If you own a rental, be sure you are reporting it correctly on your tax return. Here are a few tips on rental homes:

1. If you receive a 1099-M, be sure you report the exact amount on the tax return. For example, rental management companies will issue you a 1099-M showing rent but usually give you a statement showing the net amounts received. In this scenario, you would want to report the gross amount from the 1099-M and list the expenses on the rental schedule (as opposed to simply listing the net income). The IRS will attempt to match 1099's to your tax return. If the gross amount is not listed, this could cause you to get audited. While the net affect won't change, audits are not fun. Try to avoid them.

2. Be sure to place the house on the depreciation schedule and take depreciation each year. This will give you a decent sized expense that you do not want to miss out on.

Keep in mind that the land value is not depreciable. The best way to determine the land/building value is visiting the county website. The site separates the land and building value. Apply the percentage to the original purchase price of the home.

Keep in mind that the IRS assumes you have taken depreciation. If you do not, you will still be required to take into account the amount that should have been taken when you go to sell the home.

3. It's important to know the difference between capital improvements and repairs. Typically, when we see  high number in a clients "repairs" total, we will ask what the repairs were. An example of a repair is if you have to call the A/C repairman to simply repair the A/C unit. A capital improvement would be if he had to replace the entire unit. For capital improvements, you will list them on the depreciation schedule. You will need the date, the description, and the total.

4. There is no Section 179 depreciation allowed on rental properties. This is accelerated depreciation where you can take the entire amount of expense in one year.

5. If you actively participate in the rental, you can take up to $25,000 in rental losses each year. This amount starts phasing out when "adjusted gross income" goes above $100,000. If you make above $150,000, it is completely phased out. Do not make the mistake of factoring in a rental loss to discover your income has you completely phased out of the loss.

When in doubt with rental properties, be sure to ask a professional. We would be glad to answer any questions that you may have.

Previously, we discussed North Carolina's tax ranking on The Tax Foundation site. We highlighted the worst states for taxes.

 

Just to recap, the WORST states according to The Tax Foundation were as follows (#1 being the worst):

10. Iowa (Income Tax  8.98%, Sales Tax 6%, Per Capita Property Tax $1,430)

9. Connecticut (Income Tax 6.7%, Sales Tax 6.35%, Per Capita Property Tax $2,580)

8. Wisconsin (Income Tax 7.65%, Sales Tax  5%, Per Capita Property Tax $1,724)

7. Ohio  (Income Tax 5.33%, Sales Tax  5.75%, Per Capita Property Tax $1,140)

6. Rhode Island (Income Tax 5.99%, Sales Tax  7%, Per Capita Property Tax $2,161)

5. Vermont (Income Tax 8.95%, Sales Tax  6%, Per Capita Property Tax $2,197)

4. Minnesota (Income Tax 9.85%, Sales Tax  6.88%, Per Capita Property Tax $1,535)

3. California (Income Tax 13.3%, Sales Tax  7.5%, Per Capita Property Tax $1,426)

2. New York (Income Tax 8.82%, Sales Tax  4%, Per Capita Property Tax $2,338)

1. New Jersey (Income Tax 8.97%, Sales Tax  7%, Per Capita Property Tax $2,896)

 

What are the BEST states for taxes? Here is a list (#1 being the best):

10. Texas (Income Tax  0%, Sales Tax 6.25%, Per Capita Property Tax $1,555)

9. Utah (Income Tax 5%, Sales Tax 5.95%, Per Capita Property Tax $912)

8. Indiana (Income Tax 3.4%, Sales Tax  7%, Per Capita Property Tax $971)

7. New Hampshire (Income Tax 5%, Sales Tax  0%, Per Capita Property Tax $2,518)

6. Montana (Income Tax 6.9%, Sales Tax  0%, Per Capita Property Tax $1,347)

5. Florida (Income Tax 0%, Sales Tax  6%, Per Capita Property Tax $1,369)

4. Alaska (Income Tax 0%, Sales Tax  0%, Per Capita Property Tax $2,077)

3. Nevada (Income Tax 0%, Sales Tax  6.85%, Per Capita Property Tax $1,109)

2. South Dakota (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $1,196)

1. Wyoming (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $2,173)

 

It's important to note how The Tax Foundation arrives at this data. As you can see in the information above, some factors include income tax, sales tax, and per capital property tax. Other factors that are not listed are corporate income tax rates. Rates vary among states and play a role in the determination of ranking. As shown above, Wyoming ranks as number 1 overall, yet has a fairly high per capital property tax rate. Because there are various inputs involved in the calculation, The Tax Foundation does the best they can to weight them and rank with the overall taxes in mind.

 

With all of that being said, North Carolina is not far behind the "best" states ranking at 16 (up from 44).

 

A few important factors that The Tax Foundation does not take into account are quality of life and personal preferences. You should consider all factors when deciding where you would like to be.

