10 Tax Breaks Reauthorized for Tax Year 2015

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Congress finally took action in late December and passed a tax extender bill formally known as the Protecting Americans from Tax Hikes Act of 2015 (PATH), which was then signed into law. Retroactive to January 1, 2015, many tax provisions were made permanent while others were extended through 2016 or 2019. Let’s take a look at some of the tax provisions most likely to affect taxpayers when filing their 2015 tax returns.

1. Teachers’ Deduction for Certain Expenses
Primary and secondary school teachers buying school supplies out-of-pocket may be able to take an above-the-line deduction of up to $250 for unreimbursed expenses. An above the line deduction means that it can be taken before calculating adjusted gross income. This deduction was made permanent and indexed for inflation.

2. State and Local Sales Taxes 
The deduction for state and local sales taxes was made permanent by PATH. Taxpayers that pay state and local sales tax can deduct the amounts paid on their federal tax returns (instead of state and local income taxes)–as long as they itemize.

3. Mortgage Insurance Premiums
Mortgage insurance premiums (PMI) are paid by homeowners with less than 20 percent equity in their homes. These premiums were deductible in tax years 2013, 2014, and now, once again in 2015. This deduction was extended through 2016. Mortgage interest deductions for taxpayers who itemize are not affected.

4. Exclusion of Discharge of Principal Residence Indebtedness
Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, this tax provision has been extended through 2016, allowing homeowners whose homes have been foreclosed on or subjected to short sale to exclude up to $2 million of canceled mortgage debt. Also included are taxpayers seeking debt modification on their home.

5. Distributions from IRAs for Charitable Contributions
Taxpayers who are age 70 1/2 or older can donate up to $100,000 in distributions from their IRA to charity. Some people do not want to take the mandatory minimum distributions (which are counted as income) upon reaching this age and instead can contribute it to charity, using it as a strategy to lower income enough to take advantage of other tax provisions with phaseout limits. This deduction was made permanent by PATH.

6. Parity for Mass Transit Fringe Benefits
This tax extender allows commuters who used mass transit in 2015 to exclude from income (up to $250 per month), transit benefits paid by their employers such as monthly rail or subway passes, making it on par with parking benefits (also up to $250 pre-tax). Like many other tax extenders, this provision was made permanent.

7. Energy Efficient Improvements (including Appliances
This tax break has been around for a while, but if you made your home more energy efficient in 2015, now is the time to take advantage of this tax credit on your 2015 tax return. The credit reduces your taxes as opposed to a deduction that reduces your taxable income and is 10 percent of the cost of building materials for items such as insulation, new water heaters, or a wood pellet stove.

Note: This tax is cumulative, so if you’ve taken the credit in any tax year since 2006, you will not be able to take the full $500 tax credit this year. If, for example, you took a credit of $300 in 2013, the maximum credit you could take this year is $200.

8. Qualified Tuition and Expenses
The deduction for qualified tuition and fees, extended through 2016, is an above-the-line tax deduction, which means that you don’t have to itemize your deductions to claim the expense. Taxpayers with income of up to $130,000 (joint) or $65,000 (single) can claim a deduction for up to $4,000 in expenses. Taxpayers with income over $130,000 but under $160,000 (joint) and over $65,000 but under $80,000 (single) can take a deduction up to $2,000; however, taxpayers with income over those amounts are not eligible for the deduction.

Qualified education expenses are defined as tuition and related expenses required for enrollment or attendance at an eligible educational institution. Related expenses include student-activity fees and expenses for books, supplies, and equipment as required by the institution.

9. Donation of Conservation Property
Also made permanent was a tax provision that allowed taxpayers to donate property or easements to a local land trust or other conservation organization and receive a tax break in return. Under this tax provision, deductions of qualified conservation contributions up to 50 percent of a taxpayer’s contribution base (100 percent for qualified farmers and ranchers) are allowed.

10. Small Business Stock
If you invested in a small business such as a start-up C-corporation in 2015, consider taking advantage of this tax provision on your 2015 tax return. If you held onto this stock for five years, you can exclude 100 percent of the capital gains–in other words, you won’t be paying any capital gains. This deduction was made permanent by PATH.

If you’re wondering whether you should be taking advantage of these and other tax credits and deductions, please call us  at (877)305-1040 or email info@onts9.com TODAY!

