can be a smart tax move. Deductions are worth more when your tax bracket is higher.
Have questions about depreciation? We can help
If you’re unsure whether you should take bonus depreciation on your 2015 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us – we can help.
Are You Eligible to Deduct Home Office Expenses?
Just because you have a home office space doesn’t mean you can deduct expenses associated with it.
Home Office Requirements
The eligibility requirements for deducting home office expenses differ depending upon if you are an employee or if you are self-employed. For example, as an employee, having a home office must be for your employer’s convenience and not just your own. The IRS even has a “Convenience of Employer Test” in which an employee’s home office is deemed to be for an employer’s convenience only if it is:
- a condition of employment
- necessary for the employer’s business to properly function, or
- needed to allow the employee to properly perform his or her duties.
Most likely, you won’t pass the employer convenience test if you have another office provided by your employer but like to take work home with you. However, you would pass the test if your employer doesn’t provide you with an office, or if there is some valid business reason why you must work at home.
If you’re self-employed, generally your home office must be your principal place of business, but there are a few exceptions.
Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a family room, guest room or where your kids do their homework, the space is NOT a home office in the eyes of the IRS.
How Does the Home Office Deduction Affect Taxes?
The home office deduction can be a nice tax break – especially for self-employed people because you save not only on regular income tax but that pesky 15.3% self-employment tax as well! How the deduction works – the first step is figuring out the square footage of your home office, then you divide that number by the total square footage of your home. The result is a percentage. You may be able to deduct that percentage of your mortgage interest, property taxes, home owner’s insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
In the last couple of years, the IRS has created a simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.
For employees and S-corporation shareholders, home office expenses are a less beneficial miscellaneous 2% itemized deduction. This means you’ll get a tax break only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI).
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact us for more information.
Purchasing stock in certain qualified small businesses, not only diversifies your portfolio but also allows for preferential tax treatment. A provision in the recently signed tax extenders bill, the PATH Act, now makes owning and selling such stock even more attractive from a tax perspective.
How does 100% exclusion from gain sound to you?
The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010, with smaller exclusions are available for QSB stock acquired earlier.
The act also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.
What is Qualified Small Business Stock?
Qualified small business (QSB) stock is generally stock of a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued). The QSB must use at least 80% of its assets in an active trade or business.
There are Many Factors to Consider
Of course tax consequences are only one of many factors that should be considered before making any investment. Keep in mind that the tax benefits outlined here are subject to additional requirements and limits. If you think you may have an investment that qualifies for this preferential tax treatment consult us for more help.
File Your Taxes Early to Avoid Falling Victim to Identity Theft
If you’re like most, you may put off filing your individual tax return until close to the April 15th deadline. But there’s another date you should keep in mind: January 19th. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from the hassles and complications of tax-related identity theft.
HOW FILING EARLY HELPS PROTECT YOU
In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.
ANOTHER KEY DATE TO REMEMBER
Of course you need to have all of your key tax forms in order to file. February 1st is the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.
AN ADDED BONUS OF FILING EARLY
Let us know if you have questions or concerns about tax identity theft or would like to file your 2015 return now. An added bonus of filing early is enjoying your refund sooner. If you typically owe, remember that April 15th is still the due date for all your taxes due even if you decide to file an extension. Like we always say, an extension applies only to filing the return but NOT to paying the tax – your tax is due on or before April 15th every year!
Give your kids the power of a Roth IRA. Would you like to give your child a head start on smart money habits? Here’s our suggestion – have your child invest in a Roth IRA. Why? The tax-free compounding of contributions and investment returns over your child’s lifetime is a superior wealth-builder.
Here are the facts about about children investing in a Roth IRA:
- There is no minimum age to open a Roth IRA account. All your child needs is earned income, either from a summer job or from self-employment. Yes! Your kids can work for you! See below about the tax benefits to employing your children (ask us for details to see if your business qualifies).
- The maximum contribution to a Roth IRA for 2015 is $5,500. Your child can contribute less and you can provide some or all of the cash, up to the amount of your child’s earned income.
- Your child won’t receive a federal tax deduction for a Roth IRA contribution – however they will not pay federal or Virginia income tax on qualified distributions taken after age 59½.
- You can continue to claim your child on your tax return as a dependent. Your child is also allowed a federal standard deduction of $6,300 for 2015, which means the first $6,300 of earned income is income-tax free.
- If you own a business and can employ your child, you can benefit from additional tax savings, including a payroll deduction for your business. In addition, depending on how your business is organized, you may not have to pay federal payroll taxes such as FICA, Medicare and unemployment. Remember, your child must perform real services and the wages can’t be excessive.
