7 Tax-Saving Year-End Tax-Planning Tips

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Despite confusion created by recent and probable year-end tax legislation changes, the 2010 federal income tax environment is still quite favorable.

“We may not be able to say that after 2010; therefore, tax planning actions taken between now and year-end may be more important than ever,” said Gustavo A Viera CPA, managing partner for the Tax & Accounting firm, in a statement. “Be careful, though—Congress could change the ball game before the end of the year.”

Following are seven planning ideas for your clients to consider while there is still time to act before the end of the year.

1. Accelerate Itemized Deductions into this Year. If your Adjusted Gross Income will be more than $170,000 ($85,000 if you are married and file separately) next year, you may want to accelerate into 2010 your state and local tax payments that are due early next year. You may also want to prepay in 2010 some charitable donations that you would normally make in 2011. Why? Because for 2010, the phase-out rule that previously reduced write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) is gone, but is scheduled to come back in 2011, unless Congress takes action to prevent it, which looks increasingly unlikely.

If the phase-out rule comes back as expected, it will wipe out $3 of affected itemized deductions for every $100 of AGI above the applicable threshold. For 2011, the AGI threshold will probably be around $170,000, or about $85,000 for married individuals who file separate returns. Individuals with very high AGI may have up to 80% of their affected deductions wiped out.

2. Think Twice Before Deferring Income into 2011. This strategy makes sense if you are confident you will be in the same or lower tax bracket next year, but the tax picture for 2011 is blurry. With just weeks left in 2010, the fate of many tax provisions for 2011 and beyond is still unknown. The top two rates have widely been expected to increase in 2011 from the current 33 percent and 35 percent to 36 percent and 39.6 percent, respectively—at least for taxpayers earning $250,000 or more ($200,000 or more if single). Therefore, if you fall into this group, you might want to consider reversing the traditional strategy and accelerating income into 2010 to take advantage of this year’s presumably lower rates. However, legislators could still vote to delay any tax increase to after 2011.

3. Time Your Investment Gains and Losses and Consider Being Bold. As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year instead of next year. The maximum federal income tax rate on long-term capital gains from 2010 sales is 15 percent. However, that low rate only applies to gains from securities that have been held for at least a year and a day. In 2011, the maximum rate on long-term capital gains is scheduled to increase to 20 percent. That will happen automatically unless Congress takes action, which currently seems unlikely.

To the extent you have capital losses from earlier this year or a capital loss carryover from pre-2010 years (most likely from the 2008 stock market meltdown), selling appreciated securities this year will be tax-free because the losses will shelter your gains. Using capital losses to shelter short-term capital gains is especially helpful because short-term gains will be taxed at your regular rate (which could be as high as 35 percent) if they are left unsheltered.

What if you have some poor performing securities (currently worth less than you paid for them) that you would like to dump? Biting the bullet and selling them this year would trigger capital losses that you can use to shelter capital gains, including high-taxed short-term gains, from other sales this year. If you think your investments that are currently underwater are poised for a comeback, you can buy them back after taking a loss as long as you do not reacquire them within 30 days before or after the sale.

If selling many poor performing securities would cause your capital losses for this year to exceed your capital gains, no problem. You will have a net capital loss for 2010. You can then use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income from salaries, bonuses, self-employment, etc. ($1,500 if you are married and file separately). Any excess net capital loss gets carried forward to next year.

Selling enough poor performing securities to create a big net capital loss that exceeds what you can use this year might turn out to be a good idea. You can carry forward the excess net capital loss to 2011 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years, plus up to $3,000 of ordinary income each year—all of which may well be taxed at higher rates after 2010. This can also give you extra investing flexibility in future years because you will not necessarily have to hold appreciated securities for more than a year to get better tax results.

4. Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, you can tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you reasonably can, especially if your employer makes matching contributions. You turn down “free money” when you fail to participate to the maximum match.