Sole Proprietorships

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A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

If you are a sole proprietor you might be liable for:

– Income Tax

– Self-employment tax

– Estimated tax

– Social security and Medicare taxes and income tax withholding

– Providing information on social security and Medicare taxes and income tax withholding

– Federal unemployment (FUTA) tax

– Filing information returns for payments to non employees and transactions with other   persons

– Excise Taxes

Selecting the sole proprietorship business structure means you are personally responsible for your company’s liabilities. As a result, you are placing your assets at risk, and they could be held to satisfy a business debt or a legal claim filed against you. Therefore, there are a few disadvantages to consider.

Pay attention to our upcoming posts about selecting a business structure in details.

For more detailed information please do not hesitate to call us @ (310) 820-1080 or email @ info@onts9.com

Business Structures

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Out of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your business.

Based on the research we have done, we would like to go back to the structures of forming a business. Pay attention to our upcoming posts about selecting a business structure in details.

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

Legal and tax considerations enter into selecting a business structure.

  • Sole Proprietorships
  • Partnerships
  • Corporations
  • S Corporations
  • Limited Liability Company (LLC)

If you want to start a new business or change the formation of your business from one to another, please contact us for any questions you might have at 310.820.1080 or email @ info@onts9.com      

 

Tax Planning for Small Business Owners

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.

The mileage reimbursement rates for 2015 are 57.5 cents per business mile (56 cents per mile in 2014), 14 cents per charitable mile (unchanged from 2014) and 23 cents for moving and medical miles (down from 23.5 cents per mile in 2014).

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact the office.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home business phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2015 allows you to immediately deduct, rather than depreciate over time, up to $25,000, with a cap of $200,000 (down from $500,000 and $2,000,000, respectively, in 2014) worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification.

Some deductions can be taken whether or not you qualify for the home office deduction itself. It’s never too early to meet with a tax professional to learn more about home office deductions. Call today to schedule a consultation.

2013 Year-End Tax Planning in January 2014

Many considered Dec. 31, 2013, the final date for year-end tax planning, but there are numerous planning actions that you can take in 2014 retroactive to 2013. Here’s a quick and easy guide to help you with your planning.

Retirement Plans
• Conventional and Roth IRA contributions for 2013 can be made until the April 15 return due date for the payment to be attributed to 2013.

• Contributions for Keogh, SIMPLE and 401(k) can be made up until the due date of the return including extensions. However, the Keogh, SIMPLE and 401(k) plans must have been established before the end of 2013 (Sept. 30 for SIMPLE plans), unlike the IRAs.

• SEP plans can be opened any time in 2014 until the tax return due date, including extensions, and/or payment delayed until then for the 2013 deduction to be allowed.

Stock Sales
• Wash sales occur when stock sold at a loss is reacquired within 30 days before or after the stock’s sale. For sales made in December 2013 that had a loss, repurchasing the stock this month (within the 30-day prohibited period) will cause the 2013 loss to be disallowed and added to the basis of the January 2014 purchased shares.

Estimated Tax
• The final estimated tax installment is due Jan. 15; however, if that installment isn’t paid but the return is filed and the full tax is paid by Jan. 31 there will be no penalty for underpaying that installment.

Trusts, Estates and Foundations
• Distributions from trusts and estates that are made within 65 days after the end of the year can be attributed to 2013 if the appropriate box is checked on Form 1041 when the return is filed for 2013.

• Private charitable foundations can make distributions related to 2013 income until the end of 2014.

• Grantor trusts that mistakenly obtained a taxpayer identification number can notify their banks, brokers and others of the future use of the grantor’s Social Security Number and the discontinuance of the TIN eliminating the need to continue filing trust tax returns.

• Estates for people dying in 2013 can elect the six months later alternate valuation date on a timely filed estate tax return.

• Qualified disclaimers can be made within nine months of death for people that died in 2013, as long as the funds were not distributed or otherwise used by the beneficiary.

• Estates can make many elections retroactively on the estate tax returns up until the return’s due date.

Business Issues
• C corporations and personal holding companies, or PHCs, that pay dividends by March 15, 2014 can elect to have those dividends attributed to 2013 in order to avoid the imposition of the accumulated earnings penalty or PHC tax.

• Businesses that want to claim inventory devaluations of regular for sale items should consider 2014 sales at the reduced amounts prior to the filing of the 2013 tax return that will report the write downs.

• Businesses with a 2013 installment sale can elect out of the installment treatment if their 2013 tax bracket will be much lower than 2014 and later years are expected to be. This decision can be made before you file your 2013 tax return.

• Last in – first out, or LIFO, inventory valuation conversions can be done until due date of the 2013 tax return.

