Sold or Thinking of Selling?
If you sold your home this year or are thinking about selling it, there are many tax-related issues that could apply to that sale. To help you prepare for reporting the sale you may have already made or make you aware of what issues you may face if you are in the “thinking about” stage, this article covers the tax basics and some special situations related to home sales and the home-sale gain exclusion.
Home Sale Exclusion – For decades, Congress has encouraged home ownership, including by providing various tax breaks for taxpayers selling their homes. Under the current version of the tax code, you are allowed an exclusion of up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you owned and lived in it for at least 2 of the 5 years counting back from the sale date. You also cannot have previously taken a home-sale exclusion within the 2 years immediately preceding the sale. There is no limit on the number of times you can use the exclusion as long as you meet these time requirements; however, under some extenuating circumstances you may still be able to claim a reduced amount of the exclusion even if you haven’t satisfied the time requirements. The home-sale gain exclusion only applies to your main home, not to a second home or a rental property.
2 out of 5 Years Rule – As noted above, you must have used and owned the home for 2 out of the 5 years immediately preceding the sale. The years don’t have to be consecutive or the closest to the sale date. Vacations, short absences and short rental periods do not reduce the use period. If you are married, to qualify for the $500,000 exclusion, both you and your spouse must have used the home for 2 out of the 5 years prior to the sale, but only one of you needs to meet the ownership requirement. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of
Although this situation is quite rare, if you acquired the home as part of a tax-deferred exchange (sometimes referred to as a 1031 exchange), then you must have owned the home for a minimum of 5 years before the home-gain exclusion can apply.
If you don’t meet the ownership and use requirements, there are some situations in which a prorated exclusion amount may be possible. An example of this situation would be if you were required to sell the home because of extenuating circumstances, such as a job-related move, a health crisis or other unforeseen events. Another rule extends the 5-year period to account for the deployment of military members and certain other government employees. Please call this office if you have not met the 2 out of 5 years rule to see if you qualify for a reduced exclusion.
Business Use of the Home – If you used your home for business and claimed a tax deduction—for instance, for a home office, storing inventory in the home or using it as a day care center—that deduction probably included an amount to account for the home’s depreciation. In that case, up to the extent of the gain, the claimed depreciation cannot be excluded.
Figuring Gain or Loss from a Sale – The first step is to determine how much the home cost, combining the purchase price and the cost of improvements. From this total cost, subtract any claimed casualty loss deductions and any depreciation taken on the home. The result is your tax basis. Next, subtract the sale expenses and this tax basis from the sale price. The result is your net gain or loss on the sale of the home.
If the result is negative, the sale is a loss; losses on personal-use property such as homes cannot be claimed for tax purposes.
If the result is a gain, however, subtract any home-gain exclusion (discussed above) up to the extent of the gain. This is your taxable gain, which is, unfortunately, subject to income tax. If you owned the home for at least a year and a day, the gain will be a long-term capital gain; as such, it will be taxed at the special capital-gains rate, which ranges from zero for low-income taxpayers to 20% for high-income taxpayers. Depending on the amount of all of your income, the gain may also be subject to the 3.8% net investment income surtax that was added as part of the Affordable Care Act. The tax computation can be rather complicated, so please call this office for assistance.
If you have owned your home for 25 years or more, you may face another issue that can affect your home’s tax basis (discussed above). If you purchased your home before May 7, 1997, after selling another home, instead of a home-gain exclusion of the profit from the home you sold, any gain from the sale would have been deferred to the replacement home. This deferred gain would reduce your current home’s tax basis and add to any gain for the current sale. While this situation is rare now, if it applies to you, be sure to look back in your tax records from the year you purchased your home for information about the reinvested gain deferral.
Prior Use as a Rental – If you previously used your home as a rental property, the law includes a provision that prevents you from excluding any gain attributable to the home’s appreciation while it was a rental. The law’s effective date was the beginning of 2009, which means that you only need to account for rental appreciation starting in that year. This law was passed to prevent landlords moving into their rentals for 2 years so that they could exclude the gains from those properties. Prior to the law change, some landlords had done this repeatedly.
Effect of a Mortgage – Some homeowners mistakenly think that the mortgage they have on their home is included as part of their basis. This is not the case. Proceeds from the home’s sale are used to pay off the existing mortgage, and if they are more than the mortgage balance, the excess (less sales expenses) is payable to you when the sale closes. But this is not the profit for tax purposes. The tax profit is the amount described above in “Figuring Gain or Loss from a Sale.”
Form 1099-S – Usually, the settlement agent—typically an escrow or title company— prepares IRS Form 1099-S, Proceeds from Real Estate Transactions, which reports the home seller’s name, tax ID number, proceeds of the sale, date of the sale, etc. This form is provided to both the IRS and the seller. Note that this form only includes information from the sale; it doesn’t provide any basis information to the IRS. Sometimes, sellers think that if the home sale gain exclusion eliminates all of their gain from the sale of their home, they don’t need to report the transaction on their tax return. Unfortunately, this thinking could lead to correspondence (i.e., a bill for tax due) from the IRS as it attempts to match the sales price shown on the 1099-S to the seller’s tax return. To avoid this interaction with the IRS, you should report the home’s sale on your income tax return for the year of the sale; in doing so, you will be including your basis and exclusion information for the IRS.
