Tax Regulations

Giving your taxes your full attention just once a year isn’t the best business strategy. Experts suggest that a year-round approach is better for your finances. Click through to learn the best ways to evaluate the impact of taxes throughout the year.

Numerous tax experts agree that addressing your tax liability effectively requires tax planning throughout the year. Those business owners who reap the most benefits consider their taxes year-round, rather than waiting to focus on tax payments just a few weeks before the filing date.

A typical small business qualifies for roughly a dozen tax deductions. For example, you may be able to claim deductions on the following:

• Cars operated for business purposes
• Business-related travel and entertainment expenses
• Purchases of office supplies, furniture, equipment, and software programs
• Telephone expenses
• Contributions toward insurance policies, retirement plans, and pension funds

It’s surprising how many small businesses never take advantage of these deductions, mainly because they suffer from the “tax-planning-happens-but-once-a-year” syndrome. To fully benefit from these deductions, it’s important to maintain your expense records throughout the year.

Your goal should be to reduce your tax liabilities by retaining records of your purchases. By monitoring your expenses closely all year, you can analyze each expense for its tax impact as it’s made. Additionally, smart business owners should contemplate three key steps to tax planning:

1. Invest in a record-keeping tool for your business. Whether it’s spending roughly $30 on journals and tax books with a set of refill sheets costing less than $10 to do manual bookkeeping or investing up to $2,000 on the latest online accounting software, you will benefit from more rigorous and accurate record-keeping. Excel spreadsheets, Quickbooks Desktop, QuickBooks Online are some of the more popular options.

2. Determine when you need professional tips and tax planning advice. At times you will be able to justify paying for professional tax services, particularly if you need advice on unclear requirements in tax laws that could be in your favor. To prevent unnecessary complications and aggravations, you must avoid violating tax laws that may be applicable to your small business and having professional advice when needed, can help you keep your taxes under control.

3. Establish year-round tax planning goals. A good tax-planning strategy will help you accomplish some of these goals:

• Reduce the amount of taxable income
• Claim any available tax credits
• Lower your tax rate
• Control the time when taxes must be paid
• Avoid the most common tax-planning mistakes

Give us a call to see how can we help you and your business staying on top of your tax bill!

Victims of Imelda Storm Get More Time To File

A couple of days ago, on October 7th, IRS announced it is offering relief for victims of the tropical storm Imelda. The storm caused devastating flooding in southeast Texas.

The relief postpones the filing and payment requirements that occurred starting September 17th. The new deadline is January 31, 2020.

Thus taxpayers in Harris County, Montgomery County and several others (for complete list click here) that filed for an extension of time to file their individual returns, now have until January 31, 2020.

You must be careful, as the relief doesn’t provide more time to pay the tax due. The amounts due will still accrue interest and late payment penalties. If you think you might owe, but you need more time to file, it is best to make a payment toward 2018 taxes as soon as possible, as to minimize penalties and interest. You can pay online on the IRS website.

If you need help with 2018 tax return preparation give us a call or schedule an appointment online.

Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how you calculate that gain or loss may surprise you.

Your Basis

When you sell property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation, improvements and other items). You treat inherited property differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death or an alternate valuation date elected by the estate’s executor, generally six months after the date of death.

There are situations where special rules apply. For example if you inherited property from someone who died in 2010 or if you or your spouse gave the property to the decedent within one year before the decedent’s death, or if the inherited property was a farm or a closely held business. See Publication 551 for the complete rules regarding the basis for inherited property.

You should contact the executor of the estate or the personal representative of the estate to obtain the basis information.

The general basis rules for inherited property can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

For example: Assume your father left you stock he bought in 1990 for $10,000. At the time of his death, the shares were worth $50,000, and you recently sold them for $65,000. Your basis for purposes of calculating your capital gain is stepped up to $50,000. Because of the step-up, your capital gain on the sale is just $15,000 ($65,000 sale proceeds less $50,000 basis). The $40,000 increase in the value of the shares during your father’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? The basis must be lowered to the date-of-death value.

Holding Period For Inherited Property

Capital gains or losses resulting from the disposition of inherited property automatically are considered long-term, regardless of how long you or the decedent owned the property (see Publication 559). This presents a potential income tax advantage, since long-term capital gain is taxed at a lower rate than short-term capital gain.

You can find more details about the tax rules for the sale of inherited property on the IRS website.

If you have tax questions or need help with the preparation of your return give us a call!

Obtaining financing can sometimes be difficult. If your child or another relative is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.