• People who had informal partnerships and joint ventures in 2013 should consider filing partnership tax returns and issuing K-1s to report those activities. Formal partnership agreements are not necessary to have a valid partnership for tax purposes.

Employee Issues
• Cafeteria plans and flexible spending accounts can make payments and reimbursements for 2013 salary-reduction amounts or applicable expenses incurred and paid through March 15, 2014 if the plan permits it.

• Compensation is generally reported when received or made available to the recipient; however, if it is paid by check and the delivery of the check is delayed or otherwise not made available for collection, then the income does not need to be reported until the payment is actually received. For example, if a commission check is written at the end of 2013 and mailed to the payee while the payee is traveling or on vacation until January, then the payee will not have to report the income until 2014 (the year of actual receipt) even though his or her Form 1099 would show the 2013 payment. If this is the case, appropriate disclosure must be made on the 2013 tax return explaining why the Form 1099 amount is greater than the amount reported. Alternatively you can report the entire amount on the 1099 and on a different line on the return show a subtraction for the amount not actually received, and provide an explanation. Note that if the funds had been wired into the payee’s account by Dec. 31, it would be considered received because if they wished to withdraw it at that point, they could have.

• Credit card charges made in 2013 for deductible items are reportable on the 2013 tax return even though not paid until 2014 or later.

• Certain employer payments for deferred compensation plans are deductible in 2013 even if they are not paid until 2014, as long as they are paid by March 15, 2014. In such a case, the employee would report the income when received.

• An employee who received employer-granted restricted stock or ISOs in December 2013 can make an election within 30 days after receiving the stock to report the income or AMT in the year the stock or ISO was received rather than when the restrictions lapse. This election is made pursuant to Internal Revenue Code Section 83(b). A timely January election will have the income taxed on the 2013 tax return.

• Receipts for 2013 charitable contributions must be received by April 15, 2014 for such deductions to be allowable. If qualified appraisals are necessary, they must be attached to the returns. The receipts and appraisals can be prepared in 2014 for the 2013 contributions.

The above are some items where post-2013 planning can affect the 2013 tax return. Many of these steps involve technical issues and a professional tax advisor should be consulted prior to acting upon them. Some of these actions will need to be done right away, while others allow some time.

For more Information: www.onts9.com

Old-Line Tax Planning Techniques Still Work

For taxpayers who scrambled to make last-minute gifts at the end of 2012 to take advantage of the gift tax exemption and lower tax rate, it was a good thing to do despite the fact that within 23 hours of year’s end, legislation passed averting the return to the old-law $1 million exemption and 55 percent maximum tax rate.

“That exemption amount of $1 million and the 55 percent rate actually became effective for 23 hours,” said Shari Levitan, a partner at Holland & Knight. “The legislation could have just as easily been limited to adjustments in income tax rates, and few were willing to bet on Congress.”

As a result of the American Taxpayer Relief Act of 2012 the exemptions for federal estate, gift and generation-skipping tax transfers will remain at $5 million, indexed for inflation. For 2013, the exemption amount will be $5,250,000. ATRA retained portability, so a surviving spouse can still use a deceased spouse’s unused exemption, provided that an estate tax return is filed and the portability election is made, Levitan observed. The maximum tax rate increased to nearly 40 percent.

“Those who thought they missed the window of opportunity to take advantage of the exemption with pre-2013 gifts have been given a second chance,” Levitan said. But while the Act’s provisions are stated to be “permanent,” this means only that the new provisions will not automatically sunset, she noted.

“I think ‘permanent’ is a word that causes people to think that they know what the rules are forever, and they won’t change,” she said. “But all it signifies is that there is not an automatic future reversion to prior and lower exemption levels and higher tax rates.”

“For example, it would be entirely possible for Congress to decide that the exemption level is fine for death transfers, but that lifetime transfers will be limited to, say, a million dollars, as was the case prior to 2011,” she said. “Also, Congress has the ability to change the rates in the future up or down. So, when we say ‘permanent,’ it still bears watching because budgetary concerns have not eased, and will certainly be discussed further this calendar year.”

Taxpayers may consider making taxable gifts above the exemption limits, Levitan said. “While the transfer tax has increased from 35 percent to 40 percent, gifting during lifetime remains a more efficient manner of shifting wealth than testamentary bequests,” she said.

