1 TAX TIPS NEWSLINE Proudly Published in the USA NOVEMBER 2017 Produced monthly for Clients & Friends of the Advisory Group Associates. Our Mission. Sharing Solutions that deliver real value. This “TAX TIPS NEWSLINE” is compiled by the founder of the Tax & Advisory firms, Frank L. Zerjav, CPA and team of Professional Tax Associates, and then it is sent by email each month because all taxpayers need tax and compliance knowledge. It’s a big part of your life and the entities that you operate. The CPA firm engages in proactive Strategic Tax Planning for family-owned or privately-held businesses and their owners, professionals, investors and individuals. Our clients minimize their tax burden by appropriate proven strategies, which help them to keep more of what they earn. Advisory Group’s Tax Resolution Experts also engage in resolving tax problems with either Federal or State tax agencies for clients who need these specialized, proven solutions and options. Our devoted team of Professional Tax Advisors and Tax Resolution Experts do care; their primary objective is the well-being of clients, their family and their survivors, as well as their satisfaction with the work we do, while our goal is to be the premier choice of Tax & Advisory firms, not the biggest firm by sharing solutions that deliver real value. OFFICE CLOSED FOR THE THANKSGIVING HOLIDAY Closed on Tuesday, November, 21 st @ 12 pm through Sunday, November 26 th We will reopen Monday, November 27 th Inside this Month’s Issue Contact Us Special Tax Break For Manufacturers, Contractors & Others Update On Health Savings Accounts (HSAs) Strategies When Using Two Or More Vehicles For Business Tax Benefits When Missed Depreciation Needs Correction Use S-Corporation When Converting Home To Rental Property Tax Deductions For Out-Of Town Travel About The Home Office/Storage Deduction For Principal Office Tax Planning Solutions For S-Corporations Tax Issues For The Self-Employed Tax Benefits Of Home Ownership Tax Strategies For Dependent Children Tax Issues Of Higher-Income Indivduals About Using The Gambling Per Session Tax Rule Wide Range of Services Offered
Transcript
1
TAX TIPS NEWSLINE Proudly Published in the USA
NOVEMBER 2017
Produced monthly for Clients & Friends of the Advisory Group Associates.
Our Mission. Sharing Solutions that deliver real value.
This “TAX TIPS NEWSLINE” is compiled by the founder of the Tax & Advisory firms, Frank
L. Zerjav, CPA and team of Professional Tax Associates, and then it is sent by email each month
because all taxpayers need tax and compliance knowledge. It’s a big part of your life and the
entities that you operate.
The CPA firm engages in proactive Strategic Tax Planning for family-owned or privately-held
businesses and their owners, professionals, investors and individuals. Our clients minimize their
tax burden by appropriate proven strategies, which help them to keep more of what they earn.
Advisory Group’s Tax Resolution Experts also engage in resolving tax problems with either
Federal or State tax agencies for clients who need these specialized, proven solutions and
options. Our devoted team of Professional Tax Advisors and Tax Resolution Experts do
care; their primary objective is the well-being of clients, their family and their survivors, as
well as their satisfaction with the work we do, while our goal is to be the premier choice of
Tax & Advisory firms, not the biggest firm by sharing solutions that deliver real value.
OFFICE CLOSED FOR THE THANKSGIVING HOLIDAY
Closed on Tuesday, November, 21st @ 12 pm through Sunday, November 26
th
We will reopen Monday, November 27th
Inside this Month’s Issue
Contact Us
Special Tax Break For Manufacturers, Contractors & Others
Update On Health Savings Accounts (HSAs)
Strategies When Using Two Or More Vehicles For Business
Tax Benefits When Missed Depreciation Needs Correction
Use S-Corporation When Converting Home To Rental Property
Tax Deductions For Out-Of Town Travel
About The Home Office/Storage Deduction For Principal Office
Tax Planning Solutions For S-Corporations
Tax Issues For The Self-Employed
Tax Benefits Of Home Ownership
Tax Strategies For Dependent Children
Tax Issues Of Higher-Income Indivduals
About Using The Gambling Per Session Tax Rule
Wide Range of Services Offered
2
Contact Us - There are many events that occur during the year that can affect your tax situation.
