Will Section 179 Limits Increase for 2015?

Every year, it seems that CPAs and taxpayers are faced with a major tax planning hurdle. What assets should the taxpayer purchase, and how much will be eligible for Section 179 and bonus depreciation? We always get to the last two weeks of December, Senate & Congress finally pass the bill, and then we are scrambling to advise clients on how much they should purchase. And, if the taxpayer has to get financing for the equipment, it can definitely prove to be a stressful last few weeks of the year.

As of January 1, 2015, the Section 179 limit decreased from $500,000 to $25,000. Also, bonus depreciation was eliminated. We all hope and believe that Congress will raise the limit again, as they always do every year, but really we cannot definitely say they will. We’ve seen crazy things happen up there in D.C., so who’s to say that they definitely will do something that historically they have always done? Section179.org presented a petition on October 15 to Congress that requested immediate action for Congress to restore bonus depreciation and to increase the Section 179 limit. Hopefully, this petition combined with all of the other nudges from other concerned parties will speed up the process.

My best advice for now is to stay in touch with your CPA so that you are aware if the limit is increased and can then purchase additional assets to reduce your taxable income. Maybe one day they will sign the Section 179 and bonus depreciation into permanent tax code, but for now we play the waiting game every year.

 

Are Donated Services Eligible for Charitable Deduction?

We have numerous clients that donate services, whether it’s a free photography session donated to a charitable fundraiser event or gift certificates that are donated.  When it comes time to do taxes for the client, we always have to explain that donated services are not tax deductible.

The IRS lists specific contributions that are not deductible.  Specifically, the IRS states that the value of time or services is NOT deductible as a contribution.  The only way to deduct the contribution would be to record the donated service as income and then deduct as a contribution, which provides you no benefit because you have to pick up the contribution as income.  The main reason behind this rule is that cash donations are made with after-tax dollars, but a donation of time and services is not.  So, you earn money, pay tax on it, and then make a cash donation with which you are entitled to receive a tax benefit because you paid tax on the money when you originally earned it.  In the case of a donation of time and services, the time and services were never taxed in the first place, so you should not receive a tax benefit for them.

So, what is eligible as a charitable deduction?  Taxpayers can deduct contributions of money or property made to a qualified organization.  Keep in mind that if you receive any kind of benefit from the donation (such as season football tickets), you cannot deduct the portion of the contributions that represents the value of the benefit you receive.  For example, if you make a $2,000 donation to the Pirate Club and you receive season football tickets, only the portion of the donation above the value of the season tickets would be deductible.  Normally, you will receive a letter that states what portion is deductible or not-deductible, but always keep in mind the rules of deducting charitable donations.

Moving forward, remember that to receive a charitable deduction on your tax return, the donation has to be a contribution of money or property to a qualified charitable organization.  If you do donate time or services, you will not get a tax benefit, but will still get that feel good sensation.

 

Upcoming 2016 and 2017 NC Tax Law Changes

On September 18, North Carolina Governor Pat McCrory signed the new budget into law.  There are quite a few changes that residents of NC will encounter over the next few years due to the new tax laws that were passed.  One of the more pertinent changes is that in 2017, the individual income tax rate will drop to 5.499 percent.

Most notably, there are major changes to sales tax that will impact everyone.  Effective March 1, 2016, NC will begin charging sales tax on repair, installation and maintenance services.  For example, if you have to pay for your car to be repaired or have to pay for installation of appliances, there will be sales tax included.  Contractors that do not sell anything tangible, such as pet care, will not have to charge sales tax.  Now, you will notice that the individual income tax rate does not drop until 2017, but the sales tax rate is changing in 2016, which means that you will not see the tax benefits of these changes until you file your 2017 tax return in 2018.  According to an article in the News & Observer NC budget: More sales tax in 2016, income tax cuts in 2017: “Households making more than $95,000 a year would get an average tax cut of $476, according to legislative projections.  As long as they don’t spend more than $7,000 on taxable services, they’ll see a net benefit from the tax changes.”

Some other important changes with the latest tax laws includes the return of the medical deduction for the 2015 tax year.  In 2013, the tax reform bill eliminated a lot of the itemized deductions allowed on federal returns, including medical expenses.  Also, the corporate income tax rate will drop to 4 percent for the current tax year.

While it is great that the income tax rate is dropping and the medical deduction is returning, I am concerned that the sales tax changes will have a larger impact on consumers.  We will all certainly find out over the next 2 years.

Audit Triggers

What can trigger a tax return to get examined by the IRS?

We don’t know the specific details, but here are some factors that the IRS shares:

1. A high score on The Internal Revenue Service Discriminant Inventory Function System:

The IRS runs tax returns through the Discriminant Inventory Function System. This system assigns a numeric score to each return. If your return has a high score, it is likely you will be selected for an examination.

2. Filed return does not match third party reporting:

Your return could be selected if your filed return does not match what was reported to the Internal Revenue by third parties (1099’s, W-2’s, etc). If you are in doubt, have your tax preparer pull your “Wage and Income Transcripts” from the IRS. This will show you what they have on record.

