Blog Posts

Tax Tips: Don’t Forget to Claim your Energy Efficiency Tax Credits

Tue, 28 Jan 2025 20:56:12 +0000

Energy efficient home improvement credit.

Don’t overlook any home energy efficiency you made in the year.

The nonbusiness energy property credit is now the “energy efficient home improvement credit” is divided into two sections:

1. qualified energy efficiency improvements, and

2. residential energy property expenditures.

On Tax Form 5695, a 30% credit, up to a maximum of $1,200, may be allowed for new (not used) “qualified energy efficiency expenditures” on your “main” home (house, houseboat, mobile home, cooperative apartment, condominium) located in the USA for the following:

• Insulation material or air sealing material or systems;

• Exterior doors;

• Windows and skylights;

• Central air conditioners;

• Natural gas, propane or oil water heaters;

• Natural gas, propane or oil furnaces or hot water boilers;

• Improvements or replacement of panelboards, subpanelboards, branch circuits or feeders; and

• Home energy audits.

Heat pumps and heat pump water heaters, biomass stoves and biomass boilers have a separate annual credit limit of $2,000.

You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, battery storage technology, and fuel cell property.

Refer to instructions on Form 5695 for further details.

If you would like to learn more or to set up a consultation, call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

Maximizing Tax Benefits and Liability Protection for Rental Properties with LLCs

Wed, 05 Jun 2024 14:54:02 +0000

If you're a landlord renting out properties, understanding how the IRS classifies your rental property for taxes is crucial. Essentially, there are two categories: investments and businesses. Knowing this helps ensure you claim the right deductions.

Here's a breakdown:

Investment Rental Properties: Typically, if you're not actively involved in managing the property and mainly rely on rental income for bills, it's considered an investment by the IRS. However, proving continuous management involvement can shift this classification to a business.

Business Rental Properties: Your property qualifies as a business if it generates profits and you're actively involved in its management, even if you hire help like property managers. If you do consider the rental a business, you may have social security and medicare taxes to pay.

Residential Rental Properties: These are properties leased to tenants for residential use, regardless of type (e.g., single-family homes, apartments). To be considered residential, it must be a dwelling unit and under a lease agreement with third-party tenants.

IRS 80% Rule: Residential properties should derive more than 80% of revenue from dwelling units to be classified as such, ensuring compliance in mixed-use buildings.

Depreciation: A significant tax advantage for residential rental properties is depreciating the property's cost annually, including certain items like appliances and furniture.

Vacation Homes: IRS categorization depends on rental days versus personal use. Less than 14 days rented makes it tax-free; more than 15 days deems it a residential rental property.

Business Structures: Landlords may operate under various structures like sole proprietorship, general partnership, estate, limited liability company (LLC), or tenants in common, each with distinct legal and tax implications.

Tips for Business Conversion:

Maintain separate records for each property.
Ensure at least 250 hours annually of property-related work.
Keep detailed time reports.
Consider real estate and business education.
Choose partners wisely for complementary skills.
Hire assistance to meet business activity requirements.

Owning rental property can be complex, especially when navigating tax implications. Understanding these distinctions can optimize deductions and maximize returns during tax season.

Now, let's explore how forming a limited liability company (LLC) can enhance tax benefits and provide liability protection for your rental properties.

What Is an LLC? An LLC, or limited liability company, offers owners personal asset protection by shielding their assets from the liabilities of the business. This business structure is regulated at the state level, so it's crucial to research specific requirements for your location.

Using an LLC for Rental Properties Utilizing an LLC for rental property management provides several benefits, including:

Creating a separate business bank account to streamline financial transactions.
Accessing broader tax deductions, such as maintenance and repairs.
Contracting work under the LLC to improve tax deductions and limit personal liability.
Better management of operations by formalizing roles like property manager and maintenance staff.

Setting Up the Rental Property After Registering After registering your LLC, follow these steps to set up your rental property effectively:

Transfer the property title into the LLC's name to establish legal ownership.
Update insurance policies to reflect the LLC as the property owner and protect against unforeseen events.
Open a dedicated LLC bank account to maintain financial separation.
Revise lease agreements to indicate the LLC as the landlord for clarity and compliance.
Ensure compliance with local and state regulations and maintain detailed records for the LLC.