Records – Assets worth hundreds of thousands of dollars, including your home, need your attention, particularly regarding records. When figuring your gain or loss, you will, at a
minimum, need the escrow statement from the purchase, a list of improvements (not maintenance work) with receipts, and the final escrow (settlement) statement from the sale. If you encounter any of the issues discussed in this article, you may need additional documentation.
A few other rare home-sale rules are not included here. As you can see, home-sale computations and tax reporting can be very complicated, so please call this office if you need assistance planning a sale or post-sale reporting.
Steps You Can Take to Grow Your Business to the Next Level
For small business owners, in particular, growing a business has always been something of a challenge. On the one hand, you don’t want to grow too quickly – doing so can significantly damage the trajectory that you’ve set out on. But at the same time, you also don’t want to grow too slowly as this too can cause you to remain stagnant and get passed by some of your competitors.
All of this is also true at higher levels, particularly when it comes to taking that pivotal stop from a $1 million business to a $10 million one. According to studies, most businesses generate about $500,000 in revenue – meaning that they just need to find that next step to get to the desired level. It’s certainly not an impossible feat as countless others have done it, but it is something that requires you to keep a few key things in mind.
Growing Your Business: Breaking Things Down
First, it’s important to acknowledge that getting to $10 million in revenue for your business isn’t actually “the hard part.” Most experts agree that getting to that $1 million level is far more difficult.
This ultimately comes down to the disparity between the concepts of “wealth” and “income”
– two ideas that people sometimes have a hard time reconciling. Having an overall net wealth of $1 million is certainly an attainable goal. Getting to that point in one year may be less realistic.
Therefore, one needs to understand that ramping up the revenue of a business at the same pace is equally unrealistic. Once you learn to live by the idea of “slow and steady wins the race,” you put yourself in a much better position to succeed over the long term.
Indeed, this shift in mindset can pay dividends across the entirety of your organization. You need to re-evaluate your risk aversion, for example, so that you know which opportunities are worth capitalizing on and which must be passed by. You need to be objective with yourself about how tolerant you are to risk in the first place. You should also let that insight inform many of the decisions that follow.
Another way to grow your business from $1 million to $10 million (and beyond) also has to do with being realistic with yourself, albeit in a slightly different way. If your business has grown stagnant, you need to ask yourself why. Is it due to a legitimate lack of opportunity, or is it because of a general pessimism about what the future might hold? The latter is
understandable to a certain extent, but it also stands in the way of the growth-minded leader that you need to be. It causes hesitation at moments when action is critical, and it is something that ultimately holds a lot of people back.
Another way to grow your business involves not just learning how to market, but learning how to market correctly. Marketing is a terrific avenue for not only keeping existing customers informed and satisfied but for attracting potential new ones as well. A certain amount of experimentation will be needed and you must spend time getting to learn as much as you can about your audience. Creating buyer personas is a great way to accomplish precisely that.
Finally, you also need to make a determination about what you value in terms of business in general. Some business owners don’t actually have an urge to grow – they’re perfectly fine existing exactly as they are right now. To be clear, there is absolutely nothing wrong with that. However, if you do have the mindset that growth is in your future, you need to prioritize it in a specific way.
You need to ask yourself WHY you want to grow. Is it for wealth, are you trying to expand, or do you want to leave a legacy behind for the next generation of your family? All of these are important questions to answer because they will dictate a lot of the decisions that you make moving forward.
In the end, growing from a $1 million business to a $10 million one isn’t an unattainable goal. It will, however, require you to adjust your mindset and follow crucial best practices like those outlined above.
If you’d like to find out more information about how to grow your business, or if you’d just like to speak to an accounting professional about your own needs in a bit more detail, please don’t hesitate to contact this office today.
Ways to Maximize Business Deductions
- New Business
- Legal and professional fees
- Spousal Joint Ventures
- Self-employed Health Insurance
- Home Office
- Deducting the Cost of Business Equipment
- Advertising Expenses
- Website Costs
- Vehicle Expenses
- Business Meals
As a small business owner, you should always be on the lookout for legitimate ways to minimize your taxes. Waiting for year-end to do your tax planning can be too late and you may miss many possible opportunities. The following are valuable tips that help you maximize your business deductions.
New Business – Normally the costs of starting a business must be amortized (deducted) over 15 years. But taxpayers can elect to deduct up to $5,000 of start-up expenses and
$5,000 of organizational expenses on the return for the first year of the business. A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Examples of qualified start-up costs include:
- Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
- Wages paid to employees, and their instructors, while they are being trained;
- Advertisements related to opening the business;
- Fees and salaries paid to consultants or others for professional services; and
- Travel and related costs to secure prospective customers, distributors and suppliers.
