IRS Standard Mileage Rates Increase for 2018

The IRS has announced standard mileage rates for 2018. As of January 1, 2018, the standard mileage rates for the use of a vehicle (car, van, pick-up truck, or panel truck) for business, charitable, medical, or moving purposes are:

  • 54.5 cents for every mile of business travel driven (an increase of 1 cent from the 2017 rate)
  • 18 cents per mile driven for medical or moving purposes (an increase of 1 cent from the 2017 rate)
  • 14 cents per mile driven in service of charitable organizations

We’ve touched on the importance of keeping good mileage logs and recommend using a mobile app such as TripLog or MileIQ. It’ll save you a lot of time and stress as you gather your financial data for tax preparation.

We’re happy to answer any questions you might have about this or any of your financial service needs. Call 215-723-4881 or contact us online.

Tax Filing Season is Officially Open

Yesterday — Monday, January 29, 2018 –- marked the first day the IRS began accepting tax returns for the 2017 tax year. This year’s deadline to file your taxes is Tuesday, April 17. BusinessInsider.com has this recap on what you can expect for this year’s filing.

Keep in mind that the changes that come with the new tax law do not apply to your 2017 tax year returns. As always, our team of CPAs are here to help. Contact us with any questions.

The Tax Cuts and Jobs Act Has Passed: What You Need to Know

The Tax Cuts & Jobs Act Bill (H.R. 1) has now passed the House and Senate and is on its way to the White House for the President’s signature to become law.

Here is a summary of some of the major provisions that will affect both Individuals and Businesses after this Bill becomes law. Most changes will be effective January 1, 2018; however, there are certain specific changes which will take effect before 2018.

Changes for Individuals

Individual Rates: The top individual rate will be 37 percent for individuals earning $500,000 and above and joint filers earning at least $600,000. There will be seven tax brackets: 10, 12, 22, 24, 32, 35, and 37 percent. The tax bill will nearly double the standard deduction, increasing it to $24,000 for a couple filing jointly and to $12,000 for single taxpayers. The tax rates and standard deduction expansion will expire in 2026.

Mortgage Interest Deduction: The bill will preserve the deduction for existing home mortgages and cap it at $750,000 for newly purchased homes starting January 1, 2018. The plan will also end the deduction for interest on home equity loans.

State and Local Tax Deduction: Taxpayers will be allowed to deduct up to $10,000 of state and local taxes paid, including property taxes and either income taxes or sales taxes.

Child Tax Credit: The child tax credit will be increased to $2,000 from the current $1,000 per child credit, with up to $1,400 of it being refundable.

Medical Expense Deduction: The bill will allow taxpayers to deduct medical expenses exceeding 7.5 percent of adjusted gross income for 2017 and 2018.

Individual Mandate: The plan would zero out the penalties for not obtaining health coverage for individuals and families.

529 College Accounts: 529 Accounts can now be used for elementary, secondary, and higher education.

Individual Alternative Minimum Tax: The individual AMT will increase to apply to individual filers earning more than $500,000 or joint filers earning $1 million or more.

Changes for Businesses

Corporate Rate: The corporate rate will be reduced to 21 percent starting January 1, 2018.

Pass-through Taxation: Pass-through entity owners that meet certain conditions will be eligible for a 20 percent deduction on their business income.

Business Expensing: Full expensing of new and used capital investments will be permitted for five years. After 2022, the 100 percent allowance will be phased down by 20 percent each year. Section 179 expensing, which doubles the amount eligible for the special small business investment write-offs, will also be made permanent.

Corporate Alternative Minimum Tax: The corporate AMT will be repealed.

Other Changes

Estate Tax: The exemption is doubled for estates worth approximately $11 million for individuals and $22 million for couples. The exemptions will revert to current levels after 2025.

International Business: Eliminates incentives that now reward companies for shifting jobs, profits, and manufacturing plants abroad. These incentives will prevent American jobs, headquarters, and research from moving overseas.

For even more information, here is a summary of the policy highlights as provided by the Joint House and Senate Conference Committee for your review.

If you have any questions about how this tax bill will affect your specific tax situation, please contact us online or call 215-723-4881 to set up a time to review the effects of these changes with you.

Disclaimer: This communication contains general tax information and should not be construed as specific tax advice for your situation.

 

Lease or Buy? Sell or Trade In? Business Vehicle Wisdom from Canon Capital Accounting Services

car inventory colorful
It’s time. Whether it’s one too many repair bills or the need for updated equipment, if you use your car for your business or have vehicles for specific use in your business the day will come when you’ll need to replace it. Deciding whether to trade it in or to try to sell it for cash will likely be based on the amount you can get on a sale versus a trade-in, not to mention the time you will spend.

There are also important tax factors to consider as you weigh your options. Here’s a quick overview of the complex tax rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.