How Is Rental Income Taxed in an LLC for Rental Properties? Rental income in an LLC is typically considered pass-through income, meaning it's reported on owners' personal tax returns rather than being taxed at the entity level. LLC owners can deduct various business expenses related to rental properties, such as mortgage interest, property taxes, and maintenance costs.

Maximizing Tax Benefits While rental property owners can't legally avoid paying taxes, there are strategies to minimize tax liabilities, including:

Utilizing a 1031 exchange to defer capital gains taxes by reinvesting proceeds into another property.
Qualifying for a qualified business income deduction, which can cover up to 20% of rental business income.
Consulting with tax professionals to identify additional deductions and tax-saving strategies.

Best Practices for Managing Your Rental Property LLC Implement these best practices to effectively manage your rental property under an LLC:

Maintain rigorous financial records with separate accounts for the LLC to ensure transparency and simplify tax preparation.
Regularly review the operating agreement to ensure compliance with current laws and regulations.
Obtain adequate insurance tailored to rental properties to protect against unforeseen events and liabilities.
Stay compliant with local and state regulations to avoid fines and legal challenges.
Consult with tax professionals familiar with real estate and LLCs to optimize tax benefits and ensure compliance with IRS regulations.
Implement time-saving practices like utilizing landlord software to streamline property management tasks.

Commonly Asked Questions About LLCs for Rental Properties Here are answers to some frequently asked questions about using LLCs for rental properties:

Any landlord can benefit from creating an LLC, especially if multiple owners or properties are involved.
It's preferable to create an LLC before purchasing a rental property to avoid complications with title transfer and financing.
To transfer title to the LLC, create a quitclaim deed and file it with the county clerk's office.
Transferring a property into an LLC may affect existing mortgages, potentially leading to changes in interest rates or loan terms.
Costs associated with creating an LLC vary by state and may include filing fees, publication fees, and annual franchise taxes.
Ongoing costs may include annual franchise taxes and state registration fees.
Choose a unique and relevant name for your LLC, often based on the property address, and ensure it's available in your state.
While umbrella policies provide additional coverage, they may not offer the same level of asset protection as an LLC.

In summary, forming an LLC for your rental property can provide significant tax benefits and liability protection. By following best practices and consulting with professionals, landlords can maximize the advantages of LLC ownership while effectively managing their rental properties.

you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

TAX TIPS: 199A Business Tax Reduction Strategies By Dec. 31, 2022

Wed, 20 Dec 2023 17:15:24 +0000

The Tax Cuts and Jobs Act gave many taxpayers a 20 percent Section 199A deduction based on your defined qualified business income (“QBI”) from a qualified trade or business operated in the USA as a sole proprietor or through a pass-through entity (i.e., S-Corp. and Partnerships) and other specific qualified QBI sources. In general, total taxable income in 2023 tax year must be under $364,200 for joint 1040 filers and $182,100 for all others before phase-in limits start. Reducing your business income with tax planning also reduces your 199A deduction because the twenty percent deduction comes from your QBI and as one reduces so does the other. This leads to some strategies you can use to maximize your section 199A deductions.

Below are three strategies to reduce your taxable income so that you qualify for a higher 199A deduction (i.e., reporting taxable income under the QBI thresholds):

Harvesting Capital Losses- Taxable income less the capital gains is what sets the upper limit of your deduction so if those capital gains are working against your deduction you can harvest losses to offset the gains.

Charitable Contributions- Who doesn’t like charity? Charitable contributions increase your itemized deductions and reduce your taxable income. Some tips for this are to donate appreciated stock or to prepay your planned 2023 donations.

Buy Assets- If you buy an asset before December 31, 2022, you can use 100 percent bonus depreciation with Section 179 (2023 max Section 179 deduction is $1,160,000) expensing to write off the entire cost of most purchased assets. This reduces your taxable income but can also increase your section 199A deduction as well if your calculation includes unadjusted basis in qualified property (UBIA)

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

Paying Your Family

Tue, 24 Oct 2023 15:26:38 +0000

Understanding your tax situation is always important for both taxpayers and employers. Employee’s tax situation changes when working with a family member, whether it be spouses running a business together or a child working at a family business. The tax implications depend on the relationship of the family members and the type of business.