3. Outside news does not match returns:

Another reason to be selected for an audit by the IRS is if outside information does not agree with a filed tax return. This could be newspaper articles, news stories, public records, etc. We have seen this happen more recently with a reality television celebrity family. If you own multi-million dollar homes and expensive assets, the funds to purchase these things had to come from somewhere.

4. Random Selection.

Number four means that you could do everything that you should and still get selected. The most important thing to do knowing this, is make sure that even if you were to trigger an audit, you have reported all information and it has been done correctly. When you are not sure, you should seek professional assistance.

IRS Telephone Scam

IRS telephone scams are very prevalent this year.  The phone call or voicemail you receive can be scary: “You owe X amount of dollars, and we need payment now” or “we are going to sue/arrest you for the money that is owed.”  If you have received or do receive this phone call in the future, first off know that everything is OK.  You are the victim of a scam.

So, what do you need to do if you have received this message?  Really, nothing.  You definitely can call your tax preparer to confirm that you are in good standing with the IRS, if you are not already sure.  You can always call your tax preparer for moral support and assurance, too.

Rest assured that this is not going to be the first method of contact from the IRS.  You will always receive a notice in the mail from the IRS if there is an issue with your tax return, or if you owe money.  In fact, you will probably receive a few notices.  If you do receive a phone call from the IRS, they will never demand that you give them bank account information, and they will not threaten to sue you.  They will discuss what the next actions on their end will be: it could be a levy of your bank account or wage garnishment.  The IRS could discuss setting up a payment plan with you.  If you do receive a phone call, do not give your social security number over the phone, ever.   They should already have this information.

For more information on the IRS telephone scam, you can check out the following article:

Phone Scams Continue to be Serious Threat, Remain on IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

Rental Properties and Taxes 101

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.

I Love Paying Taxes Said No One Ever

“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

Affordable Care Act (ACA) Upheld

The Affordable Care Act (often referred to as Obamacare) was upheld by the Supreme Court in a 6-3 vote last Thursday. Chief Justice John Roberts stated in the majority opinion “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. This strengthens, if not decides, the likelihood that the Act will continue on even after President’s Obama departure from office in 2017.

Obamacare was met with mixed emotions with many believing it raised costs for middle-class Americans and small businesses. We saw firsthand individual mandate costs surprising many clients who underestimated their income on the health insurance marketplaces. Understatement of income led to an advance premium tax subsidy (or credit) that was required to be paid back in part or in full when income came in higher than expected. Others accepted the penalty and knowingly forewent health insurance this year since the penalty was significantly less than the cost of their increased coverage costs. Going forward this penalty will not be referred to as a mandate, but a tax for those that opt out of health insurance.

Whether you support the ruling or not, there are health insurance compliance items that are now parts of the individual income tax return. Everyone who received an insurance plan through the health insurance marketplaces should have received a Form 1095-A reporting the details of their coverage. This form is used to file Form 8962 on the individual income tax return which calculates the amount of premium tax credit allowed. If you received health insurance through the marketplace, please review your 2014 return to make sure this form was filled out. We have already had inquiries from individuals who did not use a professional tax service that omitted this form on their tax return and received an IRS notice. We recommend if you choose to use the available health insurance marketplace to estimate income conservatively. Like with income tax withholding and estimated tax payments, severely underpaying for health insurance throughout the year can lead to an unwelcomed surprise during tax filing time.

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.

Accomodation and Occupancy Tax

When purchasing a rental property it is important to decide whether you plan on renting to someone long term or for short term vacation rentals. A lot of times the type and location of the property will make this determination for you. However, there are different state and county tax implications for both. The North Carolina Department of Revenue requires an accommodations tax to be charged, withheld, and remitted to the state for all rental properties unless they meet the following two common exceptions:

(1)    Private residence or similar accommodation that is rented for fewer than 15 days in a calendar year if not listed by a real estate broker or agent

(2)    Private residence or similar accommodation rented to the same person for a period of 90 or more continuous days

The accommodations tax is equal to the applicable sales tax for the county where the rental property is located. For example, a Carolina Beach condo would need to collect and remit 7% sales tax on short term vacation rentals that do not meet the above exceptions. The requirements for how often these taxes need to be remitted and when can be found here:

http://www.dornc.com/taxes/sales/frequency.html

In addition to the accommodations tax, each county and/or city can charge a separate occupancy tax. In New Hanover County the occupancy tax is 6% for short term rentals. The county specifies a short term rental as “less than 90 days in a hotel, motel, beach house, condo, corporate apartment or other such short term rental”. The form for this tax remittance can be found here:

http://tax.nhcgov.com/wp-content/uploads/2014/04/occupancy-report-filing-document.pdf

This means that for the above Carolina Beach condo 13% needs to be tacked onto the rental rate and remitted to the state and county on each rental property that do not meet the above exceptions. This information is not only useful for rental property owners, but when looking at vacation spots factor in the local taxes. You may be hit with a surprising addition to your rental price!