Preparation of your tax return involves summarizing transactions and events that occurred during
the prior year. In most situations, treatment is firmly established at the time the transaction
occurs. However, negative tax effects can be avoided by proper planning. Please contact us in
advance if you have questions about the tax effects of a transaction or event, including the
following:
• Pension or IRA distributions. • Sale or purchase of a residence or • Self-employment.
• Significant change in income or deductions. other real estate. • Charitable contributions of
• Job change. • Retirement. property in excess of $5,000.
• Marriage. • Notice from IRS or other revenue • Gifts (over $14,000 to an
• Attainment of age 59½ or 70½. department. individual).
• Sale or purchase of a business. • Divorce or separation. • Starting new business.
******
SPECIAL TAX BREAK FOR MANUFACTURERS,
CONTRACTORS & OTHERS
You may not think of yourself as a manufacturer, but you might nevertheless qualify as one
under tax law.
There is a deduction for Domestic Production Activities that applies to a much broader array of
activities than you would think. There’s no catch and no recapture associated with this
deduction—it’s just extra cash for your wallet.
The deduction, in general, is for a business who converts starting materials into a new finished
product and if you think about it, that covers a tremendously broad array of activities, including:
• Construction
• Certain dental procedures
• Writing computer software
• Creating music recordings
• Producing crafts and other goods
• Raising livestock
• Farming
The deduction can be substantial—up to 9 percent of all income from qualifying activities.
Here are the basic steps to calculate the deduction:
1. Determine your income from qualifying production activities.
2. Deduct the costs attributable to the production activity, including the cost of goods sold
and an allocable share of other business expenses.
3. Multiply the result (or, if less, your taxable income) by 9 percent. That’s your tentative
deduction.
3
The deduction is “tentative” only because you have to factor in a wage limitation: your deduction
cannot exceed 50 percent of the amount your business pays as W-2 wages for work attributable to
the qualifying activity.
******
UPDATE ON HEALTH SAVINGS ACCOUNTS (HSAs)
The Health Savings Account (HSA) is just one of many possible health plans that you could use.
This Article intends to alert you to some of its benefits for you personally—or for you and your
employees, if you implement an HSA plan in your business.
Here’s a very tight summary of how the HSA works:
1. Deduct the health insurance cost. To enable the HSA, your health insurance must be a
high-deductible health insurance policy. Sole proprietors, partners, and S corporation
owners can qualify to deduct this high-deductible insurance on page 1 of Form 1040.
(The page 1 Form 1040 deduction does not suffer the 10 percent haircut that applies to
itemized medical deductions.) Also, you generally can deduct the cost of this insurance
without having to cover the employees, too.
2. Deduct the HSA contribution. For 2017, you can make a deductible HSA contribution
of up to $3,400 if you have qualifying self-only coverage or up to $6,750 if you have
qualifying family coverage (anything other than self-only coverage). You can make an
additional $1,000 HAS catch-up contribution if you are 55 or older by year-end. The
deduction for the contribution is above the line, so it does not suffer from phaseouts and
it’s deductible whether you itemize or not. And, as with the insurance, you likely could
set this up for yourself without having to cover your employees.
3. Tax-deferred earnings. The monies accumulated in your HSA grow and compound tax
deferred (even tax-free if you withdraw correctly).
4. Tax-free withdrawals. Withdrawals from your HSA are tax-free when you use the
monies to pay for qualified medical expenses. You can’t pay your high-deductible
premiums with HSA funds. But once you reach Medicare age, you can use the
withdrawals for Medicare premiums in addition to other qualified medical expenses. If
the HSA still has a balance when you die, your surviving spouse can take over the
account tax-free and treat it as his or her own, as long as you have named your spouse as
the beneficiary of the account.
5. Retirement withdrawals. You can make your HSA work like a traditional IRA after
reaching Medicare age. To make this happen, you just withdraw funds from the HSA and
don’t use them for medical expenses. This triggers the federal income tax but no
penalties. (However, the use of the accumulated funds for Medicare premiums and other
medical expenses means tax-free use—this is a lot better than taxable use.)