5. Take Advantage of Flexible Spending Accounts. If your company has heath or child care FSAs, before year-end you must specify how much of your 2011 salary to convert into tax-free plan contributions. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying child care costs (depending on the type of plan). Watch out, though, FSAs are “use-it-or-lose-it” accounts—you do not want to set aside more than what you will likely have in qualifying expenses for the year. And, starting in 2011, over-the-counter drugs (e.g., aspirin and antacids) will no longer qualify for reimbursement by health FSAs, so you may need to consider that when determining your 2011 contribution amount.

If you currently have an FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you will lose the remaining balance. For health FSAs, it is not difficult to drum up some items such as: new glasses or contacts, dental work you may have been putting off, or prescriptions that can be filled early. Also, for 2010, over-the-counter drugs still apply.

6. Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2010, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90 percent of your 2010 liability or if smaller, 100 percent of your 2009 liability (110 percent if your 2009 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

7. Make Energy Efficiency Improvements to Your Home. A great way to cut energy costs and save up to $1,500 in federal income taxes this year is to make energy efficiency improvements to your principal residence. Basically, if you install energy efficient insulation, windows, doors, roofs, heat pumps, furnaces, central A/C units, hot water heaters or boilers, or advanced main air circulating fans to your home during 2010, you may be entitled to a tax credit of 30 percent of the purchase price. However, the maximum total credit you can claim for 2009 and 2010 combined is limited to $1,500. Without Congressional action, the credit will not be available after 2010.
Taxpayers should consult with a personal tax advisor before applying these or other tax strategies.

Gustavo A Viera CPA

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Taxpayers face delayed refunds if tax code issues aren’t resolved

Posted on 14/10/202010/04/2021Categories TaxTags , , , , , , , , , ,   Leave a comment on Taxpayers face delayed refunds if tax code issues aren’t resolved

Taxpayers face delayed refunds if tax code issues aren’t resolved

IRS Commissioner Doug Shulman warned lawmakers Wednesday that making retroactive changes to the tax code in early 2011 could create an “unprecedented and daunting operational challenge” that could lead to service disruptions and delayed refunds for millions of taxpayers. Several popular tax breaks expired at the end of 2009, including a deduction for educators’ out-of-pocket classroom expenses and a property-tax deduction for homeowners who claim the standard deduction. Congress hasn’t acted on legislation that would extend the incentives through 2010.

Even more significantly, Congress hasn’t enacted a stopgap measure that would limit the number of taxpayers subject to the alternative minimum tax. The AMT is a parallel tax system that eliminates many popular deductions and credits, resulting in a higher tax bill. It was originally intended to prevent wealthy taxpayers from using loopholes and deductions to avoid paying any taxes. But it was never indexed to inflation, and in recent years, Congress has enacted a “patch” to limit its growth. If Congress fails to act by year’s end, more than 21 million taxpayers will face an average tax increase of $3,900 for tax year 2010.

Leaders from both parties assured the IRS in November that they plan to approve an AMT stopgap by year’s end. Shulman said he has directed the IRS technology team to program the agency’s computers accordingly. If Congress fails to approve the fix, Shulman said, “Our computers will have been programmed incorrectly, and we will need to delay filing for these individuals as we reprogram our computers to the actual law in effect.”

In the past, Congress has approved tax extenders and the AMT before Dec. 31. This year, though, tax code updates have been tied up in the debate over the expiration of the Bush tax cuts. Republicans want all of the tax cuts extended, while President Obama wants to allow them to lapse for wealthy taxpayers.

“While I know you and your colleagues have a difficult challenge to enact legislation this year,” Shulman said, “I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011.”

Gustavo A Viera CPA

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New Rules Require Rental Property Owners to Issue 1099s

Posted on 14/10/202010/04/2021Categories TaxTags , , , , , , , , , , , ,   Leave a comment on New Rules Require Rental Property Owners to Issue 1099s

New Rules Require Rental Property Owners to Issue 1099s

 The recently enacted Small Business Jobs Act contained one provision that may have escaped the notice of taxpayers who own rental property, but will affect them starting in January. Under the provision, owners of property who receive rental income will be required to issue Forms 1099 to service providers for payments of $600 or more during the year.