Overall, the sale of a business asset yields a gain or loss depending on the net amount you receive from the sale and your basis for it. “Basis” is your “cost” for tax purposes, and, if you bought the asset, it usually equals your cost less the depreciation deductions you claimed for the asset over the years. Under the tax-free swap rules, trading in an old business asset for a new, like-kind asset doesn’t result in a current gain or loss, and the new asset’s basis will equal the old asset’s remaining basis plus any cash you paid to trade up. The rules generally are the same for business vehicles, with a couple of extra twists. So, what’s best for you?

Trade in your old business vehicle if:

  • The vehicle was used exclusively for business driving.
  • The vehicle’s basis has been depreciated down to zero or is very low.

The trade-in process often avoids a current tax. For example, if you sell your business vehicle for $9,000, and your basis in it is only $7,000, you will have a $2,000 taxable gain. If instead, you trade it in, a current tax is avoided. The trade-in means that the basis in the new vehicle will be lower than it would be if you bought it without a trade-in, but that doesn’t necessarily mean lower depreciation deductions on the new vehicle. Thanks to the “luxury auto” annual depreciation dollar caps, when purchasing a car for business your annual depreciation deductions on the new car may be the same whether you sold the old car or traded it in.

Consider selling your old business vehicle for cash if:

  • You used it exclusively for business driving and depreciation on the old vehicle was limited by the annual depreciation dollar caps.

In this situation, your basis in the old vehicle may exceed its value. If you sell the old vehicle, you will recognize a loss for tax purposes. However, if you trade it in, you will not recognize the loss.

Breaking this down, let’s assume a business person bought a $30,000 car several years ago and used it 100% for business driving. Because of the annual depreciation dollar caps, there is still a $16,000 basis in the car, which has a current value of $14,500. When this person wants to buy another $30,000 car, if the old vehicle is sold, a $1,500 loss will be recognized ($16,000 basis less $14,500 sale price). If the old vehicle is traded in for a new one, there will be no current loss. Again, if the old vehicle’s value exceeds its basis, the smart move on the taxation front is to trade it in, avoiding a gain.

  • You used the standard mileage allowance to deduct car-related expenses.

The 2016 allowance is 54¢ per business mile driven; For 2017, the allowance is 53.5¢ per business mile driven. The standard mileage allowance has a built-in allowance for depreciation, which must be reflected in the basis of the car. The deemed depreciation is 24¢ for every business mile traveled during 2016, and 25¢ for every business mile traveled in 2017. When you decide it’s time to make a change, the depreciation allowance may leave you with a higher remaining basis than the vehicle’s value. Under these circumstances, the vehicle should be sold to recognize the loss.

Did you use your vehicle partially for business, partially for personal use?

The rules are more complicated in this situation, which mainly applies to people who are self-employed, or as an employee are required to supply a vehicle for business use. In these instances:

  • If you sell the vehicle, cost and depreciation must be allocated between the business and personal portions. Gain or loss on the business part is recognized; gain, but not loss, is recognized on the personal part.
  • If you choose to trade it in, a special basis rule applies for depreciation purposes only. The basis of the new vehicle as computed under the normal trade-in rules is reduced by any difference between the depreciation that would have been allowable had the vehicle been used 100% for business driving and the depreciation claimed for its actual business use.

Leasing a Business Vehicle

The complex rules that apply to purchased business vehicles are one reason many business owners choose leasing vehicles over buying. When leasing, you simply deduct the business/investment use portion of annual lease costs. If the vehicle is a “luxury” model, for each lease year you add back to income an income inclusion amount derived from an IRS table. According to guidelines for 2016 and 2017, a leased vehicle is deemed “luxury” if the vehicle’s fair market value exceeds $19,000 ($19,500 for certain trucks and vans). There are, however, a few aspects of leasing to be aware of:

  • If you pay an additional sum up-front, it should be amortized over the life of the lease.
  • Any refundable deposit required as part of the lease deal cannot be deducted at all.

If you’re thinking, “This all sounds so very complicated,” you’re right. Before taking that next step with regard to your business vehicle, whether selling, trading in, or leasing, please contact us to set up a meeting to discuss the best path for your specific situation.

Memorial Day Holiday Observance

Canon Capital’s offices will be closed in observance of Memorial Day on Monday, May 30th. Our regular business hours will resume on Tuesday, May 31st.

We wish you a safe and happy holiday!

Four Little Words Cost My Client over $55,000

“Details matter.” That’s what a client recently said as I was handing her a series of amended tax returns for 2014 and 2015 which included around $18,000 in additional taxes owed. Add to that a projection of an additional $37,000 owed for 2016. Why? Four words. Four little words cost my client over $55,000 in unexpected taxes, and I am helpless to do anything about it at this point.

“Details matter.” How simple, yet how profound.

The four words? “Tenants-by-the-entireties.” What does that even mean?

My client’s husband had 50/50 ownership of several rental properties with an unrelated partner. My client’s husband began to have failing health and passed away in 2014. Before his passing, they approached a lawyer to provide some estate planning.