Each of the $5,000 amounts is reduced by the amount by which the total start-up expenses or organizational expenses exceeds $50,000. Expenses not deductible in the first year of the business must be amortized over 15 years.
Legal and Professional Fees – incurred in setting up the business would fall under the organizational expense first year deduction of $5,000 and the balance would be amortized over 15 years. However, legal, and professional fees incurred after the business is up and running can be expensed.
Spousal Joint Ventures – When both spouses in a married couple are involved in the operation of an unincorporated business, it is common – but incorrect – for all that business’s income to be reported as one spouse’s income as a sole proprietorship on IRS Schedule C. In which case, the spouse not filing a Schedule C loses out on the chance to accumulate his or her own eligibility for Social Security benefits and the ability to fund a retirement account.
In addition, to claim a childcare credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the non-Schedule C spouse has another source of earned income, the couple will not be allowed a childcare credit.
There are two ways to remedy this situation, either: (1) by establishing a partnership or (2) a joint venture (each spouse files a Schedule C with their share of the income, deductions, and credits).
Self-employed Health Insurance – If you are a self-employed individual, you can deduct 100% (no AGI reduction) of the health insurance premiums without itemizing your deductions. This above-the-line deduction is limited to net profits from self-employment.
Home Office – Small business owners may qualify for a home-office deduction, which will help them save money on their taxes and benefit their bottom line. Taxpayers can generally take this deduction if they use a portion of their home exclusively for their business and on a regular basis. Plus, this deduction is available to both homeowners and renters.
There are actually two methods to determine the amount of a home-office deduction: the actual-expense method and the simplified method.
Actual-Expense Method – The actual-expense method prorates home expenses based on the portion of the home that qualifies as a home office, which is generally based on square footage. Aside from prorated expenses, 100% of directly related costs, such as painting and repair expenses specific to the office, can be deducted. Unlike the simplified method, the business is not limited to 300 square feet.
Simplified Method – The simplified method allows for a deduction equal to $5 per square foot of the home used for business, up to a maximum of 300 square feet, resulting in a maximum simplified deduction of $1,500. A taxpayer may elect to take the simplified method or the actual-expense method (also referred to as the regular method) on an annual basis. Thus, a taxpayer may freely switch between the two methods each year.
Additional office expenses such as utilities, insurance, office maintenance, etc., are not allowed when the simplified method is used. Prorated rent or home interest and taxes are not either, although 100% of home interest and taxes are deductible as non-business expenses if the taxpayer itemizes deductions.
Deducting the Cost of Business Equipment – From time to time, an owner of a small business will purchase equipment, office furnishings, vehicles, computer systems and other items for use in the business. How to deduct the cost for tax purposes is not always an easy decision because there are several options available, and the decision will depend upon whether a big deduction is needed for the acquisition year or more benefit can be obtained by deducting the expense over a number of years using depreciation. The following are the write-off options currently available.
Depreciation – Depreciation is the normal accounting way of writing off business capital purchases by spreading the deduction of the cost over several years. The IRS regulations specify the number of years for the write-off based on established asset categories, and generally for small business purchases the categories include 3-, 5- or 7-year write-offs. The 5-year category includes autos, small trucks, computers, copiers, and certain technological and research equipment, while the 7-year category includes office fixtures, furniture and equipment.
Material & Supply Expensing – IRS regulations allow certain materials and supplies that cost
$200 or less, or that have a useful life of less than one year, to be expensed (deducted fully in one year) rather than depreciated.
De Minimis Safe Harbor Expensing – IRS regulations also allow small businesses to expense up to $2,500 of equipment purchases. The limit applies per item or per invoice, providing a substantial leeway in expensing purchases. The $2,500 limit is increased to $5,000 for businesses that have an applicable financial statement, generally large businesses.
Routine Maintenance – IRS regulations allow a deduction for expenditures used to keep a unit of property in operating condition where a business expects to perform the maintenance twice during the class life of the property. Class life is different than depreciable life.
|Autos & Taxis
Bonus Depreciation – The tax code provides for a first-year bonus depreciation that allows a business to deduct 100% of the cost of most new tangible property if it is placed in service during 2022. The remaining cost is deducted over the asset’s depreciable life. This provides a larger first-year depreciation deduction for the item. Bonus depreciation is a temporary provision and for eligible business property bought after 2022, the rates drop to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and nothing after 2026.
Expensing – Another option provided by the tax code is an expensing provision for small businesses that allows a certain amount of the cost of tangible equipment purchases to be expensed in the year the property is first placed into business service. This tax provision is commonly referred to as Sec. 179 expensing, named after the tax code section that sanctions it. The expensing is limited to an annual inflation adjusted amount, which is
$1,080,000 for 2022. To ensure that this provision is limited to small businesses, whenever a business has purchases of property eligible for Sec 179 treatment that exceed the year’s investment limit ($2,700,000 for 2022), the annual expensing allowance is reduced by one dollar for each dollar the investment limit is exceeded.
An undesirable consequence of using Sec. 179 expensing occurs when the item is disposed of before the end of its normal depreciable life. In that case, the difference between normal depreciation and the Sec. 179 deduction is recaptured and added to income in the year of disposition.