The act subjects recipients of rental income from real estate to the same information-reporting requirements as taxpayers engaged in a trade or business. Thus, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide an information return (typically, Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010, and will cover, for example, payments made to plumbers, painters or accountants in the course of earning the rental income.

While rental property owners will not actually issue the required 1099s until early 2012, they need to start keeping adequate records of payments starting Jan. 1, 2011, so they will be prepared to issue correct 1099s. They will also need to obtain the name, address and taxpayer identification number of the service provider, using Form W-9 or a similar form.

Exceptions

The law provides exceptions for individuals who can show that the requirement will create a hardship for them. The IRS is directed to issue regulations on this, but has not done so yet, so there is currently no guidance on what constitutes sufficient hardship to qualify for the exception or how a taxpayer would demonstrate that hardship.

The law also contains an exception for individuals who receive rental income of “not more than a minimal amount.” Again, the IRS is directed to issue regulations to determine what constitutes “not more than a minimal amount” but has not done so yet.

If such guidance is not forthcoming before Jan.1, all individuals who receive rental income should start keeping records of payments to service providers so they are prepared to issue 1099s in 2012.

The law also contains an exception for members of the military or employees of the intelligence community if substantially all their rental income comes from renting their principal residence on a temporary basis.

Information Return Penalties

Taxpayers should also be aware that in addition to creating a new reporting requirement, the act increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30; the second-tier penalty increases from $30 to $60; and the third-tier penalty increases from $50 to $100. For small business filers (with average annual gross receipts under $5 million), the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.

The increased penalties apply to information returns required to be filed on or after Jan. 1, 2011.

Expanded 1099 Reporting After 2011

Currently, payments to corporations are excepted from the 1099 information reporting requirements, but starting for payments after Dec. 31, 2011, businesses (including, now, individuals who receive rental income) will be required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). This change was made by the Patient Protection and Affordable Care Act, which was enacted in March. That act also expanded the information reporting requirements to include gross proceeds paid in consideration for property.

Gustavo A Viera CPA

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New Rules for Collecting Sales Tax Over the Internet

Posted on 14/10/202014/10/2020Categories TaxTags , , , , , , , , ,   Leave a comment on New Rules for Collecting Sales Tax Over the Internet

New Rules for Collecting Sales Tax Over the Internet

Several states that are now requiring sales tax collection for online businesses that use affiliate marketers.  Whether you use affiliates, or are an affiliate marketer yourself, learn more about the changing regulations and how to find out the rules for your state.

Understanding “Physical Presence” Nexus Rules

In 1992, the Supreme Court ruled that states cannot require mail-order businesses including online retailers to collect sales tax in a state unless they have a physical presence there (Quill v. North Dakota, 504 U.S. 298, (1992).  In legal terms, this physical presence is known as a “nexus.” Each state defines nexus differently, but all agree that if you have store or office of some sort, a nexus exists.   Remember that each state defines what constitutes a physical presence differently.  If you are uncertain whether or not your business qualifies as a physical presence, contact your state’s revenue agency.

Instead of collecting sales tax from remote retailers, many states required the consumer to pay a “use” tax on their online purchases.  Unfortunately, many consumers were either unaware of this requirement or chose to ignore the use tax, and enforcement was cost-prohibitive for revenue agencies.

Role of Affiliates

Affiliate marketing is a commission-based referral partnership, typically between a website owner and an online retailer who wants to promote their product.  In most affiliate agreements, a website owner puts links or ads on their site that promotes the retailer’s product to the visitors of the site, ideally potential customers for the retailer.  In exchange for the promotion, the retailer agrees to share a percentage of the profit with the website owner (or affiliate), if the transaction generates a lead.  Learn more about affiliate marketing.