 

Topics to consider: Will you own a business? Are you in a young professional, in retirement age, somewhere in between, etc?  What are your interests? Are you purchasing a home in the state? What are your preferences on climate? The Tax Foundation's rankings gives you some insight to the best and worst states from a taxation standpoint, but as you can see, there is much more to it. This type of decision simply cannot be based on taxes alone. We hope you find this information useful.

Previously, we discussed North Carolina's tax ranking on The Tax Foundation site. We highlighted the worst states for taxes.

 

Just to recap, the WORST states according to The Tax Foundation were as follows (#1 being the worst):

10. Iowa (Income Tax  8.98%, Sales Tax 6%, Per Capita Property Tax $1,430)

9. Connecticut (Income Tax 6.7%, Sales Tax 6.35%, Per Capita Property Tax $2,580)

8. Wisconsin (Income Tax 7.65%, Sales Tax  5%, Per Capita Property Tax $1,724)

7. Ohio  (Income Tax 5.33%, Sales Tax  5.75%, Per Capita Property Tax $1,140)

6. Rhode Island (Income Tax 5.99%, Sales Tax  7%, Per Capita Property Tax $2,161)

5. Vermont (Income Tax 8.95%, Sales Tax  6%, Per Capita Property Tax $2,197)

4. Minnesota (Income Tax 9.85%, Sales Tax  6.88%, Per Capita Property Tax $1,535)

3. California (Income Tax 13.3%, Sales Tax  7.5%, Per Capita Property Tax $1,426)

2. New York (Income Tax 8.82%, Sales Tax  4%, Per Capita Property Tax $2,338)

1. New Jersey (Income Tax 8.97%, Sales Tax  7%, Per Capita Property Tax $2,896)

 

What are the BEST states for taxes? Here is a list (#1 being the best):

10. Texas (Income Tax  0%, Sales Tax 6.25%, Per Capita Property Tax $1,555)

9. Utah (Income Tax 5%, Sales Tax 5.95%, Per Capita Property Tax $912)

8. Indiana (Income Tax 3.4%, Sales Tax  7%, Per Capita Property Tax $971)

7. New Hampshire (Income Tax 5%, Sales Tax  0%, Per Capita Property Tax $2,518)

6. Montana (Income Tax 6.9%, Sales Tax  0%, Per Capita Property Tax $1,347)

5. Florida (Income Tax 0%, Sales Tax  6%, Per Capita Property Tax $1,369)

4. Alaska (Income Tax 0%, Sales Tax  0%, Per Capita Property Tax $2,077)

3. Nevada (Income Tax 0%, Sales Tax  6.85%, Per Capita Property Tax $1,109)

2. South Dakota (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $1,196)

1. Wyoming (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $2,173)

 

It's important to note how The Tax Foundation arrives at this data. As you can see in the information above, some factors include income tax, sales tax, and per capital property tax. Other factors that are not listed are corporate income tax rates. Rates vary among states and play a role in the determination of ranking. As shown above, Wyoming ranks as number 1 overall, yet has a fairly high per capital property tax rate. Because there are various inputs involved in the calculation, The Tax Foundation does the best they can to weight them and rank with the overall taxes in mind.

 

With all of that being said, North Carolina is not far behind the "best" states ranking at 16 (up from 44).

 

A few important factors that The Tax Foundation does not take into account are quality of life and personal preferences. You should consider all factors when deciding where you would like to be.

 

Topics to consider: Will you own a business? Are you in a young professional, in retirement age, somewhere in between, etc?  What are your interests? Are you purchasing a home in the state? What are your preferences on climate? The Tax Foundation's rankings gives you some insight to the best and worst states from a taxation standpoint, but as you can see, there is much more to it. This type of decision simply cannot be based on taxes alone. We hope you find this information useful.

"I love paying taxes," said no one ever. It's no secret. We all hate taxes. This is the one thing we can all agree on. My career is dependent upon them, and I will admit, I hate them too. With that said, I do not foresee taxes  going away, so instead of focusing on how much we hate taxes, let's focus on the good news. What IS the good news you ask?

Did you know that NC had the most noted improvement compared to other states and taxes per the Tax Foundation website. We moved from 44 to 16! This is the single largest jump in the history of the index. How did we make this dramatic change?

Our income tax dropped from a multi-bracket system with the top bracket being 7.75 to flat rate of 5.8% in 2014 and 5.75% for 2015. To put this in perspective, California's top income tax rate is 13.3%! All of a sudden, 5.75% doesn't look that bad.

Our per capita property tax is $917. Compare this to New Jersey's $2,896 per capita property tax. Again, not bad at all.

North Carolina state sales tax is 4.75% (not including county). California's is 7.5%.

North Carolina Corporate tax is 5%. Some states are as high as 12% (Iowa).