Married people in a business together

Wages for someone who works for their spouse are subject to income tax withholding, Social Security and Medicare taxes, but not FUTA tax if they are organized as a business (filing Schedule C on their 1040 tax return) and not a corporation, estate or partnership.

Children Employed by their parents

In the case of a child working for their parents’ sole proprietorship or a partnership of both parents, the child’s tax situation depends on the age of the child.

A child of any age is subject to income tax withholding
Children 18+ are then subject to Social Security and Medicare taxes
Wages paid to a child 21+ become subject to Federal Unemployment Tax Act (FUTA)

If however, the business is instead a corporation, estate, or a partnership in which only one or none of the partners are the child parent then the child’s wages are subject to all the above except FUTA taxes regardless of their age.

Parents employed by their child

The tax implications of the parents’ wages depend on the business type.

If the business of the child is a sole proprietorship the parents’ wages are subject to income tax withholding, Social Security and Medicare taxes, but not FUTA tax.
If the business is a corporation, partnership, or estate then the parents’ wages are subject to income tax withholding, Social Security and Medicare taxes, and FUTA tax.

If the parent is performing nondomestic services for the child but not for the child’s business then the parents’ wages are not subject to Social Security and Medicare taxes. The wages are not subject to FUTA tax regardless of the services provided.

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

College Savings & Affordable On-Line Learning

Tue, 24 Oct 2023 15:28:53 +0000

Below are two web-site links to resources for students and parents. The first covers 529 plans and the benefits of early college savings using other options.

The second link includes a collection of resources to help students find affordable online flexible and cost-effective learning options.

College Savings & 529 Plans:
http://www.affordablecollegesonline.org/financial-aid/529-college-savings-plan-online-guidebook/

Find Affordable Online Colleges:
http://www.affordablecollegesonline.org/

MARLIES Y HENDRICKS CPA PLLC does not endorse any of these articles or confirm their accuracy. If tax planning or tax preparation services are required, contact us at 716-694-3500 or 910-769-8730 for an appointment.

Thinking about Moving? States With the Lowest Tax Burden!

Tue, 24 Oct 2023 15:26:06 +0000

Over the last year, prices have been rising, and the effect of taxes on your paycheck and life may have been more stressful than usual. Due to this, many people have been looking into the tax differences between states and moving around the country.

Though you may know of the seven states that gain fame from having no state income tax, there are other state taxes to consider when looking for the lowest individual tax. These include property, state and local taxes, and sales taxes. If you have been looking into which states are best to lighten your tax burden, here are some of the lowest tax-burdened states and their estimated average tax rates.

6. Florida

Individual income tax: 0%

Property tax burden: 2.77% (23rd lowest)

Total sales & excise tax: 3.87% (35th lowest)

Overall tax burden: 6.64%

5. New Hampshire

Individual income tax: 0.14% (9th lowest)

Property tax burden: 5.11% (3rd highest)

Total sales & excise tax: 1.16% (2nd lowest)

Overall tax burden: 6.41%

4. Wyoming

Individual income tax: 0%

Property tax burden: 3.32% (15th highest)

Total sales & excise tax: 3.00% (16th lowest)

Overall tax burden: 6.32%

3. Delaware

Individual income tax: 2.20-6.60% (graduated) (3.28% avg. 7th highest)

Property tax burden: 1.77% (5th lowest)

Total sales & excise tax: 1.17% (3rd lowest)

Overall tax burden: 6.22%

2. Tennessee

Individual income tax: 0.06% (8th lowest)

Property tax burden: 1.71% (2nd lowest)

Total sales & excise tax: 3.98% (14th highest)

Overall tax burden: 5.75%

1. Alaska

Individual income tax: 0%

Property tax burden: 3.54% (11th highest)

Total sales & excise tax: 1.52% (5th lowest)

Overall tax burden: 5.06%

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

How Does Working in a New Location Affect Your Tax Home?

Tue, 24 Oct 2023 15:24:55 +0000

A person’s “tax home” is where they choose to live in order to work. Married couples can have more than one tax home, depending on where their jobs are located. If a taxpayer has to travel away from their tax home in order to work, their expenses, to a degree, will be deductible. However, if a taxpayer chooses to live further away from their place of work, those commuting expenses to and from work are not allowed to be deductible.