Affiliate-advertiser relationships are at the center of the “physical presence” nexus debate.  In an effort to collect previously un-reported sales tax, some states are using an advertiser’s affiliate network as a means of establishing physical presence in a state, and thus making the advertiser eligible to pay sales tax there.

States Begin to Revise Nexus Rules

Under-collected use taxes coupled with industry concerns have caused many states to recently re-evaluate the definition of physical presence as it applies to online sales.  Proponents for reform call for a level tax-collection playing field between online retailers and traditional brick-and-mortar businesses; while those against reform argue that affiliates are essentially an advertising method – a non-taxable activity.

New York, Colorado, North Carolina, Rhode Island have enacted legislation that counts an online affiliate as a method of establishing physical presences in a state, although the content of the statutes include varied exemptions and income thresholds.  Several other states have attempted to pass legislation aimed at collecting sales tax for online businesses that use affiliate marketers, including California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, Mississippi, New Mexico, Tennessee, Vermont, and Virginia.

The Bottom Line for Affiliate Marketers

New taxes requirements don’t necessarily add additional burden to small affiliates (affiliates don’t pay sales tax because they are not “selling” anything – they essentially just receive a commission from the advertiser(seller), and the advertiser(seller) is the one ultimately responsible for paying the tax), however the changing tax laws do have other implications.  In some cases, high-profile advertisers have dropped affiliates in certain states where they could be considered a tie to establishing a physical presence (Amazon.com LLC v. New York State Department of Taxation and Finance (N.Y Sup. Ct. No. 601247/08)). If you are an affiliate marketer, or are considering becoming one, it would be wise to stay up-to-date on your state’s laws through your state’s revenue agency.

The Bottom Line for Advertisers

If you are an advertiser that uses affiliates, it would be wise to stay abreast of changing tax requirements in the states where your affiliates are located.  Recently, several states have banded together to develop the Streamlined Sales and Use Tax Agreement (SSUTA), which aims to standardize Internet sales taxation and encourages online retailers to collect taxes from customers in the states where the agreement is valid, and the Main Street Fairness Act is calling for Congress to enact the SSUTA.

Obama and Republicans Talk of Tax Negotiation

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Obama and Republicans Talk of Tax Negotiation

President Obama and congressional Republicans are laying out their positions more openly on the fate of the expiring Bush tax cuts as they prepare for negotiations later this month.

In an interview with CBS’s “60 Minutes” on Sunday evening, Obama told correspondent Steve Kroft about his wish to limit the extension of the tax cuts for those making above $250,000 a year.

“I understand the Republicans have a different view,” he said. “And so, we are going to have to have a negotiation. And I am open to finding a way in which they can meet their principles and I can meet mine. But in order to do that, I think we do have to answer the question of how we pay for it. If in fact we’re going to extend these tax cuts, then we’ve got to figure out what does that mean for our debt and our deficit. Because there’s no getting around it. It’s going to cost $700 billion to extend those over 10 years.”

Kroft asked Obama if he would be open to a suggestion from House Minority Leader John Boehner, R-Ohio, who is expected to take over as Speaker of the House in January. Boehner wants to extend the current rates for another two years and roll back discretionary government spending to 2008 levels.

“I think that when we start getting specific like that, there’s a basis for a conversation,” said Obama. “I think that what that means is that, we can look at what the budget projections are. We can think about what the economy needs right now, given that it’s still weak. And hopefully, we can agree on a set of facts that leads to a compromise. But my number one priority coming into this is making sure that middle-class families don’t see their tax rates go up January 1.”

Obama pointed out that under his proposal, those making over $250,000 a year would not see their taxes return to the rates under the Clinton administration. Only the amount above $250,000 would be taxed at those rates, so for a couple making $300,000 a year, the majority of their income would still be taxed at the current rates.

Obama also noted that he wants to extend tax breaks for businesses as well as individuals, particularly for research and development.