Have a Written Agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues. Having written documentation is also important in case the borrower fails to repay all or part of the loan.

Charge Adequate Interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest or no interest at all, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you, as if you received it. In addition it becomes a gift to the borrower, as if you transferred it back, thus possibly generating gift tax reporting.

You can avoid the below-market loan issues and the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, this month, July 2019, the annual AFR (using a monthly compounding assumption) is:

• 2.11% for a short-term loan (three or fewer years)
• 2.06% for a mid-term loan (more than three but no more than nine years)
• 2.47% for a long-term loan (more than nine years)

Term Loans

For a term loan (a loan other than a demand loan discussed below), the rate can remain fixed for the life of the loan. In order to avoid he below-market loan issues, you should charge at least the AFR in effect on the day the loan was made, based on the term of the loan.

Demand Loans

For a demand loan (one that gives you the right to demand full repayment at any time or a loan with an indefinite maturity), in order to
avoid imputed interest issues, you have to charge a floating AFR that is at least equal to the short-term AFR in effect for each semi-annual period that the loan is outstanding.

If you want a fixed rate of interest on a demand loan and you don’t want the loan to become a below-market loan, the terms of the loan should provide that the rate at any given time is the higher of the stated fixed rate or the minimum rate required by the regulations.

Exceptions

When you lend your child or a family member no more than $100,000, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.

There are a lot more considerations and complexities regarding the below-market loan rules and we are here to help. Give us a call to see how we can help you and your particular situation.

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

• No deduction is available until the business becomes active.
• You may deduct up to $5,000 of accumulated start-up expenses in the tax year in which the active business begins. You have to reduce this $5,000 limit (but not below zero) by the excess of total start-up costs over $50,000.
• Any remaining start-up expenses, you may deduct them ratably over the 180-month period beginning with the month in which the active business begins.

Example:

Gina spent $20,000 on start-up costs before her new business began on July 1, 2019. In 2019, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2019 ($15,000/180 × 6 = $500), a total of $5,500. She may deduct the remaining $14,500 ratably over the remaining 174 months.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

You can find out more information about the destructibility of start up and organizational expenses in IRS Publication 535, Business Expenses.

If you opened or thinking of opening a new business and have questions about what expenses you can deduct, how you should set up your entity for tax purposes, how to set up your QuickBooks, how to use QuickBooks, what other reporting might be involved, such as payroll reporting, sales tax reporting, we are here to help. Give us a call!

Everyone knows about income taxes and sales taxes, but we tend to forget about excise taxes, because they’re not obvious.

Excise taxes are paid when purchases are made on specific goods or activities, such as wagering or highway usage by trucks. The producers or merchants pay the tax and typically include the additional tax in the price to the end consumer. Governments levy excise taxes on goods and services that have a high social cost, such as cigarettes, alcohol and gambling. Excise taxes are also referred to as selective sales or differential commodity taxes.

Here are six key facts regarding common, little-known excise taxes:

1. The tax reform bill exempted certain payments made by an aircraft owner or sometimes a lessee, related to the management of private aircraft, from excise taxes imposed on taxable transportation by air.
2. To support the use of alternative fuels, fuel tax credits are allowed on certain types of fuel including the following: biodiesel, including renewable diesel and mixture; alternative fuel credit and mixture; and second-generation biofuel producer.
3. Indoor tanning service providers may need to file a federal excise tax return. These services are subject to a 10 percent excise tax under the Affordable Care Act. This is an example of how excise taxes are often levied on goods and services that are considered unnecessary.
4. Taxpayers who engage in certain specified activities related to excise tax must be registered by the IRS before engaging in the activity. This is known as the 637 registration program. The taxpayer can go online to confirm whether they or a specific company has a valid IRS registration.
5. You may be surprised to know that there is an archery federal excise tax, including the importation and manufacture of archery and fishing products. These, of course, affect relatively few people, but are good examples of how a product or service may be subject to a particular excise tax that is not necessarily obvious.
6. The Environmental Protection Agency’s list of devices to reduce high tractor idling may be exempt from the 12 percent retail excise tax. This shows that a major component of the excise program is motor fuel, and different rates may apply to different types of fuel — gasoline, diesel and gasohol.

The idea is to limit the use of certain products, such as alcohol and tobacco. States also levy excise taxes. Some people say that excise taxes are stopgap measures to solve short-term problems. In fact, some note that discriminatory excises on the consumption of specified products is a step back in development of fiscal systems, postponing a more proper reform for the country or state.

You can find out more about excise taxes on the IRS website.

If you have tax questions, give us a call! We are here to help.