There are instances where a taxpayer has already established a tax home in one location, but is offered a long-distance job. The ruling on this to allow travel expenses to be deductible is that the job must be temporary, meaning that “If employment at a work location is realistically expected to last…for 1 year or less, the employment is temporary.” This means that expenses could be deducted provided that the work is subject to end within a year’s time limit.

There is also a difference between the “temporary” job and the “uncertain” job. If a taxpayer accepts a job outside their current tax home with the knowledge that the job will only last a maximum of a year, that job can be considered temporary. However, if a taxpayer is only accepting work outside of their tax home on a “temporary” basis because they are uncertain of the job market and do not wish to commit to moving, that is not considered a temporary job, and the expenses will not be deductible.

Couples should consider this when purchasing homes, and accepting positions to cut down on their expected expenses.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

2023 IRS Changes for Car and Truck Depreciation Limits

Tue, 24 Oct 2023 15:21:44 +0000

Every year the IRS issues an inflation-adjusted update to the depreciation limits for passenger automobiles placed in service for that year. These limits are updated for the inflation according to the automobile component of the chained consumer price index. Here are the changes made for the 2023 tax year:

For vehicles in which bonus first-year deprecation applies, the depreciation limit is $20,200 (increased from $19,200) for the first tax year, $19,500 (increased from $18,000) for the second tax year $11,700 (increased from 10,800) for the third tax year; and $6,960 (increased from $6,460) for each following year.

For vehicles in which bonus first-year deprecation does not apply, the depreciation limit is $12,200 (increased from $11,200) for the first tax year; $19,500 (increased from $18,000) for the second tax year; $11,700 (increased from $10,800) for the third tax year; and $6,960 (increased from $6,460) for each following year. These changes are shown under Sec. 280F(d)(7).

Deductions on the cost of leasing automobiles is limited under Sec. 280F(c) where the limitation is calculated using the formula and tables directed under Regs. Sec. 1.280F-7.

https://www.irs.gov/pub/irs-drop/rp-23-14.pdf

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

Real Estate Tax Tips

Tue, 24 Oct 2023 15:20:36 +0000

Many people do not know that you may qualify to have all or part of any gain from the sale of your main home to be excluded from your income. It is important your main home is the home you live in most of the time.

To qualify and claim the exclusion you must meet certain requirements. These are:

- that you must have owned the home for at least 2 years, and

- that you lived in the home as your main home for at least 2 years.

Both conditions must happen during the 5-year period ending on the date of the sale.

Once you know you qualify, you can exclude up to $250,000 of the gain from your main home from your income if your filing status is single, married filing joint or head of household. You may exclude $500,000 gain from your income if your filing status is married filing joint and widow.

This means that you do not have to report the sale of your main home on your tax return unless you have a gain in the sale and cannot exclude all of it or choose not to exclude all of it. If you have a loss on your principal residence (main home), you cannot use this as a deduction on your tax return.

You may only exclude up to a maximum of $250,000 or $500,000 depending on your filing status on your main house. If you have a secondary house, these exemptions do not apply in whole or part. You must report the sale and any capital gain or capital loss on the secondary house regardless.

If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

The above information is of a general nature only and should not be relied upon for specific situations.

First Time Home Buyers Tax Tips

Tue, 24 Oct 2023 15:19:21 +0000

The House of Representatives added an exception to the tax law 72(t) penalty, which changed to allow qualified first-time home buyers to withdraw up to $10,000 from their IRA without being penalized.

The key take- away here is that taxpayers can only make an early withdrawal (before age 59 ½) from an IRA up to $10,000 to use towards their first- time home with incurring a 10% tax penalty.

This specification was later clarified in the 2015 court case: Lily Hilda Soltani-Amadi and Bahman Justin Amadi v. Commissioner. To assist in paying for their new home, Ms. Amadi made an early withdrawal from her 401(k) plan. The court determined that had they withdrawn from an IRA they would have been penalty free. However, an early withdrawal from a 401(k) requires a 10% penalty. Judge Armen summarized the issue by stating, “Congress chose to grant relief… for distributions from IRAs but not for distributions from other qualified plans, such as a section 401(k) retirement plan.”