- An early Roth IRA withdrawal could affect your child’s college financial aid. Your child can take withdrawals from a Roth penalty-free to pay for college costs. But those withdrawals generally count as income when applying for financial aid.
Are you interested in learning more about how your children can start investing in a Roth IRA? Give us a call (757) 926-4109. We’ll help you get started on saving for your child’s future.
When will Congress pass “extenders” legislation to revive expired tax breaks for 2015?
With Congress returning from its August recess, this is the question on tax-savvy Americans’ minds. Many valuable tax breaks aren’t permanent, so Congress has to pass legislation extending them to keep them in effect. Unfortunately, Congress often waits until the last minute to do so.
For example, Congress didn’t pass 2014 extenders until December 2014, making the legislation retroactive to January 1, 2014 — but not extending the breaks to 2015. So once again we’re in a waiting game to see what will happen with extenders legislation. Some believe Congress will act soon, while others think we’ll again be waiting until December. Let’s hope they act sooner than later.
Here are several expired breaks that may benefit you or your business if extended:
- The deduction for state and local sales taxes in lieu of state and local income taxes,
- Tax-free IRA distributions to charities,
- 100% bonus depreciation,
- Increased Section 179 expensing,
- Accelerated depreciation for qualified leasehold improvement, restaurant and
retail improvement property,
- The research tax credit,
- The Work Opportunity tax credit, and
- Various energy-related tax incentives.
Please check back with us for the latest information. Keep in mind that quick action after extenders legislation is passed may be required in order to take maximum advantage of the extended breaks.
A new law signed in July changed the federal due dates for certain 2016 business tax returns and the annual “Report of Foreign Bank and Financial Accounts” (Form 114).
The due date for personal income tax returns was not changed.
The rules coordinate due dates between personal and business tax forms and are intended to reduce the number of extensions and amended returns that are filed each year. The revised dates will have no impact on your business’s 2015 federal income tax return. Instead, the new dates will be effective for 2016 returns.
Changes include a March 15 deadline for partnerships (Form 1065), and an April 15 deadline for the annual “Report of Foreign Bank and Financial Accounts” (Form 114) and most C corporations (Form 1120).
The law also requires additional tax reporting from executors of federal estate returns filed after July 31, 2015, and enhanced information on mortgage interest statements (Form 1098).
Please call us (757) 926-4109 for a complete list of revised due dates and other changes.
Remember these fall tax deadlines
Fall is a busy season for tax due dates. Check the list below to see if any of these September or October deadlines apply to you or your business.
September 15 – Due date for third quarter installment of 2015 individual estimated income tax.
September 15 – Filing deadline for 2014 tax returns for calendar-year corporations that received an extension of the March 16 due date.
September 15 – Filing deadline for 2014 partnership tax returns that received an extension of the April filing deadline.
September 15 – Due date for the third quarter installment of 2015 corporate estimated tax.
October 1 – Deadline for self-employed individuals and small businesses to establish a SIMPLE retirement plan for 2015.
October 15 – Filing deadline for 2014 individual income tax returns that received an extension of the April filing deadline.
October 15 – Deadline for undoing a 2014 conversion of a regular IRA to a Roth IRA and switching the Roth back to a regular IRA without penalty.
October 15 – Deadline for withdrawing 2014 excess IRA contributions to avoid a 6% tax penalty.
For more information or filing assistance, please give us a call.
Do you ever take the home office deduction?
Do you work at home or have a home-based business? If so, you should be aware that the IRS has created a simpler option for calculating the deduction for the business use of your home. The new option makes record keeping easier because, instead of maintaining records of specific home office expenses, you can use a standard rate per square foot. The rate is $5 per square foot (up to a maximum of 300 sq. feet or $1,500) for qualifying business use space in place of taking a pro rata percentage of items such as mortgage interest, taxes and repairs. Keep in mind there are good and bad aspects to this “simpler” method. The new method gives you back your full interest and tax deduction on schedule A, but you will lose your depreciation and loss carryover deductions. Of course, you must still use your home office regularly and exclusively for business. This may be a welcome relief for some taxpayers, but it might not be the best choice for others. Let our firm’s tax experts help you determine if the simplified deduction is the right choice for you. Please contact us at (757) 926-4109 for answers to all your financial questions and concerns – it’s what we do.