“To illustrate, if a taxpayer makes a testamentary bequest of $1 million, the estate tax, which comes off the top, is $400,000, and the beneficiary receives $600,000,” she explained. “Effectively, the beneficiary bears the burden of estate tax. By comparison, the donor bears the burden of the gift tax. To make an equivalent gift during lifetime, the donor can make a gift of $600,000, which results in gift tax of $240,000. In short, for a beneficiary to receive $600,000, the total outlay is $840,000 when making the lifetime gift, as compared to the $1 million bequest at death. Even better, if the taxpayer lives more than three years from the date the gift is made, the gift taxes paid are excluded from the donor’s taxable estate for federal estate tax purposes.”

Contrary to some prior proposals, ATRA does not curtail a taxpayer’s ability to take advantage of the transfer techniques that that have worked well in the current low interest environment, Levitan indicated. “For example, the Obama administration previously made broad proposals, including requiring a minimum term for Grantor Retained Annuity Trusts (GRATs), substantially revising the grantor trust rules.”

ATRA contained no such limitations, so many planning techniques are still in effect, Levitan observed. “These include planning techniques such as short duration GRATs, sales to grantor trusts, loans to family members and trusts at the applicable federal rate (0.87 percent for mid-term loans made in January, 2013), and gifts of non-marketable minority interests in entities.”

However, she said that clients who are thinking about making gifts should do them sooner rather than later, so the attractive planning is not legislated away. “It would not be surprising to see some of the administration’s prior proposals reappear in further tax reform. It would be unlikely, though not impossible, for any such legislation to be retroactive. Taxpayers who have not made use of these beneficial transfer opportunities might consider doing so early in 2013, so that if adverse legislation is introduced, such gifts may be grandfathered,” she cautioned. “This will bear careful watching.”

For more information: www.onts9.com

 

 

2012 Tax Planning-Part 4

ACCELERATING AND DEFERRING

Normally, taxpayers are advised to try to postpone income and accelerate deductions. In an environment, however, of anticipated higher rates in the following year, 2012 is a year to consider the opposite strategy. Accelerate income to get it taxed at the lower rates of 2012, and postpone deductions so they can offset income in 2013 that would otherwise be taxed at a higher rate than 2012 income.

REQUIRED DISTRIBUTIONS

One of the provisions that expired at the end of 2011 was the provision permitting taxpayers over age 70-1/2 to make IRA distributions directly to charity and avoid taking those distributions into income. Taxpayers who have taken advantage of this strategy in the past and who would like to do so also for 2012 should try to postpone required minimum distributions until after the November elections to see if Congress acts to retroactively extend the provision.

For more information: www.onts9.com

 

 

2012 Tax Planning-Part 3-GIFTING TO CHILDREN

The current unified gift and estate tax exclusion of $5 million (actually $5,120,000 for 2012) will revert to $1 million in 2013 under current law. The maximum tax rate will also go from 35 percent to 55 percent. Most taxpayers would be unwilling to accelerate their deaths, but they might be willing to accelerate gifts to take advantage of the current high exclusion amounts.

Neither the Obama administration nor the Republicans are advocating a return to the $1 million exclusion. However, in an impasse, it might happen because no one can agree on how to keep it from happening

For more information: www.onts9.com

 

2012 Tax Planning-Part 2- INVESTING IN TAX-EXEMPT BONDS

One option being discussed as a way to avoid the increased Medicare taxes on net investment income is to shift more investments to tax-exempt bonds. Tax-exempt bonds generally offer a lower return, and an investment portfolio too heavily weighted in such bonds probably does not offer sufficient diversity, but it is one move to avoid the increased taxes on taxable investments.

Obama has proposed that the same categories of wealthy taxpayers that are subject to the increased Medicare taxes also be taxed on their municipal bond investments. Again, taxpayers can judge after the November elections how likely Obama’s budget proposals are to gain traction in 2013.

For more information: www.onts9.com

2012 Tax Planning-Part1: REALIZING CAPITAL GAINS

The stock market has been doing rather well of late. Current maximum capital gain rates of 15 percent would rise to 20 percent in 2013 under current law. Realizing those gains in 2012 would ensure taxation at the current rates. Investors can even immediately repurchase the investments that they desire to hold for a longer period and still recognize the gain in 2012.

Of course, there are proposals to eliminate capital gains taxes entirely. Taxpayers may want to wait until after the November elections to get a better sense of which way the political winds are blowing before deciding whether capital gains taxes are more likely to rise or to fall in the future. Investors may also consider the likelihood of some companies sitting on cash to pay out a special dividend before 2013 if the law threatens to start taxing dividends as ordinary income again.

For more information: www.onts9.com