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.
You’ve probably seen or heard news reports about prepaying 2018 state and local real estate taxes in reaction to the recently-passed Tax Cuts and Jobs Act.
With this new legislation, beginning in 2018, 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. 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.
So, can you prepay your 2018 real estate taxes in 2017? Yes, and no. If you live in Montgomery or Bucks counties in Pennsylvania, the answer is “No.” Montgomery County has posted the following statement on their website:
The county has received a number of inquiries from individuals seeking to prepay their 2018 county real estate taxes. While the county understands and supports these efforts, Montgomery County is not permitted under Pennsylvania Law to accept such prepayments. Unlike Philadelphia, Delaware, and Allegheny counties, which are governed by Home Rule charters and thus permitted to allow the prepayment of taxes, Montgomery County, as well as Bucks, Chester, and other counties which are not Home Rule, must work within the confines of the tax collection requirements imposed by the Commonwealth. As these requirements explicitly prohibit the prepayment of real estate taxes, Montgomery County is prohibited from accepting 2018 real estate taxes until after the first of the year.
If you pay property taxes in a region where prepayment is permitted, you may only do so if you’ve received your 2018 tax assessment, as this article from Yahoo Finance explains:
But many residents trying to avoid that deduction limit on their state and local taxes will be disappointed: the IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.
As always, we are here to help. If you have any questions, or would like to discuss your tax plan for 2018, please contact us online or call 215-723-4881.
As you might be aware, tax reform bills have passed in both the House and Senate. Both of these bills have some differences and are currently in the process called “reconciliation” to bring one bill to the President for his signature. We will have to wait and see what the final bill includes, but as 2017 is coming to a close rather quickly, there are some year-end “moves” you might want to consider in anticipation of the coming changes for 2018. Most items included in a new tax law will be effective January 1 of 2018, so this year-end’s planning becomes important to obtain the maximum tax benefits. Otherwise, certain deductions may be lost forever.
Here are some planning points for you to consider in light of the anticipated tax law changes:
State and Local Taxes
Currently, real estate taxes are deductible for all property owned by a taxpayer, and all state and local income taxes are deductible.
Under the House and Senate plans, there would be a cap of $10,000 for state and local property taxes ($5,000 for married taxpayers filing separately). The deduction for state and local income taxes potentially might be eliminated altogether.
Therefore, if you are an itemizer, you may want to pay your property tax payments for 2018 ahead of time to include the deduction in your 2017 return. You may also want to consider paying any state and local estimated income taxes in 2017, since the deduction may be lost if you wait until 2018.
Charitable Donations
Since the tax bills are both doubling the standard deduction for all taxpayers (married filing joint to $24,000 and single to $12,000), many taxpayers will no longer be able to itemize deductions, but will instead just take the increased standard deductions. As a result, this may be the last year many taxpayers obtain a tax benefit for charitable contributions.
Therefore, you may want to consider accelerating any planned donations from 2018 into 2017. This will also make the ability for taxpayers who are taking required minimum distributions from IRA’s to make their charitable contributions directly from an IRA account.
Mortgage Interest and Home Equity Loans
Currently, mortgage interest is deductible for mortgages on a first or second home. The acquisition debt – that is, mortgages obtained to acquire the property – is capped at $1M and home equity indebtedness – defined as debt secured by the home in excess of acquisition debt – is capped at $100K.
The House plan would reduce the mortgage interest deduction limitation to $500K of debt and limit it to the taxpayer’s primary residence only. It would eliminate the interest deduction on home equity indebtedness altogether.
The Senate plan would keep the limitation of $1M on acquisition debt, but would also limit the deduction on home equity indebtedness.
Therefore, you may want to consider paying down any loans where the interest deduction would be eliminated next year.
Medical Expenses
Currently, medical expenses in excess of 10% of adjusted gross income (7.5% for ages 65 or older) are deductible as an itemized deduction.
Under the House Bill, medical expense deductions would be eliminated. Under the Senate Bill, the deduction is preserved, and the threshold is reduced to 7.5% of adjusted gross income for 2018.
Between the potential for the elimination of the deduction altogether and the increase in the standard deduction, if you currently are near or are close to the 10% limit for 2017, you may want to consider accelerating payments for medical expenses prior to year-end. You may also want to consider scheduling any elective procedures before year-end for you or your dependents.
Other Items to Consider
You will still have the usual decisions to delay or accelerate income and expenses – such as increasing or decreasing 401k or retirement plan contributions, Health Savings Accounts, etc. Investment and capital gain planning will take on a new wrinkle as both bills will now require the use of the FIFO method, instead of the taxpayer having options of methods to recognize gains. If you’re in business, should you buy new assets this year by December 31 when the tax rates are higher, or wait until the rates potentially drop next year?
Both the House and Senate Bills are extremely comprehensive and touch on many other areas, including Alternative Minimum Tax, elimination of other itemized deductions, Alimony, Child Tax Credits, Education Credits, and so on.