I will agree that North Carolina has not always been ideal, but we are making strides to at the very least be competitive with other states as far as tax.

Here are some more fun facts. Below is a list of the top 10 worst states for taxes. The tax foundation compares states based on taxes such as income tax, sales tax, per capita property tax, corporate tax, etc.

            1. New Jersey

            2. New York

            3. California

            4. Minnesota

            5. Vermont

            6. Rhode Island

            7. Ohio

            8. Wisconsin

            9. Connecticut

            10. Iowa

Whether you own business assets or a rental home, you have likely heard about depreciation. Depreciation occurs due to the general wear and tear of an asset over the passage of time. The IRS requires that you to take a "depreciation" expense on assets placed into service each year. This expense will offset income just as any other business expense would.

The important thing you should know about depreciation is that if you sell the property or asset for a gain, you are required to calculate the gain but also allocate the portion of the gain attributable to any depreciation recapture.

Depreciation recapture is the procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through the depreciation expense. Because the depreciation expense was ordinary, the tax code requires that the gains be reported as ordinary to the extent of prior depreciation.

Occasionally, clients will ask if they can avoid this by simply not taking the depreciation expense each year. The answer is no. Depreciation must be taken if you are able to take it. When you sell the property, the calculation is using "depreciation allowed or allowable". You will end up being taxed on depreciation recapture even if you did not take it (due to choice or mistake).  

Let's apply this to an example: You have owned the property and have been renting it out for the past few years. It's original cost was $100,000 (ignoring land value). You have depreciated $20,000. It's basis is $100,000 – $20,000 = $80,000. You sold it for $200,000. What is the gain and what portion of that is depreciation recapture?

The gain would be $200,000 (sales price) less the basis of $80,000 = $120,000. Of this $120,000 gain, the first $20,000 is allocated to depreciation recapture and taxed at ordinary income tax rates. The remaining $100,000 would be taxed at capital gain rates.

This matters when you are selling property at a gain and could hit you hard from a tax standpoint if you are not prepared. In scenarios where you think you will be impacted by depreciation recapture, consult with your tax professional to be sure you are prepared.

Uber: Employee or Contract Laborer

It seem like someone has it out for Uber. The company has made the news yet again! I am sure you all have recently heard about the Uber contract labor verses employee controversy. A ruling by California's Labor Commission says that an Uber driver IS an employee and not a contract laborer.

The California's Labor Commission stance was that Uber is "involved in every aspect of operation," from critically examining potential drivers and their vehicles before hiring to setting the rates for trip fares. The Commission continued to state, " Uber controls the tools drivers use, monitors their approval ratings and terminates their access to the system if their ratings fall below 4.6 stars.

Why does it even matter? This issue spans from medical malpractice disputes to payroll tax, workers compensation,  unemployment matters to list a few. From a tax standpoint, a business must withhold and pay payroll taxes on an employee but not a contract laborer. If this sticks, Uber could find itself in quite the tax dilemma.

Is California's Labor Commission right or wrong? Uber has since appealed.

All states can be different, but what does the Internal Revenue Service say? Regarding whether one is considered an employee or contract laborer, the IRS asks the following:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker's job controlled by the payer? (i.e. how the worker is paid whether the expenses are reimbursed, who provides tools/supplies)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.) Will the relationship continue and is the work performed a key aspect of the business?

The IRS continues to say, "Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination."

It will be interesting to see how this one plays out. Whether you agree or disagree with the latest California ruling on Uber drivers, it is very important as a business owner that you know when someone is considered either an employee or a contact laborer. If you have any questions on this, feel free to contact us.

If you have lived in Wilmington, North Carolina for a substantial amount of time, you are familiar with the damage hurricanes can cause. If you suffer damage to your home, you may be able to deduct the losses that you incur.

What is a casualty? A casualty is a sudden, unexpected or unusual event. This could include hurricanes, tornadoes, floods, but also fires, accident, thefts and vandalism. This would not include the normal wear and tear of your home including termite damage.

One other thing to keep in mind, is that if your insurance covers this damage, you must reduce the loss by what was reimbursed.

After determining the loss, you must reduce each instance by $100. If your home got broken into two different times, you would subtract the $100 from each instance. Note, this is not involving pieces of property but actual instances.  You will then reduce the amount of the casualty loss by 10% of adjusted gross income (AGI). AGI is the last number on the first page of your tax return, Form 1040. You will report the loss on Form 4684, but it will flow to Schedule A (itemized deductions). If you do not itemize and this loss is not enough to push you over the threshold to itemize, you will not actually see this loss on the tax return.  If you have suffered casualty losses and need help with the preparation of your tax return, be sure to contact a professional to ensure that you are reporting properly.

One of the bigger changes for 2014 in North Carolina on a personal level was the legalization of "same sex marriage". 