“It’s not, by the way, just tax cuts for individuals that we’re concerned about,” he said. “There are also a bunch of provisions for businesses in terms of how business investment is treated. If they’re investing in research and development here in the United States and what kind of tax breaks do they get on that, we need to provide businesses certainty on that. We’ve got to do that before the end of the year, and my hope and expectation is that we can solve this problem.”

Unlike Boehner, House Republican Whip Eric Cantor, R-Va., who is expected to become House Majority Leader in January, opposes “decoupling” tax cut extensions for upper-income taxpayers for just two years, while the tax rates remain permanently at the current rates for the middle class.

“I am not for decoupling the rates,” he told “Fox News Sunday.” “Because all that says to people looking to go back in and put capital to work and invest to create jobs is you’re going to get taxed on any return that you can expect.”

However, Senate Minority Leader Mitch McConnell, R-Ken., indicated a willingness to at least negotiate with Obama, even though he believes the tax cuts should remain permanent for both middle-class and upper-income tax payers. “We’re happy to talk to the president about that and all the other issues that he has on his mind,” he said on CBS’s “Face the Nation” on Sunday. “But our view is, don’t raise taxes on small business. We would rather not do it at any time. In fact, I’ve introduced the only bill that would make the current tax rates permanent.”

Gustavo A Viera CPA

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Small Business Expenses and Tax Deductions

Posted on 14/10/202030/01/2021Categories TaxTags , , , , , , , , , , , , , ,   Leave a comment on Small Business Expenses and Tax Deductions

Small Business Expenses and Tax Deductions

Guidance for the Self-Employed and Sole Proprietors

There are two basic tax concepts new business owners need to add to their vocabulary: business expenses and capital expenses.

Business expenses:

are the cost of conducting a trade or business. These expenses are common costs of doing business, and are usually tax deductible if your business is for profit. For example, costs of renting a storefront, business travel, and paying employees are all deductible business expenses.

Capital expenses:

are the costs of purchasing specific assets, such as property or equipment, that usually have a life of a year or more and increase the quality and quantity of products and services. For example, if you own a landscaping business and you purchase mowers and excavating equipment, these costs are capital expenses and do not qualify as deductible business expenses. However, you can recover the money you spent on capital expenses through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expenses over time.

Figuring business expenses vs. capital expenses is not always clear cut. Consider taking advantage of free tax training opportunities offered by the IRS. If you have hired an accountant, you should also seek his or her advice regarding tax deductions.

The following information provides a brief overview of expenses that quality as tax deductions, with links to resources that provide clear guidance on deducting and capitalizing your expenses.

Deducting Business Expenses

To be deductible, a business expense must be both “ordinary” and “necessary.” An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.

Personal vs. Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal portions. You can deduct the business portion. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes. There are two basic requirements for your home to qualify as a deduction:

1. Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if use an extra bedroom to run your online business, you can make home office deduction for the extra bedroom.

2. Principal Place of Your Business. You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.

Visit the our page on Home Office Deductions for a full explanation of tax deductions for your home office.

Travel, Meals, Entertainment and Gifts

Generally, you can deduct all of your travel expenses if your trip was entirely business-related. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination, including tips, cab fare, and other “life on the road” expenses such as dry cleaning. Meals are the only exception. You can deduct only 50 percent of your meals while traveling.

If your business trip includes personal side trips or extended stays for a personal vacation, you can only deduct travel expenses used for business-related activities. For example, suppose you live in Atlanta, and then went on a 5 day business trip to New York. You spent 3 days in business meetings, and two days sight-seeing and visiting friends. You can only deduct the costs of the 3 days you spent on business activities.

If you take your family on vacation to Hawaii, and conduct business there, you can deduct any expenses that are directly related to your business. However, you may not deduct the entire cost of the trip as business expense.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to the Car Expenses Section in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates. Also, be sure to read Tax Deductions for Personal Vehicles Used for Business Purposes.