Mixing Methods – A mixture of Sec. 179 expensing, bonus depreciation and regular depreciation can be used on a specific item, allowing just about any amount of write-off for the year for that asset.
Advertising Expenses – Once the business is operating, all forms of advertising are generally currently deductible expenses, including promotional materials such as business cards, digital or print advertisements, and other forms of advertising. However any adverting expense incurred before a business begins functioning would be treated as a start-up expense.
Trade shows are a form of advertising, and if a business purchases their own custom trade show booth, that booth can generally be expensed in the year purchased using bonus depreciation or Sec 179 expensing.
Website Costs – Although the IRS has not issued guidance on when Internet website costs can be deducted, the costs should generally be treated under the same principles as other
business expenses. Generally, website costs will be either a software expense or an advertising expense, but if they are paid or incurred before a business begins, they
would be treated as start-up expenses.
Financing – Interest expenses incurred to finance your business operation are deductible as a business expense. But be careful not to mix personal and business interest expenses. Banks are usually reluctant to lend money on a startup business. However, an equity loan on your home will generally achieve a lower interest rate anyway and the interest can be traced to and deductible as business interest.
Vehicle Expenses – If you use your car for business purposes you can deduct its business use by using either the standard mileage method, which allows a per mile amount, or the actual expense method. However, both methods require that you track your business and total mileage for the year. If using the standard mileage method you need to know the number of business miles driven, and if using the actual method you will need to prorate the actual operating expenses including fuel, insurance, repairs, and depreciation by the percentage of business miles to total miles. You can also deduct tolls and parking fees with either method.
Business Meals – Generally business entertainment is not deductible although business meals are 50% deductible, or 100% if the business meals are provided by restaurants during 2021 through 2022. The 100% deductibility provision is to encourage spending at restaurants, which generally were hard-hit by the COVID-19 pandemic emergency lockdowns. Record keeping for business meals is especially important. Each meal expense must be substantiated by not only the amount, date, time, and place, which are usually included on the receipt, but also the business purpose and the names of the guests and their business relationship.
Of course, the list of potential expenses goes on and is too extensive to include all possibilities here. If you are just starting a business or are already in business and have questions related to the business, please give this office a call.
You May Receive an IRS Form 1099-K This Year
- 1099-K Reporting Threshold
- IRS Is After Unreported Income
- Venmo, e-Bay, Etsy, and Others
- Deductible Expenses
- Self-employment tax
- Self-employment Retirement
- Self-Employed Health Insurance Deduction
- Hobby vs. Business
Effective for 2022 and later years, Congress reduced the threshold for the Form 1099-K filing requirement from $20,000 to a mere $600. So, you might ask, what does that have to
do with me? This change can impact taxpayers in several ways, some unexpected, so you may find yourself in for a surprise that can be unpleasant in some situations.
This article explores the several ways taxpayers can be affected. But first we need to review the purpose of the 1099-K and what can occur for you to receive one.
The 1099-K was created by the IRS as a means to detect unreported income by businesses. The IRS does that by requiring third-party settlement organizations such as credit card companies, eBay, Venmo and others to report the transactions they’ve handled for an individual or business on a 1099-K if the gross amount of those transactions exceeds a specified threshold.
Although primarily intended for businesses, there are situations where you may find yourself a recipient 1099-K.
One such situation is where a taxpayer is downsizing and sells personal property on eBay. If the total amount sold is $600 or more the taxpayer will receive a 1099-K. Although these sales are generally not taxable since used personal items are usually sold for less than their
cost, the IRS does not know the circumstances of the sale and if the amount is significant, it needs to be reconciled on the individual’s tax return. A sale of personal property that results in a loss, is not deductible for tax purposes. In prior years, because the threshold for requiring a 1099-K was $20,000, a 1099-K was never issued to most non-business taxpayers, so there was no concern about reconciliation.
Many taxpayers are also involved in the gig economy selling their products through Etsy, eBay, etc., or hiring out their services on TaskRabbit.
Others may be driving for Uber or Lyft or making deliveries through Door Dash, Uber Eats, etc.
Some individuals have been meeting their tax responsibilities from these activities while others have not, thus prompting Congress to reduce the threshold. In either case, it is important that these individuals keep records of their expenses associated with their income-producing activities to reduce any tax liability. Here are some examples:
- Cost of goods sold
- Vehicle travel
- Business cell phone service
- Internet service for on-line sales
- Office supplies
- Postage & shipping
- Some may qualify for a home office deduction
Since these activities are generally treated as self-employment income, here are other issues to be aware of:
Self-employment tax – Which is like Social Security and Medicare taxes paid by employees and matched by the employer through payroll taxes. Except a self-employed individual pays both the employee’s and the employer’s share, which combined can total 15.3% of net profit.
Self-employment Retirement – Self-employment Income qualifies for IRA contributions and the very popular Simplified Employee Pension Plan (SEP) where a self-employed individual can contribute a tax-deductible amount of 20% of their net earnings to the retirement plan.