In short, if you decide that it is in your best interest to withdraw money from your retirement plan to help pay for your first home – ensure that you are withdrawing from an IRA; the no 10% penalty relief granted by Congress, does not extend to any other retirement plan.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.

Charitable Contributions and State and Local Tax Credits New Regulations

Tue, 24 Oct 2023 15:17:57 +0000

New regulations imposed by the US Department of the Treasury and the Internal Revenue Service now require taxpayers to reduce their charitable contribution deduction by the amount of state and/or local tax credits they receive. Taxpayers may also treat any payments made as credits.

As part of the new regulations, taxpayers making charitable payments to entities that can receive tax-deductible contributions must reduce their federal deduction amount by the amount of state or local tax credits they receive in their return.

An example of this would be if a state grants a 70 percent credit for charitable contributions and a taxpayer contributes $1,000 to an entity, the taxpayer will receive $700 as a state tax credit. In order to itemize deductions, the taxpayer needs to reduce the $1,000 federal charitable contribution by the state tax credit of $700, which leaves a federal charitable contribution deduction of $300.

There are exceptions for the state tax deductions and tax credits that do not exceed 15 percent of the amount transferred. If a taxpayer receives a state tax deduction of $1,000 for a contribution, they are not required to reduce their federal contribution in order to account for the state tax deduction. Also, if a taxpayer makes a $1,000 contribution it is not required for them to reduce their contribution if the state tax credit is no more than $150.

The IRS also is providing a safe harbor for taxpayers who itemize deductions by allowing them to treat payments that will be disallowed as charitable contribution deductions. For those who have already filed may be able to claim a great deduction by filing an amended return if they have not yet claimed the $10,000 maximum ($5,000 for married filing joint).

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

New Connecticut Pass-Through Entity Tax

Tue, 24 Oct 2023 15:14:15 +0000

Connecticut enacted a new pass-through entity (PET) income tax that is taxed at the top personal income tax rate and is offset by a credit at the personal or corporate income tax rate.

This new tax requires pass-through entities to pay at the entity level. This is Connecticut’s way of providing relief from the $10,000 federal limit that is imposed on state and local tax deductions.

The PET tax is imposed on partnerships, S corporations, and LLCs. There are several ways to calculate the PET, and those are as follows:

Separately and non-separately computed items under the IRC
Derived from or connected to Connecticut sources as determined by the sourcing rules that are currently applied to the Connecticut income tax
Adjusted by applicable Connecticut state modifications
Multiplied by 6.99%

If the calculation results in a loss, the entity may carry forward until it is utilized fully.

Credits and Overpayments

All those, whether individuals or corporate members, of affected business entities are entitled to have an offsetting credit against their respective taxes. The credit is 93.01% of the member’s direct and indirect pro rata share of the tax paid. Any portion of the credit that exceeds the tax liability is then treated as an overpayment.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Can the IRS Tax a Loan?

Tue, 24 Oct 2023 15:13:03 +0000

Is a loan taxable by the IRS?

In short, no. This is due to the fact that when you receive a loan, it is expected to be paid back. With that being said, there are three main avenues for taxation when it comes to “loans” – income, sales, and gift tax.

First and foremost, a loan must be legitimate by legal standards. This means that a loan agreement needs to be in place to detail exactly what is given and expected in return. This is true for loans received from the bank, as well as those from friends or family.

Whether or not the loan is from the bank or a third party, if the loan were to be forgiven the debt owed on your loan would then be taxable as a Cancellation of Debt Income (COD Income). Once the loan is forgiven, you will normally receive Form 1099-C reporting the income to you, and this gets reported on your personal income tax return.

What about taxing a loan as a sale?

Could the IRS claim that the proceeds from a loan are actually proceeds from a sale instead? In certain cases, yes, and to avoid such implications, it is imperative to ensure that all transactions between affiliated parties are properly structured. This includes, but is not limited to: legal titles, parties’ intent, and treatment of transactions by involved parties.