4
One final point: you don’t lose the HSA contribution privilege just because you happen to
be a high earner.
******
STRATEGIES WHEN USING TWO OR MORE
VEHICLES FOR BUSINESS
Do you have two or more cars in your household?
If your circumstances are right, YOU might find a hefty increase in deductions for you with the
two-car strategy.
If this strategy works for you, you don’t have to drive one mile farther. You don’t have to spend
one additional penny. All you need are the right circumstances and a desire to increase your tax
deductions.
If you have two or more vehicles in your household, the following information is needed for
each personal vehicle:
1. Business miles for each vehicle
2. Total miles for each vehicle
3. Cost of each vehicle
4. Estimated sales proceeds when you plan to sell the vehicle
With the above numbers, we can determine the approximate dollar benefit or detriment you
would have by using two or more personal vehicles in your business.
******
TAX BENEFITS WHEN MISSED DEPRECIATION NEEDS
CORRECTION
Here is some good news when a valuable tax deduction is missed or mistakenly computed.
First, you don’t have to pay the IRS user fees (which can vary from around $2,000 to $10,000),
because a depreciation change (Correction) qualifies as an automatic change that is not subject to
user fees.
Second, because you failed to claim your correct depreciation in prior years, you are going to
have what’s called a negative Section 481(a) adjustment (negative for the government, but
positive for you) equal to the total amount of your missed depreciation. This means the
correction allows you to take all the missed depreciation in one lump sum in the tax year
when you make your automatic accounting change.
5
Third, some planning is needed as to the year you make the automatic change so that you realize
the best possible tax benefit from your missed depreciation.
To make this change and correction it is necessary to complete an eight-page IRS Form 3115 and
a one-to-two-page Section 481(a) adjustment worksheet attachment, then calculate the dollar
adjustment and answer some questions for the IRS about the depreciation adjustment.
The next step is to attach one copy of the Form 3115, along with the Section 481(a) worksheet,
to your tax return and create a duplicate copy for you to file with another office of the IRS. Our
instructions will be crystal clear.
Contact one of our Professional Tax Advisors if you may have such a situation to determine
how this missed depreciation can turn into your good fortune.
******
USE S-CORPORATION WHEN CONVERTING HOME TO
RENTAL PROPERTY
You may or may not be thinking of converting your personal home to a rental property, but if
you are, consider this potential strategy that works!
You have some strategic tax planning opportunities available on this conversion of your home to
a rental that can improve the rental profits.
One possible strategy is to create an S-Corporation and then sell your home to the S-Corporation,
which would then operate as the landlord for the property. With this strategy:
1. You avoid taxes by using the home-sale profit exclusion of up to $250,000 ($500,000 for
joint returns).
2. You create an increase in your rental property’s depreciable basis that generates an
increase in depreciation deductions.
Our Professional Tax Advisors can also help you examine your projected financial results
of this or other possible rentals so you can make sure that the investments will have the
attributes necessary to give you the best potential outcome with strategies that are often not
considered.
******
6
TAX DEDUCTIONS FOR OUT-OF TOWN TRAVEL
As most of you already know, you can deduct your away-from-home overnight travel expenses.
There are tax rules that you do you need to know if you want to travel, or need to travel, to an
out-of-town business location for an extended period.
First, your travel to and expenses of living in this out-of-town location are deducible only if this
is a temporary work location/assignment, which the IRS defines as a location where you expect
to spend less than one year.
Second, you have to travel away from your tax home. Your tax home is not your personal home.
Your tax home is the location of your principal place of business.
You can run into these rules when you create a second business location in a second state.
For example, a business owner who has an operation in Missouri creates a second business
location in Florida. One of the two locations is going to be the principal place of business.
Traveling to and living in the second location is going to create tax deductions for travel.
If you have this situation or if you have any such travel coming up or in your plans, make a
reservation with one of our Professional Tax Advisors to help determine and spend a little
time making sure you qualify to deduct the travel.
******
ABOUT THE HOME OFFICE/STORAGE DEDUCTION FOR
PRINCIPAL OFFICE
The home-office/Storage deduction is becoming more and more popular, and you need to know
these insights.