Self-Employed Health Insurance Deduction – Most self-employed individuals can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of the taxpayer, spouse, dependents, and children under age 27 even if the child is not a dependent. However, this deduction is limited to the net income from the business.
Hobby vs. Business – Whether the activity is truly a business or just a hobby impacts how the income is reported on the tax return, deductibility of expenses (including medical insurance premiums), whether self-employment tax applies, and if contributions to retirement plans can be based on the activity’s income.
As you can see, all of this can become quite complicated and the penalties for not reporting self-employment income can be severe. Please contact this office about what expenses are deductible for your specific type of endeavor and your business filing obligations.
What Do You Do If the IRS Wants to “Audit” Your Tax Return?
The word “audit” tends to strike fear in the hearts of American taxpayers, but the truth is that not every audit is a result of a problem, or that the Internal Revenue Service suspects you of wrongdoing. There are several reasons why the IRS might want to audit your taxes and financial information, and there are several steps that you can take to make the process as painless as possible.
In light of an uptick in identity theft scams involving tax audits and returns, we want to take a moment before delving into this topic to stress that the IRS will never institute an audit process via telephone or email. Taxpayers are always alerted of an upcoming audit by U.S. mail.
Reasons for IRS Audits
Though it is certainly true that some audits are generated by irregularities, the IRS can also request an audit to verify the information contained within your tax papers, to correct a simple mistake such as failing to attach a Schedule, or because the individual taxpayer has some kind of involvement with other taxpayers — such as business partners or investors — whose paperwork raised questions. You may even have been selected for audit as a result
of a random selection process designed to gauge taxpayer returns to see how they compare to national norms.
Different types of audits
There are three types of audits conducted by the IRS. In all cases, the taxpayer will be notified of the review by mail.
- Correspondence audit – Generally a result of a low-level error or omission, the agency sends out information to the taxpayer referencing the mistake and requesting that revised information be submitted via mail.
- Office audit – This type of audit is more intimidating, as it requires the taxpayer to appear at an IRS office, bringing their documentation along with them. These audits are often the result of deductions or credits that are out of the norm, such as an unusually large medical expense deduction for which the agency requires documentation in the form of invoices and payment receipts.
- Field audit – The most intrusive of all audits, a field audit involves IRS agents coming to the taxpayer, usually visiting either their place of business or their home in order to review the tax return in detail.
How to prepare for an audit
Receiving notice of a tax audit will put a stutter in the step of even the most meticulous and upstanding taxpayer, but the nerves set off by the notice can easily be offset with the knowledge that you’ve kept good records and maintained copies of all pertinent documents. If you haven’t been keeping careful records, understand that in the face of an audit it will be up to you to prove that you deserve whatever deduction you’ve taken, so amend your ways and start keeping well-organized files of all financial statements, invoices, and receipts.
Doing so will not only be a substantial help in case of an audit, but it will also be remarkably helpful should you need to assess your business’ health or put together a financial statement for potential investors or when applying for a loan.
If you are uncomfortable with addressing the IRS questions on your own, you have the right to be represented by a professional of your choice. That might be a CPA, an attorney, or an enrolled agent. This person or persons can go with you or for you to any face-to-face meetings. There is no requirement that you attend an audit session unless the IRS specifically requests your presence.
After the audit is over, you will be provided with a report. If you agree with the contents of the report, you can simply sign it or whatever assenting form the auditor provides to you.
The taxpayer bill of rights
You may think yourself at the mercy of the IRS, but Congress enacted a taxpayer bill of rights that specifically outlines the IRS’ tax collecting abilities as well as the protections offered to taxpayers in the face of IRS collections. The taxpayer bill of rights includes:
- Right to be Informed
- Right to Quality Service
- Right to pay no more than the Correct Amount of Tax
- Right to Challenge the IRS’s position and be Heard
- Right to Appeal an IRS’s decision in an Independent Forum
- Right to Finality
- Right to Privacy
- Right to Confidentiality
- Right to Retain Representation
- Right to a Fair and Just system
What if you don’t agree with the audit decision?
Knowing that you have rights is nice, but pushing back against the decision of an IRS examiner can feel challenging. If you’ve complied with all of the examiner’s requests and now find yourself with a Revenue Agent Report that you disagree with, there are specific steps that you can take. You can:
- Ask for an informal conference with the examiner’s manager before the deadline
provided within the report.
- Ask for an Appeals conference to occur before the deadline provided within the report.
If you have received a Statutory Notice of Deficiency, you can also file a petition with the tax court.
How to Get Through an Audit
There is no shame in being unnerved by an IRS audit, but there are several ways that you can minimize the stress that you feel.
- Don’t hesitate to request a postponement if you need time to get your documents together.
- Familiarize yourself with your rights
- Be honest
- Discuss your audit strategies with your Authorized Representative, whether that is your CPA, attorney, or another person. That person will respond directly to the assigned IRS agent.
- Don’t try to fake your way through an audit. Have the information that is requested
so that you can get through it more quickly.