Fortunately, the lawyer established an estate where shares of the partnership would be passed to the children and heirs. This not only kept the partnership from terminating upon my client’s husband’s death but it also meant the partnership was no longer a 50/50 split. Simply put, you need two people for a partnership. If one passes away, the partnership no longer has two individuals and therefore can’t exist. So the lawyer adequately addressed one concern by passing the partnership on to the children and heirs. However, he also did something else that he probably shouldn’t have done. He admitted the wife into the partnership as “tenants-by-the-entireties.” Those four words – “tenants by the entireties” – cost my client about $55,000.

When my client’s husband passed away, the partnership interest (aka ownership) would have automatically gone to his surviving spouse. The fair market value of the partnership interest would have passed through his estate, and his wife would have inherited the properties/partnership interest at full fair market value. So if the properties were sold the day after the husband’s passing, the wife wouldn’t pay a penny in federal income tax because it was handled through the estate.

What should have been a simple inheritance was complicated by the lawyer admitting the wife to the partnership, creating a tenancy by the entireties. From a tax perspective, she then owned 50% of her husband’s share and became ineligible to inherit the whole ownership at fair market value. She was only eligible to inherit half of it at fair market value. As a result, she had to pay taxes on her half of her husband’s share.

Communication is Key

While this is a very complicated area of tax law, the point of the story is this: Whether you have a multi-million-dollar business or as little as two rental properties, make sure your team is in communication with each other. Your accountant, lawyer, insurance agent, investment broker, etc., should all be on the same page. I recommend your accountant should be the “quarterback” guiding the team and identifying the “details” that matter.

It wasn’t until after we drafted the final partnership return in 2016 that we discovered the partnership agreement as it was revised. At that point, there was nothing we could do. While the lawyer did what he did to ease the transfer of ownership, it cost my client approximately $55,000.

Don’t be deceived into thinking this couldn’t happen to you. These particular clients weren’t “big clients with a lot of money.” There were only two rental properties. So please, hear my plea, and that of my clients: “Details matter.”

If you have questions about how your estate planning affects your tax situation, we’d be happy to help. Contact us or call 215-723-4881.

 

BrentThompson fromweb

Brent Thompson, CPA has been with Canon Capital since 1998. He provides management advisory services, tax and general business planning, tax preparation, and financial statement preparation and review services for numerous businesses and their owners. He holds the Certified Management Accountant (CMA) designation and a Chartered Global Management Accountant (CGMA) designation. Brent is a member of the AICPA and the Institute of CMA’s.

This article is designed for general information only. The information presented should not be construed to be formal advice nor the formation of a client relationship.

New Sales Tax Laws Effective 8/1/16

On July 13, 2016, Governor Tom Wolf signed into law Act 84 of 2016. Per the Pennsylvania Department of Revenue, the following updates have been made to Sales, Use, and Hotel Occupancy taxes:

Timely Filing Vendor Discount
Effective for returns that have a period end date after August 1, 2016, the vendor discount for licensees for timely filed returns and payments is limited to the lesser of $25 or 1 percent of tax collected for a monthly filer, $75 or 1 percent of tax collected for a quarterly filer and $150 or 1 percent of tax collected for a semi-annual filer.

Exemptions
Effective July 1, 2017, property and services directly and predominately used in “timbering” by a company primarily engaged in the business of harvesting trees is exempt from tax. The term shall not include the harvesting of trees for clearing land for access roads.

Effective immediately, licensees are not required to collect tax on corrugated boxes used by a person engaged in the manufacture of snack food products to deliver the manufactured product, whether or not the boxes are returnable.

Effective in 60 days, the sale at retail or use of services related to the setup, tear down, or maintenance of tangible personal property rented by an authority to exhibitors at the Pennsylvania Convention Center and the David L. Lawrence Convention Center is exempt from sales and use tax.

Sales tax base expansion
Effective August 1, 2016, licensees are now required to collect tax on digitally or electronically delivered or streamed video, photographs, books, any other taxable printed material, apps, games, music, any audio service including satellite radio or canned software. These items are taxable whether accessed and purchased singly, or by subscription or in any other manner. Any maintenance, updates or support on these items are taxable.

Taxable sales on these items made on or after August 1, 2016, must be included when filing sales tax returns. The date of sale is the date of the invoice or other similar document.

Sales Suppression
Any person who, for commercial gain, sells, purchases, installs, transfers or possesses in this commonwealth an automated sales suppression device or zapper that the sole purpose of the device is to defeat or evade the determination of sales tax due commits a punishable offense.

Anyone that commits such an offense and is in possession of three or fewer devices will be subject to a fine up-to but not to exceed five thousand dollars ($5,000).

Anyone that commits such an offense and is in possession of three or more devices will be subject to a fine up-to but not to exceed ten thousand dollars ($10,000).

This shall not apply to an entity that possesses an automated sales suppression device for the sole purpose of developing hardware or software to combat the evasion of taxes by use of automated sales suppression devices or zappers or phantomware.

For additional information or if you have any questions regarding this notification, contact the Taxpayer Service and Information Center at 1-717-787-1064, or visit the department’s website at www.revenue.pa.gov, and click on Online Customer Service Center; Service for Taxpayers with Special Hearing and/or Speaking Needs is 1-800-447-3020 (TT only).