Additionally, there are certain times when loans can be considered for the “gift tax”, in which case any money received as an intended loan could be taxed as a gift. Usually the gift tax is applied when loaning or receiving money from family members. It is best to avoid these types of transactions in order to bypass any taxation.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Reasonable Cause and Abatement

Tue, 24 Oct 2023 14:37:24 +0000

Reasonable cause. A term coined by the IRS giving taxpayers a legitimate chance of reducing tax debt or, in some cases, canceling outstanding penalties and interest. The IRS will consider any “sound reason” for failure to file, deposit, or pay tax by a deadline as “reasonable cause”.

According to the IRS, reasonable cause is typically seen as: death, fire, natural disaster, and serious illness. While these are the most common reasonable cause cases, they are not the sole instances. The IRS will look at any case which “…establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so” and will classify it as reasonable cause (per IRS.gov).

Tax practitioners utilize a technique known as “penalty abatement” to prove that their client did in fact have reasonable cause for missing tax payments. The practitioner must make it evident to the IRS that as a result of reasonable cause, the taxpayer was delayed or unable to make their tax payment or meet their tax filing requirement. When making this argument, it is helpful to keep in mind that the IRS is more forgiving to those with failure to pay penalties, rather than failure to file penalties.

For more information regarding the reduction of IRS Penalties click here to read an article by CPA Magazine.

For the IRS Penalty and Intrest Manual click here.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Minimizing Taxes for Selling a Business

Mon, 23 Oct 2023 16:33:04 +0000

When selling a business, how the deal is structured is just as important as the selling price. There are three different ways to structure a sales transaction: asset sale, stock sale or stock sale with a Section 338(h)(10) election.

Asset Sale

The seller maintains legal ownership of the business entity, while the buyer acquires negotiated assets, including equipment, inventory, customer lists, and so on. Normally, the seller’s cash or long-term debts are not included in an asset sale.

This type of sale is what buyers are more inclined towards due to the fact that they can control their liability exposure and create potential tax savings. The buyer will set up a new entity to acquire the seller’s assets, which means that they are not assuming any of the potential liabilities. The buyer also records the acquired assets at the agreed-upon sales price instead of the seller’s depreciated basis.

For a seller, this option could put them at a disadvantage, especially depending on the business type. If the business is an S Corp, partnership, or LLC any assets that have depreciated are now subject to depreciation recapture if they are sold at a gain. This means that instead of being taxed at a 20% capital gain rate, assets that were sold at a gain are now taxed at the 25% capital gain rate. C Corps could be subject to double taxation because the business is taxed on any gains from the sale, and the shareholders are also taxed on any proceeds they receive once the corporation is liquidated.

Because the buyer is gaining the benefits of reduced income taxes and increased annual cash flow, the seller could anticipate a higher sales price, which is why this structure is highly favorable.

Stock Sale

With this sales structure, the buyer purchases business equity, such as shares of stocks or partnership interest. Depreciation recapture can be avoided using this method because the exchange is occurring between the buyer and the business owner instead of the entity itself.

The buyer takes on all liabilities of the selling company, which could include liabilities where exact amounts are not known or recorded on financial statements. All assets acquired by the buyer will also avoid the additional depreciation expense.

Typically, sellers benefit from this structure more because it increases the seller’s net proceeds by reducing their tax obligation.

Stock Sale with Section 338(h)(10) Election

This is a combination of both Asset and Stock sales. The buyer acquires the business entity, but it is treated as an asset sale for legal purposes. The business is deemed to have sold all its assets, liquidated, and distributed the proceeds to the owners under this model.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Should I Amend a Tax Return?

Mon, 23 Oct 2023 15:58:39 +0000

Discovering a mistake was made on a tax return may cause panic and fear of ramifications from the IRS, however to err is human, and if appropriate action is taken then there is usually little to no cause for concern.

If a tax return has been filed and includes an error there is the option to file an amended return. Errors could be due to simple miscalculations, incorrect information on W-2, 1099 or other tax form, or even receiving a tax form after filing. However, some errors don’t always warrant filing an amended return.

If a form or schedule was not included with the return the IRS will send a notice informing you of the missing item in the mail, remember they will never call you!

If there is a simple math error the IRS will make the correction and will adjust taxes owed or refund amount.

Errors that DO need to be corrected with an amended return include:

-incorrect filing status

-income total

-deductions and credits

-number of dependents.