Other Types of Deductible Business Expenses

There are numerous other costs of doing business that qualify as deductions. These include but are not limited to the following:

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
  • Business-Related Education – Such as seminars, classes, educational tapes or CDs and conventions.

Deducting Capital Expenses

There are two ways to deduct capital expenses. You can “depreciate” them by deducting a portion of the total cost each year over an asset’s useful life; or you might be able to deduct the cost in one year as a Section 179 deduction.

Depreciation

If property you acquire to use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year on Form 1040, Schedule C. This method of deducting the cost of business property is called depreciation.

What property can be depreciated?

You can depreciate property if it meets all the following requirements.

  • It must be property you own.
  • It must be used in business or held to produce income. You never can depreciate inventory because it is not held for use in your business.
  • It must have a useful life that extends substantially beyond the year it is placed in service.
  • It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up.
  • It must not be excepted property. This includes property placed in service and disposed of in the same year.

Repairs

You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. You can deduct these amounts on line 21 Form 1040, Schedule C or line 2 of Schedule C-EZ.

Depreciation Method

The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in How to Depreciate Property (IRS Publication 946).

Section 179 Deduction

Purchasing such things as office equipment and computer software would seem like ordinary and necessary expenses, however, the IRS considers these costs to be capital expenses. Unlike assets that are acquired for the production of income (such as investment property), Section 179 of the U.S. Internal Revenue Service Code gives you the option to deduct the costs assets acquired for business use as expenses in the year you purchased the assets, instead of requiring them to be capitalized and depreciated. Eligible property is generally limited to tangible, depreciable property which is acquired for use in the active conducting of a trade or business. Section 179 deductions are subject to dollar amount and deductible limitations.

Listed property

You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property is any of the following.

  • Most passenger automobiles.
  • Most other property used for transportation.
  • Any property of a type generally used for entertainment, recreation, or amusement.
  • Certain computers and related peripheral equipment.
  • Any cellular telephone (or similar telecommunications equipment).

Form 4562.

Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.

  • Depreciation on property placed in service during the current tax year.
  • A section 179 deduction.
  • Depreciation on any listed property (regardless of when it was placed in service).

For clear and complete rules for deducting depreciation, refer to How to Depreciate Property (IRS Publication 946).

Amortization

Where depreciation allows you to deduct the cost of an asset over the asset’s life, amortization is a method of deducting certain capital expenses over a fixed period of time. The IRS allows you to amortize costs associated with:

  • Starting a Business, including the costs of researching a business idea and creating a legal entity
  • Getting a Lease on Business Property
  • Intangible Assets defined in Section 197 of U.S. Internal Revenue Service Code, including business licenses, permits, patents, trademarks, trade secrets, customer loyalty (goodwill); and the intangible value of physical items such as client lists and accounting and inventory records
  • Oil and Gas Exploration
  • Pollution Control Facilities
  • Research and Experimentation

Gustavo A Viera CPA

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Audits From Hell Target Rich

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Audits From Hell Target Rich

An Internal Revenue Service unit set up to look at wealthy taxpayers and their complicated financial arrangements has started rigorous probes of some hedge-fund managers and other investors it suspects may be trying to evade taxes.

The reviews performed so far have been particularly harsh, say Miami Accountants. Investors are being asked to turn over numerous hard-to-get documents in short order. These are the audits from hell that your grandfather warned you about.

The IRS unit, known as the Global High Wealth Industry Group, was set up last year. It began conducting audits earlier this year—but tax accountants say the group is only recently getting up to speed. The unit is headed by Donna Hansberry, a longtime litigator for the tax agency who was formerly a senior legal adviser on the IRS commissioner’s staff.

Rarely has the agency conducted audits of the wealthy and their businesses or investments in the same way as it looks at large companies, according to advisers. Now, though, these individual audits will be in the hands of agents who have worked on coordinated corporate audits. Given their experience and sophistication, according to advisers, the agents will be better at unearthing trouble.