Tax-Exempt Health Care Help
The “tax extenders” legislation that became law in December 2014 included the “Achieving a Better Life Experience Act” (also called the ABLE Act). This law provides for tax-exempt accounts that can help you or a family member with disabilities pay for qualified expenses related to the disability. These “ABLE accounts” are exempt from income tax although contributions to an account are not deductible on your federal income tax return. ABLE accounts are generally not means tested and some can provide limited bankruptcy protection.
You or a family member are eligible to open an ABLE account if:
1. You’re entitled to social security disability benefits due to blindness or other disability, and that blindness or disability occurred before age 26; or
2. You file a disability certification with the IRS for the tax year.
Annual contributions to an ABLE account are limited to the amount of the annual gift tax exclusion ($14,000 for 2015). Distributions are tax-free as long as they are less than your qualified disability expenses for the year.
The list of qualified disability expenses includes the following:
- employment training/support
- health prevention/wellness services
- financial management
- legal fees
- funeral expenses
There are certain other expenses that are also approved under the regulations.
Distributions exceeding qualified disability expenses are included in taxable income and are generally subject to a 10% penalty tax. Distributions can be rolled over to another ABLE account for another qualified beneficiary and beneficiaries can be changed between family members. Funds in the account can earn interest or dividends and are not subject to federal income tax as long as distributions are used for qualified disability expenses. ABLE accounts do not have a “use it or lose it” feature and funds can carry over to future years.
After an account beneficiary dies the balance remaining in the account can be used to reimburse state Medicaid payments made on behalf of the beneficiary after the account was established. The remaining balance goes to the deceased’s estate or to another qualified designated beneficiary. After-death distributions that are not used for qualified disability purposes are subject to income taxes, but not the 10% penalty.
If you are thinking many of these rules sound familiar, you’re correct. ABLE accounts are modeled on 529 college savings accounts If you think you qualify for one of these accounts, give us a call so we can help you make the most of this new opportunity.
The IRS issued “final” rules known as the “repair regulations” this year. They will effect your 2014 tax return if you have any depreciable assets or if you regularly purchase materials & supplies in your line of business. The rules clarify which costs should be capitalized and which can be expensed when your business buys, makes, maintains, or improves certain fixed assets such as buildings, equipment, vehicles and machinery.
Here are three ways your business can be affected:
1. Accounting policies. You’ll need to update your accounting policies to reflect how you treat expenses for repairs, materials, and supplies, and the acquisition of assets. Having a written policy in place will help keep you in compliance with the rules. Your accounting policy must be in effect as of January 1 of each year. Contact us for a template to help you with tax compliant wording.
2. Elections. The final regulations include six elections. You’ll want to review them to learn if they are beneficial to you. For example, by choosing the “de minimis safe harbor election,” you can opt to expense the cost of property below a specific dollar amount, typically $500 but your industry standard could dictate more.
3. Form 3115. You may want to file Form 3115, Application for Change in Accounting Method, with your 2014 federal income tax return to revise certain decisions you made regarding the treatment of tangible property in prior years. Alternatively, under simplified rules recently issued by the IRS, certain small businesses have the option of applying the repair regulations to 2014 and future years without filing Form 3115.
The final repair regulations will affect every business with fixed assets on the books as well as individuals with rental properties. This law is very complex and requires a lot of paperwork to be in compliance. Our tax preparers understand the ins and outs of the new repair regulations. Please contact us to schedule an appointment so we can help you determine how to apply the rules.
Online Transactions May Be Taxable
Whether you’re a long time technophile or newly computer literate, your use of technology can affect your income tax return. Read below to learn about virtual transactions that can have taxable consequences on your individual income tax return.
- Proceeds from sales of goods and services on Internet marketplaces can be taxable. This is the case whether you’re a hobbyist or running a business online. Depending on your level of activity, tax rules may limit your deductions.
- Receipts from crowd-funding sites such as indiegogo, gofundme or kickstarter – where you raise money from others to fund a project – most likely will be taxable income. You probably think of the money as a gift but when the people providing the funds get something in exchange, such as a reward for participating, the amounts you receive are typically considered income from a sale. It is extremely important that you keep track of all expenses related to the project and document how you spent the money.
Payments you receive in the form of virtual currency (i.e. bitcoin) for goods and services are includible in your gross income at fair market value. Other transactions involving virtual currency, such as the sale or exchange of the currency, can result in taxable gains or losses. Under guidance issued in 2014, the IRS treats virtual currency as property.
- Money received from listing your home on websites offering temporary or short-term lodging is generally reportable as rental income. The tax impact can vary based on the length and frequency of the rental activity.
Questions? Give us a call (757) 926-4109. We’ll help you sort out the real-world consequences of all of your virtual transactions.