The tax code gives you only four ways to qualify for the home-office deduction:
1. Cash register. Principal place of business (the office from which you make the cash
register ring). This method of qualifying is generally referred to as the Soliman rule.
2. Administration. Principal place of business (a place of business used by you for the
administrative or management activities of any trade or business of yours, if there is
no other fixed location where you conduct substantial administrative or management
activities of such trade or business).
7
3. Physical meet and greet. A non-principal place of business (a place of business used
by patients, clients, or customers in meeting or dealing with you in the normal course
of your trade or business).
4. Detached structure. A non-principal place of business (a separate structure that is
not attached to the dwelling unit but is used in connection with the taxpayer’s trade or
business).
You achieve the best tax results when your home office/Storage qualifies as a principal
office under the rules above, because the principal office allows you to deduct mileage from
your home to your outside office.
******
TAX PLANNING SOLUTIONS FOR S-CORPORATIONS
An S-Corporation, is a pass-through entity that is treated very much like a partnership for federal
income tax purposes. As a result, all income is passed through to your shareholders and taxed at
their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable
to the shareholders when it is earned whether or not the corporation distributes the income.
Because an S corporation has a unique tax structure that directly impacts shareholders, it is
important for you to understand the S corporation distribution and loss limitations, as well as
how and when items of income and expense are taxed, before developing your overall tax plan.
In addition, some S corporation income and expense items are subject to special rules and
separate identification for tax purposes. Examples of separately stated items that could affect a
shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense
deductions, foreign taxes, and net income or loss related to rental real estate activities.
These items, as well as income and losses, are passed through to the shareholder on a pro rata
basis, which means that the amount passed through to each shareholder is dependent upon that
shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and
deductions may only be used to offset income from other sources to the extent that the total does
not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder
by the corporation. The S corporation losses and deductions are also subject to the
passive-activity rules.
Other key points to consider when developing your comprehensive tax strategy include:
• the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
• reporting requirements for the domestic production activities deduction;
• the tax treatment of fringe benefits;
8
• below-market loans between shareholders and S corporations; and
• IRS scrutiny of distributions to shareholders who have not received compensation.
Contact one of our Professional Tax Advisors who can assist you in identifying and
maximizing the potential tax savings.
******
TAX ISSUES FOR THE SELF-EMPLOYED
Owning your own business can be very rewarding, both personally and financially. Being the
sole decision-maker for this important undertaking can also be overwhelming. Business owners
have many choices to make, and these decisions involve tax consequences that are not always
foreseen. We can help you minimize your overall tax burden by identifying and maximizing
business deductions, providing guidance on substantiation of expenses, and exploring tax
planning alternatives that are uniquely available to the self-employed.
Some frequently overlooked business expenses that you may be able to deduct include moving
expenses, costs of travel away from home, entertainment expenses, and expenses related to a
home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a
significant deduction. In addition, there are multiple benefits when you employ your spouse,
child, or other family member in the business.
There are some risks involved in adopting tax positions related to operating a business as an
independent contractor. For example, the distinction between employee and independent
contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you
must comply with these rules for yourself or for any workers that you hire. If you are an
employer, you must withhold income and employment taxes from an employee’s income.
However, if your workers are independent contractors, you are only required to report payments
of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right
classification, however, could result in additional taxes, interest and penalties.
The IRS offers an amnesty program called the Voluntary Classification Settlement Program
(VCSP) to encourage employers to reclassify their workers as employees for employment tax
purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat
the workers as employees at a cost that is 10 percent of what is normally owed in a worker
misclassification situation.
Complex rules and calculations are involved in many of the planning opportunities that are
available to you including asset protection and proper Entity Structure for the business.
Contact one of our Professional Tax Advisors who can help to review your overall tax
scenario in order to maximize your tax savings.
******
9
TAX BENEFITS OF HOME OWNERSHIP
Buying a home is the single most valuable investment most families make, and home ownership
offers tax breaks that make it the foundation for your overall tax planning. The tax law provides
numerous incentives to home ownership, including the following:
• Buying, rather than renting, replaces nondeductible rent with deductible mortgage
interest.