- Don’t hesitate about reaching out to the auditor if you disagree with the examination report that they have produced.
- Remember that if you are unable to pay a tax liability or disagree with the auditor’s
assessment, negotiation is a possibility.
One of the most important decisions you can make in the face of an audit letter is to work with an experienced tax representative who can help you with both your preparations and your response. For information on the assistance we can provide, contact our office today.
Tax Benefits for People with Disabilities
- ABLE Accounts
- Disabled Spouse or Dependent Care Credit
- Medical Deductions
- Home Modifications
- Special Schooling
- Nursing Services
- Impairment-related Work Expenses
Individuals with disabilities, as well as parents of disabled children, are eligible for several income tax benefits. This article explains some of these tax breaks.
ABLE Accounts – A federal law allows states to offer specially designed, tax-favored ABLE accounts to people with disabilities. Qualified ABLE programs provide the means for individuals and families to contribute and save to support individuals who became blind or severely disabled before turning age 26 in maintaining their health, independence, and quality of life.
The states run the ABLE programs authorized by the federal tax statute. A state that has established an ABLE account program can offer its residents the option of setting up one of these accounts or contracts with another state that offers ABLE accounts. Contributions totaling up to the annual gift tax exclusion amount, currently $16,000, can be made to an ABLE account each year, and distributions are tax-free if used to pay qualified disability expenses.
Through 2025, a tax provision allows the beneficiary of the ABLE account (i.e., the disabled person) to contribute a maximum additional amount each year, equal to the lesser of:
- The beneficiary’s taxable compensation for the year, or
- The prior year’s inflation-adjusted poverty level (so using the 2021 poverty level amounts for a one-person household, the 2022 ABLE beneficiary’s contribution could be up to $12,880. The equivalent amount for residents of Hawaii is $14,820 and
$16,090 for Alaska.
However, the extra contribution isn’t allowed if the beneficiary’s employer contributes to a qualified retirement plan on the beneficiary’s behalf.
The beneficiary’s additional contribution qualifies for the non-refundable saver’s tax credit, which, depending on the beneficiary’s actual income, can be 10%, 20%, or even as much as 50% of up to the first $2,000 contributed, for a maximum credit of $1,000.
Disabled Spouse or Dependent Care Credit – A tax credit is available to individuals who incur childcare expenses for children under the age of 13 at the time the care is provided.
This credit is also available for the care of the taxpayer’s spouse or of a dependent of any age who is physically or mentally unable to care for himself or herself and lived with the taxpayer for more than half the year. This is also true for individuals who would have been dependents except for the fact that they earned $4,400 or more (2022) or filed a joint return with their spouse. The credit ranges from 20% to 35%, with lower-income taxpayers benefiting from the higher percentage and those with an adjusted gross income of $43,000 or more receiving only 20%. The care expenses qualifying for the credit are limited to
$3,000 for one and $6,000 for two or more qualifying individuals. Note that for 2021 only, the credit rate and care expenses allowed were significantly higher and the credit was refundable.
Medical Expense Deductions – In addition to the “normal” medical expenses, individuals with disabilities can incur other unusual deductible expenses. However, to gain a tax benefit, an eligible taxpayer must itemize his or her deductions on Schedule A, and the taxpayer’s total medical expenses must exceed 7.5% of their adjusted gross income.
Eligible expenses include:
- Vision Aids – Contact lenses and eyeglasses
- Hearing Aids – Including the costs and repair of special telephone equipment for people who are deaf or hard of hearing
- Wheelchair – Costs and maintenance
- Service Dog – Costs and care of a guide dog or service animal. The IRS has stated that “the costs of buying, training, and maintaining a service animal to assist an individual with mental disabilities may qualify as medical care if the taxpayer can establish that the taxpayer is using the service animal primarily for medical care to alleviate a mental defect or illness and that the taxpayer would not have paid the expenses but for the disease or illness.”
- Transportation – Modifications or special equipment added to vehicles to accommodate a disability
- Impairment-Related Capital Expenses – Amounts paid for special equipment installed in the home or for improvements may be included as medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The costs of permanent improvements that increase the property’s value may be partly included as a medical expense. The costs of the improvement are reduced by the increase in the property’s value. The difference is a medical expense.
If the improvement does not increase the property’s value, the entire cost is included as a medical expense. Certain improvements made to accommodate a home to a taxpayer’s disabled condition, or to that of the spouse or dependents who live with the taxpayer, do not usually increase the home’s value, so the costs can be included in full as medical expenses. A few examples of full-cost medical expenses include constructing entrance or exit ramps for the home; widening entrance and exit doorways, hallways, and interior doorways; installing railings, support bars, or other modifications; and adding handrails or grab bars.
- Learning Disability – Tuition fees paid to a special school for a child who has severe learning disabilities caused by mental or physical impairments, including nervous system disorders, can be included as medical expenses. A doctor must recommend that the child attend the school. Fees for tutoring from a teacher who is specially trained and qualified to work with children with severe learning disabilities may also be included if the tutoring is recommended by a doctor.