Prior to being married, same sex couples should have filed two tax returns, both filing with "single" status. Now that same sex marriage is legal in North Carolina and if a couple was legally married in 2014, the couple can file together on the federal and state tax return for tax year 2014.

Because the couple is legally married, the filing option of "single" is no longer applicable. There will now be two other choices. The couple can either file as "married filing joint" or "married filing separately". Typically, "married filing joint" is going to be the most beneficial. In fact, depending on the situation, there will likely be a much higher refund in 2014.

Here is a link to the IRS frequently asked questions that we feel is a helpful resource:

http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Same-Sex-Married-Couples

If you have questions pertaining to this topic, please contact us.

I have had numerous people over my career ask me what I thought the most common mistake business owners, particularly start-ups make. The list is short and simple:

1. Not setting up the business properly. This would be from a legal standpoint.

2. Not setting up your accounting systems properly. Whether you use QuickBooks or some other method, be sure that you are organized and using the software properly.

2. Not filing payroll reports/sales and use tax Reports/other misc forms (at all or filing incorrectly). We all know that we need to file a tax return, but you need to be aware of ALL the other forms that your business must file. Here are a few: payroll reports, sales and use tax, business property tax listing, annual report, etc.

What do these all have in common? If you do any one of these three incorrectly, it could cost you much more to correct the problem in the long run. The ONE thing that I urge small business owners to do is seek professional help. You should look at it as an investment. Will it cost you money? YES! Is it worth it? Absolutely.

My recommendation is for the business owners to build a team. You will be in a much better position with a skilled team verses trying to  do it all alone. We are here to either help you and/or to give you referrals if it is something we do not do (i.e. attorney, bookkeeper, payroll provider, bankers, etc).

Affordable Care Act 2014

A very hot topic for both the tax professional and the taxpayer leading into the 2015 year is the Affordable Care Act and how it should be treated on the tax return. To refresh, the Affordable Care Act requires the taxpayer to have one of the following: (1) have minimum essential health coverage, (2) qualify for an exemption, or (3) make an individual shared responsibility payment with the filing of your 2014 tax return.

For the Taxpayer:

Form 1095-A: If you purchased coverage through the Marketplace, the 1095-A will be sent to you showing your coverage. You should receive this by the end of January. You will need to give this to your tax preparer.

Here are a list of additional pages that could be in your 2014 tax return relating to "ACA" (if you purchased health care through the Marketplace):

Form 8962 Premium Tax Credit: This credit helps taxpayers with moderate income afford the health insurance coverage required by the Affordable Care Act. In essence, the  government pays part of the taxpayers health coverage with an advance payment and the taxpayer covers the rest by making monthly premium payments. If applicable, this form will be included in your 2014 tax return and will be where the tax credit is claimed as well as to reconcile those advance payments. If you overpaid, you could get a refund. Whereas, if you underpaid, you may owe additional tax. To reiterate, you would only see this form IF you went through the Marketplace to receive health care coverage.

Form 8965 (will need to be completed for each person in the household). This form is where you would report a coverage exemption granted by the Marketplace or to claim a coverage exemption on the taxpayers tax return. Note: "tax household" would include taxpayer, spouse, dependents, individuals that CAN be claimed as a dependent but that are not (unless they are claimed on another person's return). Household income is taxpayers Modified Adjusted Gross Income and Modified Adjusted Gross Income of dependents (in regards to tax household).

Here are examples of additional questions that your tax preparer may ask:

1. Did you (and your household) have full year coverage?

2. Was the coverage through the Marketplace (the Exchange)?

3. If you have dependents listed on your tax return and they were required to file a tax return, you must list their "Adjusted Gross Income" (AGI).

The new Affordable Care Act health care regulations can be confusing. If you have question, be sure to reach out to your Wilmington, NC CPA or visit healthcare.gov.

If you are a business owner, this blog is for you. This is a reminder that you will need to file a business property tax listing for the county in which you operate in. If you have done this in the past, you should receive a pre-filled out form that you simply need to update. Some of our clients have already started getting their listings in the mail.

If your business was started in 2014, there is a chance you will not be on your county's list. However, if you own a business, you are required to fill out a listing . You should pull the form from your county's website and fill it out. Here is the link to New Hanover County and Brunswick County listing/website:

New Hanover Listing:

http://tax.nhcgov.com/wp-content/uploads/2014/04/Business-Prop-2015.pdf

Brunswick County:

http://www.brunswickcountync.gov/Departments/LandDevelopment/TaxAdministration/PersonalPropertyTaxBusiness.aspx

While each county form looks a little different, they are usually all due by January 31st of each year. They will use this form to assess the business property tax that you owe for the year. You will receive a tax bill around October reflecting your most up to date figures. The bill is usually due in the beginning of the following year.  You can typically apply for an extension through 4/15. 

If you need help filling out your property tax listing or have questions, please let us know.