• Taxpayers can deduct an unlimited amount of property tax they pay on any number of
residences.
• Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing
jointly and certain surviving spouses) from taxable income when they sell.
• There is no penalty for an early withdrawal from an IRA for a “first-time” homebuyer for
up to $10,000 so long as the proceeds are used for acquisition of a home.
• Business owners & Professionals may deduct expenses for a portion of their home used
for business. A simplified optional method for claiming a home office deduction is now
available.
Unless retroactively extended by Congress, the following home-friendly provisions are not
available in 2017:
• The exclusion from gross income for discharges of qualified principal residence
indebtedness,
• The mortgage premium insurance deduction, and
• Energy credits for environmentally friendly and ecologically responsible home-related
expenditures.
You may benefit from a close review of these provisions, particularly if you are considering
transactions involving your home, including selling, refinancing, or renting. Many home
ownership tax benefits also apply to a second home.
******
TAX STRATEGIES FOR DEPENDENT CHILDREN
Raising a family can be both challenging and rewarding. As a parent, you worry about your
children receiving quality child care, paying medical expenses, or saving for college. You want
to do what is right for your family, but there are so many factors to consider, including how your
choices will impact your family’s overall tax burden. We can assist you in understanding your
options and in taking full advantage of the credits and deductions that you are entitled to as a
10
parent.
For instance, you may be able to take a child and dependent care credit if your child is under the
age of 13 at the end of the year. However, not all expenses qualify, and some expenses may
qualify for both the dependent care credit and the deduction for medical expense, depending on
your circumstances. In addition, if your employer offers a flexible spending plan, you might
consider whether or not participating in the plan saves you more money than claiming the credit.
If you are divorced, the issues can be more complicated. Who is entitled to an exemption for
your child and how does claiming the exemption impact other tax benefits for a dependent?
Even if child care is not a concern of yours, these examples illustrate how complex family tax
planning can be. There are many other tax considerations, such as the benefits and pitfalls of
shifting income to minor children in light of the kiddie tax; determining what expenses qualify
for the education credits and deductions and who can claim them; the eligibility requirements for
the earned income credit; or the impact of the alternative minimum tax.
Contact one of our Professional Tax Advisors who can help you see the bigger picture and
develop a plan that both meets your needs and saves you money.
******
TAX ISSUES OF HIGHER-INCOME INDIVDUALS
We know that you have worked hard for your money and would like to reap the benefits to the
greatest extent possible. Your ultimate goal is to sustain a successful wealth-building strategy
while avoiding unnecessary and expensive tax consequences. We are interested in helping you
achieve these objectives.
For the last few years, there has been talk of major tax reform that would place an increased tax
burden on higher income individuals. President Trump proposed a tax reform plan that would
reduce individual tax rates, abolish the alternative minimum tax (AMT) and federal estate tax,
and more. Individual rates under the President’s proposal would be 10, 25 and 35 percent. At the
same time, the President proposed to double the standard deduction and protect the home
ownership and charitable gift tax deductions. The President also proposed to provide unspecified
tax relief to families with children and dependents. The President’s proposal calls for a 15
percent corporate tax rate. The 15 percent rate would also be available to small and mid-size
pass-through businesses, White House officials said.
Further, the President called for elimination of unspecified tax breaks for special interests.
Democrats in Congress said the President’s plan favored high-income taxpayers and did not
deliver enough tax breaks to lower and middle-income taxpayers. As tax reform moves into the
latter half of 2017, the chances of a retroactive tax cut to include the 2017 tax year are lessened
but not entirely removed from consideration. Tax planning for the balance of the year therefore
should remain flexible.
11
Some of the issues that may impact your tax planning strategy for 2017 include:
• your marginal tax rate;
• personal exemption and itemized deduction phaseouts;
• additional 0.9 percent Medicare tax on wages and self-employment income over
threshold amounts;
• net investment income tax of 3.8 percent for taxpayers with modified AGI exceeding
threshold amounts;
• a capital gain rate of 20 percent for taxpayers in the highest tax bracket;
• capital gain exclusion for small business stock held for more than 5 years;
• foreign account disclosure and reporting requirements and related enforcement penalties;
• in-service rollovers to designated Roth accounts without the imposition of a 10-percent
additional tax on early distributions;
• IRA distributions to charity of up to $100,000;
• strict rules about deducting passive activity losses (PALs); and
• alternative minimum tax (AMT).