IRS spokeswoman Michelle Eldridge says the group is looking at “individuals who have a complex set of situations, and looking at the complete financial set up.” She acknowledged that “these cases are full audits.”

The IRS group is focusing on many kinds of financial instruments and asset classes, from derivatives to real estate—such as, say, a stake in a winery in Europe—as well as trusts, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies and partnerships.

The wealthy often make sophisticated business and investment arrangements with complicated legal structures and tax consequences. These can involve other family members or business associates, and can be difficult to map. Some are simply mechanisms to avoid taxes, while others legitimately protect assets, promote charitable causes or defer income.

Tax advisers say they are being given very little time to help clients comply.

Gustavo A Viera CPA

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IRS Has $164.6M in Refunds Waiting to Be Claimed

Posted on 14/10/202014/10/2020Categories TaxTags , , , , , , , , , , ,   Leave a comment on IRS Has $164.6M in Refunds Waiting to Be Claimed

IRS Has $164.6M in Refunds Waiting to Be Claimed

The Internal Revenue Service is looking to return $164.6 million in undelivered refund checks.

A total of 111,893 taxpayers are due one or more refund checks that could not be delivered because of mailing address errors.

 “We want to make sure taxpayers get the money owed to them,” said IRS Commissioner Doug Shulman in a statement. “If you think you are missing a refund, the sooner you update your address information, the quicker you can get your money.”

A taxpayer only needs to update his or her address once for the IRS to send out all checks due. Undelivered refund checks average $1,471 this year, compared to $1,148 last year

The average dollar amount for returned refunds rose by just over 28 percent this year, possibly due to recent changes in tax law which introduced new credits or expanded existing credits, such as the Earned Income Tax Credit.

If a refund check is returned to the IRS as undelivered, taxpayers can generally update their addresses with the “Where’s My Refund?” tool on IRS.gov. The tool also enables taxpayers to check the status of their refunds. A taxpayer must submit his or her Social Security number, filing status and amount of refund shown on their 2009 return. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.

Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Taxpayers can receive refunds directly into their bank, split a tax refund into two or three financial accounts or even buy a savings bond.

The IRS also recommends that taxpayers file their tax returns electronically, because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds.

Gustavo A Viera CPA

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7 Tax-Saving Year-End Tax-Planning Tips

Posted on 14/10/202014/10/2020Categories TaxTags , , , , , , , , , ,   Leave a comment on 7 Tax-Saving Year-End Tax-Planning Tips

Despite confusion created by recent and probable year-end tax legislation changes, the 2010 federal income tax environment is still quite favorable.

“We may not be able to say that after 2010; therefore, tax planning actions taken between now and year-end may be more important than ever,” said Gustavo A Viera CPA, managing partner for the Tax & Accounting firm, in a statement. “Be careful, though—Congress could change the ball game before the end of the year.”

Following are seven planning ideas for your clients to consider while there is still time to act before the end of the year.

1. Accelerate Itemized Deductions into this Year. If your Adjusted Gross Income will be more than $170,000 ($85,000 if you are married and file separately) next year, you may want to accelerate into 2010 your state and local tax payments that are due early next year. You may also want to prepay in 2010 some charitable donations that you would normally make in 2011. Why? Because for 2010, the phase-out rule that previously reduced write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) is gone, but is scheduled to come back in 2011, unless Congress takes action to prevent it, which looks increasingly unlikely.

If the phase-out rule comes back as expected, it will wipe out $3 of affected itemized deductions for every $100 of AGI above the applicable threshold. For 2011, the AGI threshold will probably be around $170,000, or about $85,000 for married individuals who file separate returns. Individuals with very high AGI may have up to 80% of their affected deductions wiped out.