- Special Schooling – Medical care includes the costs of attending a special school designed to compensate for or overcome a physical handicap to qualify the individual for future normal education or for normal living. This includes a school that teaches braille or lip reading. The principal reason for attending the school must be its special resources for alleviating the student’s handicap. The tuition for ordinary education that is incidental to the special services provided at the school, as well as the costs of meals and lodging supplied by the school, are also included as medical expenses.
- Nursing Services – Wages and other amounts paid for nursing services can be included as medical expenses. Services need not be performed by a nurse if the
services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication, changing dressings, and bathing and grooming the patient. These services can be provided in the home or another care facility. Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, these amounts must be divided between the time spent performing household and personal services and the time spent on nursing services.
- Impairment-related Work Expenses – An employed individual with physical or mental disabilities may claim a deduction for impairment-related work expenses for attendant care at the individual’s place of employment or for other expenses at the job location that enable the individual to work. Those with a physical or mental disability that limits their being employed, or substantially limits one or more major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working are eligible to deduct their impairment-related work expenses if they itemize deductions. These expenses are claimed as a miscellaneous itemized deduction on Schedule A, not as a medical expense.
If you have questions about any of the disability-related tax benefits discussed in this article, or if you have questions concerning potential medical expenses not discussed above, please give this office a call.
RMDs and IRA-to-Charity Distribution Provisions
- Required Minimum Distributions
- Qualified Charitable Distribution
- QCD Benefits
- Fly In the Ointment
Tax law requires individuals who have reached age 72 to begin taking minimum distributions from their traditional IRA accounts. These are referred to as a required minimum distribution or RMD. The RMD amount is the value of the IRA account on the last day of the prior year divided by the distribution period from the Uniform Lifetime Table, corresponding to the taxpayer’s attained age. For example, if an individual had their 75th birthday in the current year, the distribution period from the table is 24.6. If the balance in the IRA was $500,000 on the last day of the prior year, then the individual’s RMD for the current year would be $20,325 ($500,000/24.6). (The IRS develops the Table using mortality rate data and updated it effective with 2022 distributions.)
Qualified Charitable Distributions – The tax law also permits individuals aged 70½ or over to transfer funds from their IRA accounts to charities in what is referred to as Qualified Charitable Distributions (QCDs). These QCDs are not taxable and where a taxpayer is also required to make required minimum distributions (RMDs), the QCDs count toward the RMD requirement. Thus, in our prior example, if the individual had transferred the $20,325 to a qualified charity in a QCD, the $20,325 would not have been taxable.
QCDs are not limited to the RMDs. For those with large IRA balances QCDs can total up
$100,000 per year. Neither are QCDs limited to a single transfer in a tax year so long as the total distributed does not exceed the $100,000 annual limit.
It is important to remember that all individual’s Traditional IRAs are treated as one for purposes of determining an RMD and that all QCDs must be direct transfers by the IRA trustee to the charity.
QCD Benefits – QCDs can provide significant tax benefits. Here is how this provision, if utilized, plays out on a tax return:
- The IRA distribution is excluded from income.
- The distribution counts toward the taxpayer’s RMD for the year; and
- The distribution does NOT count as a charitable contribution deduction.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps for other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, taxable Social Security income, and so on. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
Fly In the Ointment – In the past the tax code did not permit contributions to IRAs by individuals once they reached age 70½, which coordinated with the prior age requirement to begin RMDs and the ability to make QCDs. The age restriction to contribute to IRAs has been eliminated, so now individuals may make IRA contributions at any age provided they have earned income.
Whether intentional or an oversight by Congress, the tax changes did not modify the age at which a taxpayer can begin making QCDs and left it at age 70½ – no longer in synchronization with the revised RMD age of 72.
Unfortunately that has created a situation that can be detrimental for individuals who have earned income and wish to utilize the QCD provisions and continue to contribute to an IRA after age 70½.
The problem being that a QCD must be reduced by the sum of IRA deductions made after age 70½ even if they are not in the same year, causing unexpected tax results for taxpayers that are not aware of this complication. This is best explained by a couple of examples.
All this can become quite complicated. If you are considering making a QCD and made IRA contributions after age 70½ and don’t understand the tax ramifications, you should consider consulting with this office before you make the distribution.
Do You Want to Grow Your Business With Minimal Investment? Here is How You Do It
With a potential recession on the horizon, most small businesses, in particular, are looking for avenues to cut costs wherever they can. However, that doesn’t mean that your business can’t still grow – you just have to be savvy about how you do it.
With that in mind, there are a number of ways to grow your business without a significant upfront capital investment that is more than worth exploring.
Growing Your Business: Breaking Things Down
One opportunity to grow your business that a lot of people don’t take enough advantage of comes by way of a vigorous networking and outreach campaign. Experts typically agree that doing so is the best way to build a base for your business – something that you can use to build upon regardless of what is happening with the economy.