Of course, we cannot touch on all topics and scenarios here. Therefore, we would encourage you to reach out to us with any specific questions you may have on your own situation. As these two Bills are reconciled and potentially become law, we will continue to keep you informed. Please contact us with any questions. We are happy to be of service.
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 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:
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.
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:
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’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.
If there’s one thing tax preparers can count on after the sun rises each morning, it’s clients wondering why we make such a big deal about having auto mileage, travel and entertainment properly documented.
To answer in detail, everyone is familiar with the principle of “the low hanging fruit” – that is, when we have a very big task to accomplish, we usually go after the easy “low hanging fruit” first. With the well-documented budget cuts to the IRS over the past few years, the IRS is left with limited resources to audit taxpayers. Thus, common sense would tell us they will, and are, concentrating on the “low hanging fruit.” And when it comes to exams of taxpayers, travel and entertainment expenses are the lowest hanging fruit. There are numerous reasons for this.
First, most wage earners receive a W2 at the end of the year reporting their wages. The IRS gets a copy of the W2, so there’s no real subjectivity. Even if the wage earner has interest income, business income reported on a K-1, and mortgage interest deductions – these are all reported to the IRS as well. In contrast, self-employed individuals and businesses self-report practically everything. Therefore, self-employed individuals are generally at a much higher risk of exam. And the expenses that are going to attract additional attention deal with travel and entertainment. The reason these specific expenses draw specific attention are due to their higher substantiation requirements.
There was a fairly famous case, Cohan v. Commissioner, which concluded with the decision that if the taxpayer was unable to substantiate the exact amount of an expense and evidence dictates that an expense was incurred, the proper amount may be estimated by the court.
The IRS and Congress weren’t thrilled at the idea of estimating expenses, so they created a new law concerning auto, travel, meals and entertainment expenses. This law expressly states that no deduction will be allowed as approximations or “unsupported testimony” of the taxpayer. In other words, if you don’t have proper evidence, the IRS will disallow ALL of your expenses – even if evidence indicates that the expenses were incurred.
Keeping Good Records
For travel away from home, the taxpayer must have adequate records to prove the amount, time, the place, and business purpose of the trip. For entertainment, the taxpayer must have adequate records to prove the amount, the time, the place, the business purpose, and the business relationship. For auto mileage, the taxpayer must have adequate records to prove the amount, time, and business purpose of the trip.
In other words, just having receipts for travel away from home and entertainment are not sufficient since the receipt will not document the business purpose or relationship substantiation requirements. And so, you need a contemporaneous (produced in real time) auto log.
There are thousands of cases filled with summary language similar to “Taxpayer didn’t keep or provide contemporaneous written records of time, place, miles driven, or business purpose, and instead conceded that he/she kept poor records…” in which the IRS disallowed ALL of the auto expense claimed – even though evidence indicated an expense was incurred. If that sounds like you – not keeping records in real time – not documenting business reason, place or mileage – or just keeping poor records – your WHOLE deduction is at risk. Even if there is other evidence business mileage was incurred. Again, there are hundreds if not thousands of tax court rulings where the entire auto expense was disallowed even though taxpayers had delivery receipts and other reports to evidence auto mileage had been incurred.
So you can start to see why there is such a big fuss around auto mileage. First, the entire deduction is at risk – not just a portion of it. Thus, when we as tax preparers ask the amount of business mileage incurred, answers like, “Oh, about the same as last year,” are not acceptable. It acknowledges that there are no contemporaneous records that exist to support the deduction. Second – and just as important – under an examination, you want to have the “easy” items correct on your return. Think about it from the examiner’s point of view. If the first thing they look at isn’t correct, how do you think they feel about the rest of the return? Contrast that to having everything documented correctly and making a good first impression. Which situation would you rather have? Everyone would obviously want the latter situation. Thus, keeping contemporaneous records is a big deal.
Here at Canon Capital, we speak from experience. Not too long ago, one of our self-employed clients was examined. The very first item the examiner went after was auto mileage. The examiner spent two full days reconstructing the auto logs from his records, and using other audit techniques. He barely looked at other income or expense items. In the end, our client had contemporaneous records – so the deduction stood, other than a slight miscalculation the client had in calculating the amount of mileage.
So please understand – reporting accurate auto mileage is a big deal. Thus, big deals usually come with a big fuss.
Record-keeping Made Easy
It doesn’t have to be difficult to maintain good mileage records. Stop by our reception area, where we have auto mileage logs available for your use. You might also find mobile apps like TripLog or MileIQ helpful. While the apps provide additional features, by simply tracking the date, mileage, and reason for incurring the mileage each time you travel for business, you will be in good shape.
If you have more questions or would like more advice on maintaining good expense records, we are happy to help. Contact us at 215-723-4881 or www.canoncapital.com.
“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.
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.