2. Think Twice Before Deferring Income into 2011. This strategy makes sense if you are confident you will be in the same or lower tax bracket next year, but the tax picture for 2011 is blurry. With just weeks left in 2010, the fate of many tax provisions for 2011 and beyond is still unknown. The top two rates have widely been expected to increase in 2011 from the current 33 percent and 35 percent to 36 percent and 39.6 percent, respectively—at least for taxpayers earning $250,000 or more ($200,000 or more if single). Therefore, if you fall into this group, you might want to consider reversing the traditional strategy and accelerating income into 2010 to take advantage of this year’s presumably lower rates. However, legislators could still vote to delay any tax increase to after 2011.

3. Time Your Investment Gains and Losses and Consider Being Bold. As you evaluate investments held in your taxable brokerage firm accounts, consider the impact of selling appreciated securities this year instead of next year. The maximum federal income tax rate on long-term capital gains from 2010 sales is 15 percent. However, that low rate only applies to gains from securities that have been held for at least a year and a day. In 2011, the maximum rate on long-term capital gains is scheduled to increase to 20 percent. That will happen automatically unless Congress takes action, which currently seems unlikely.

To the extent you have capital losses from earlier this year or a capital loss carryover from pre-2010 years (most likely from the 2008 stock market meltdown), selling appreciated securities this year will be tax-free because the losses will shelter your gains. Using capital losses to shelter short-term capital gains is especially helpful because short-term gains will be taxed at your regular rate (which could be as high as 35 percent) if they are left unsheltered.

What if you have some poor performing securities (currently worth less than you paid for them) that you would like to dump? Biting the bullet and selling them this year would trigger capital losses that you can use to shelter capital gains, including high-taxed short-term gains, from other sales this year. If you think your investments that are currently underwater are poised for a comeback, you can buy them back after taking a loss as long as you do not reacquire them within 30 days before or after the sale.

If selling many poor performing securities would cause your capital losses for this year to exceed your capital gains, no problem. You will have a net capital loss for 2010. You can then use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income from salaries, bonuses, self-employment, etc. ($1,500 if you are married and file separately). Any excess net capital loss gets carried forward to next year.

Selling enough poor performing securities to create a big net capital loss that exceeds what you can use this year might turn out to be a good idea. You can carry forward the excess net capital loss to 2011 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years, plus up to $3,000 of ordinary income each year—all of which may well be taxed at higher rates after 2010. This can also give you extra investing flexibility in future years because you will not necessarily have to hold appreciated securities for more than a year to get better tax results.

4. Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, you can tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you reasonably can, especially if your employer makes matching contributions. You turn down “free money” when you fail to participate to the maximum match.

5. Take Advantage of Flexible Spending Accounts. If your company has heath or child care FSAs, before year-end you must specify how much of your 2011 salary to convert into tax-free plan contributions. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying child care costs (depending on the type of plan). Watch out, though, FSAs are “use-it-or-lose-it” accounts—you do not want to set aside more than what you will likely have in qualifying expenses for the year. And, starting in 2011, over-the-counter drugs (e.g., aspirin and antacids) will no longer qualify for reimbursement by health FSAs, so you may need to consider that when determining your 2011 contribution amount.

If you currently have an FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you will lose the remaining balance. For health FSAs, it is not difficult to drum up some items such as: new glasses or contacts, dental work you may have been putting off, or prescriptions that can be filled early. Also, for 2010, over-the-counter drugs still apply.

6. Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2010, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90 percent of your 2010 liability or if smaller, 100 percent of your 2009 liability (110 percent if your 2009 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

7. Make Energy Efficiency Improvements to Your Home. A great way to cut energy costs and save up to $1,500 in federal income taxes this year is to make energy efficiency improvements to your principal residence. Basically, if you install energy efficient insulation, windows, doors, roofs, heat pumps, furnaces, central A/C units, hot water heaters or boilers, or advanced main air circulating fans to your home during 2010, you may be entitled to a tax credit of 30 percent of the purchase price. However, the maximum total credit you can claim for 2009 and 2010 combined is limited to $1,500. Without Congressional action, the credit will not be available after 2010.
Taxpayers should consult with a personal tax advisor before applying these or other tax strategies.

Gustavo A Viera CPA

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