You don’t even necessarily have to leverage in-person events in order to do this. You can use social networking sites like LinkedIn, Twitter, and TikTok depending on the audience that you’re trying to reach. If yours is a business that caters to a more professional market, something like LinkedIn would be the prime choice. If you’re going after a younger group of consumers, TikTok or Snapchat would serve you well. All of these services offer free accounts and the only real investment is your time.
Another way to grow your business involves creating – and verifying – your “Google Business” profile. Keep in mind that even when it comes to brick and mortar stores, the vast majority of all people will discover a brand for the first time via a search engine. Statistically speaking, that engine is likely to be Google given their market share.
Therefore, you always want to make sure that your “Google Business” profile is updated and accurate. This includes adding not only your contact information but also your business hours, high-quality photos of your physical location and more. It’s a way to make a solid first impression among prospects and it’s one that you certainly shouldn’t overlook.
Finally, make sure to leverage the best practices of search engine optimization (SEO) to your advantage. Again, this doesn’t necessarily take an “expert” in order to accomplish. Make sure that you’re regularly updating your website with fresh, original content, particularly via your blog. Whenever you post something relevant that you think that your audience would like to see, post it in multiple places like on your social media channels.
Make sure to include specific, targeted keywords on each page to give yourself the best chance of ranking highly.
The more of these steps that you’re able to accomplish, the more likely you are to grow your business without the significant investment that normally comes with it.
If you’d like to find out more information about budgeting or managing cash flow during a downturn, or if you just have any additional questions that you’d like to discuss with someone in a bit more detail, please contact this office today.
How QuickBooks Online Tracks Products and Services
What products and services does your company sell? Do you have enough to fulfill existing and future orders? QuickBooks Online can tell you.
Most small businesses maintain a changing inventory of multiple products. Even if you sell one-of-a-kind goods, you need to know what you’ve sold and what’s available. And if your company sells services, you also have to keep track of what you’re able to offer customers.
QuickBooks Online can meet these needs. It allows you to create detailed records for both products and services. If you carry inventory, it can make sure that you always know what’s available to sell. When you enter sales and purchase transactions, the site draws on the records you’ve created to help you complete invoices, sales receipts, purchase orders, etc., without having to leave the form you’re working on.
Creating your records initially can take some time. And your products and services require regular monitoring and maintenance. But if you’re conscientious about these tasks, you’re not likely to run short on inventory or have too much money tied up in products that aren’t selling fast enough.
Preparing QuickBooks Online
Before you begin creating records and tracking inventory, you need to make sure that QuickBooks Online is set up correctly. Click the gear icon in the upper right. Under Your Company, click Account and settings. Click the Sales tab in the toolbar. You’ll see the Products and services section near the middle of the screen.
Make sure you’ve turned on the Products and services features you’re going to need.
Toggle the slider buttons on and off by clicking on them, and be sure to save your changes when you’re done. One option allows you to turn on price rules. This is still classified as a beta feature, but it’s live on the site. It’s also quite complicated to set up and can create confusion for your customers and revenue loss for you if it’s not done correctly. Let us help if you want to use this tool.
Creating Your Product and Service Records
Your first task, of course, is to build your product and service records. Hover your mouse over Sales in the left vertical toolbar on the home page and select Products and Services. The screen that opens is your home base for dealing with inventory and services.
Eventually, it will contain a detailed table containing information about both. Two large buttons at the top of the page warn you when you have Low Stock or you’re Out of Stock.
Click New in the upper right corner. A vertical panel slides out from the right displaying your four options for Product/Service information. They are:
need to track the amount you have in stock. These are considered non-inventory.
Click on Inventory for this example. Here is a partial view of the pane you’ll see:
You can track your inventory levels and reorder points when you create inventory product records in QuickBooks Online.
To create a product or service record, just fill in the blanks on the form and save it. Some fields are optional. In fact, only three are required: Name, Initial quantity on hand, and As of date. Of course, your inventory tracking and the use of product and service records in transactions and reports will be much more effective if you complete as many of the fields as possible. We recommend that you at least provide answers in some additional fields (some of which aren’t shown here), including:
Please let us know if you have other questions we can answer that would help you use QuickBooks more effectively.
August 2022 Individual Due Dates
August 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during July,
you are required to report them to your employer on IRS Form 4070 no later than August
10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
August 2022 Business Due Dates
August 1 – Social Security, Medicare, and Withheld Income Tax
File Form 941 for the second quarter of 2022. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
August 1 – Self-Employed Individuals with Pension Plans
If you have a pension or profit-sharing plan, this is the final due date for filing Form 5500 or 5500-EZ for calendar year 2021.
August 1 – All Employers
If you maintain an employee benefit plan, such as a pension, profit sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2021. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.
August 1 – Certain Small Employers
Deposit any undeposited tax if your tax liability is $2,500 or more for 2022 but less than
$2,500 for the second quarter..
August 1 – Federal Unemployment Tax
Deposit the tax owed through June if more than $500.
August 10 – Social Security, Medicare, and Withheld Income Tax
File Form 941 for the second quarter of 2022. This due date applies only if you deposited the tax for the quarter in full and on time.
August 15 – Social Security, Medicare, and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in July. August 15 – Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in July.
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