As you can see, the more complex issues faced by higher-income individuals create a
challenging planning environment for the 2017 tax filing season. One of our Professional
Tax Advisors should be contacted to meet with you to discuss the options that are best
suited to meet your personal financial goals while minimizing your tax liability.
******
ABOUT USING THE GAMBLING PER SESSION TAX RULE
As a casual gambler, you will pay less in taxes if you follow session reporting, because you net
your activity for that day. Unfortunately, the only crystal-clear session advice from the IRS is on
slot machines.
In Shollenberger, the court used the IRS Advice Memorandum 2008-0 1 1 on session reporting
to find that Mr. and Mrs. Shollenberger entered the casino with $500, won a $2,000 jackpot,
reinvested $400 from the jackpot in additional wagers, and left with $1,600, so their session
income for that day was $1,100 ($1,600 -$500).
12
Without session reporting, income for this day would have been reported on the tax return as
$2,000 of taxable income above the line and $900 in losses below the line as itemized
deductions. This type of reporting causes more federal income taxes. So the solution for “paying
less in taxes” is session reporting, as the court did for the Shollenbergers.
For the session rule, the Tax Court draws an analogy to the recovery of a capital investment in
that you calculate the casual gambler’s gross income from a wagering transaction by subtracting
the bets placed to produce the winnings, as found in:
• Green (practical difficulties of tracking the basis of each wager individually in a session
of like play—stating that a tabulation of the amounts paid for chips less the amount paid
to redeem chips would have served to verify the net win or loss figures)
• Szkircsak (it is impractical to record each separate roll of the dice or spin of the wheel)
The IRS has clearly established the per-session basis for reporting the winnings or losses from
slot machines, as you see in the Shollenberger case above.
The slot machine session principles should apply to craps, roulette, horse races, and other
gambling. In Szkircsak, the court made the point that it’s not practical to record each separate
roll of the dice or spin of the wheel.
In applying the gambling per session rule, be strict with yourself on three fronts:
• First, be precise on the sessions themselves. Do not combine craps with roulette or other
games. These are separate sessions.
• Second, be consistent in your session definition. For example, if you use the calendar
day, stay with the calendar day for all session reporting. If you pick a 24-hour day that
starts at 5:01 a.m., stick with that for all session reporting.
• Third, keep meticulous records.
******
Contact us to schedule your consultation to identify proven
tax-smart strategies, options & solutions that deliver real value for
the professional services needed based upon your particular
situation by calling (314) 205-9595.
******
13
TAX ACCOUNTING ADVISORY
Providing a wide array of specialized non-traditional solutions plus offering
traditional CPA services including:
Real Estate Transactions
Entity Structuring
Asset Protection Solutions
Tax & Business Advisory
Strategic Tax & Business Planning
Comprehensive Accounting Solutions including data and payroll processing
Representation for Resolution of Tax Problems involving levy, liens, audit defense,
payment plans, un-filed tax returns, penalty abatement and offer in compromise.
Tax Return Preparation for individuals, investors, professionals, real estate and business
owners, Corporations, Partnerships, Trusts and tax exempt organizations.
Our knowledgeable and experienced team of dedicated Professional Accounting Professionals
are committed to providing personal attention, quality work, reliable, proactive, helpful services
and solutions to make complex accounting and compliance tasks easier, gain greater financial
control and increase profitability by providing timely, accurate and complete accounting, data
and payroll processing services. This allows you more time to focus on growing your
enterprise.
Professional Tax Advisors & Experts consult on all aspects of tax compliance, advisory and
planning, as well as, Tax Return preparation and Tax Problem Resolution Specialized Solutions.
These tax related services are provided by Zerjav & Associates, Certified Public Accountants,
which has an alternative practice structure that is a separate and independent entity which works
together with the Advisory Group to serve clients’ needs.