If you are expecting a refund or credit with the amended return it must be filed within 3 years of the original filing date, or 2 years after you paid the tax, whichever is later. It should be noted that if taxes are owed, penalties and interest will be calculated after filing the amendment by the IRS and/or state.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

1031-Like-Kind Exchanges

Mon, 23 Oct 2023 15:59:34 +0000

A 1031 exchange, also referred to as a like-kind exchange, is a means of deferring taxes by ‘swapping’ one business or investment property for another. As the IRC section 1031 (a)(1) states:

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”

As of January 1, 2018, like-kind exchange rules now ONLY apply to real estate. They no longer apply to other property such as personal property. Therefore any “exchange” of personal property will be treated as a “sale”.

While this exchange can be extremely beneficial for an investor it can be complicated to navigate due to strict rules enforced by the IRS to ensure that the transaction stays within the 1031 guidelines.

There is no limit on how many times one may “exchange” their property or how frequently they can do so. It is possible for an investor to keep rolling over property, and will not have any tax implications until the property is eventually sold for cash.

The term ‘like-kind’ seems straightforward, but the types of property that qualify for an ‘equal’ exchange is fairly broad. While they do not have to be identical, for example an investor may exchange a multi-family residence for a single-family residence or an office building for a shopping center, they must adhere to the “productive use in trade or business” rule. If the property is for personal use, like your residence, then it does not qualify. Whether the personal property is used predominantly in the United States and/or personal property used predominantly outside the United States neither are like-kind properties.

Property held “primarily for sale” also cannot be exchanged, meaning if you were to purchase a home as a fixer-upper with the intent to sell it immediately after it will qualify you as a “dealer”. Partnership shares, corporate stocks, bonds, and the like are also exempt.

There is also a specific time-frame in which the transaction must take place. If an exchange does not happen simultaneously it can be delayed, which is often the case as it may not always be easy to find another property that meets the needs & wants of the investor at a similar price. A delayed exchange is handled by having a qualified intermediary who “holds” the cash from the sale and then uses it for the purchase once the replacement property is found. During this delay the IRS requires that the replacement property be identified in writing to the intermediary within 45 days from the sale of the original property. The acquisition must be completed within 180 days of the sale.

Use Form 8824: “Like-Kind Exchanges” when filing your tax return.

This just scratches the surface of 1031 exchanges and there may be other factors that could come into play depending on the particular situation. Having a knowledgeable CPA on your side to help navigate 1031 exchanges is very important.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Hobby vs Business

Mon, 23 Oct 2023 15:57:36 +0000

In today’s technology driven age many Americans are taking advantage of being able to share with the world their hobbies. Websites like eBay, and even Facebook allow users to sell their own handmade goods and help turn their past times into profits. While many people don’t rely on this as their main source of income there are certain things to know when it comes to the tax implications of what the IRS considers a hobby or a business. The IRS defines a hobby as an activity that is not pursued for profit, where as a Business is an activity that is carried out with the reasonable expectation of earning a profit. For each activity the tax considerations differ, so it is important to know which activity you are engaging in. Almost all sources of income must be reported and taxes paid, but when it comes to deductions each have their own tax implications.

The following criteria will help you understand which category you fall under:

Do you depend on the income from the activity?

Does the time and effort put in indicate an intention to make a profit?

If there are losses, were they beyond your control or did they occur in the start-up phase?

Have you changed methods of operation in order to improve profits?

Do you, or your advisors, have the knowledge to continue the activity as a successful business?

Have you made a profit with similar activities in the past?

Have you made a profit with this activity in some years?

Can you reasonably expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS will look at several factors to decide if your hobby is for pleasure or business purposes. The primary factor is the profit test. If you have made a profit during at least three of the last five tax years, including the current year, then the IRS presumes that you have engaged in this activity for profit. Once deemed business activity you can deduct ordinary and necessary expenses for operation.

If the activity is not for profit, any losses may not be used to offset other income and you may only deduct expenses up to the amount of income earned from the hobby.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Converting home to rental

Mon, 23 Oct 2023 15:56:29 +0000

Q: "I have a home that I cannot sell, so what value do I use if I convert this to a rental?"

A: When property is converted from personal use to business use,you will need to determine what the fair market value is as of date you make this home available for rent (start advertising). You will also need to calculate what your adjusted basis of the home is as of this conversion date. This means you will include the purchase price and add any improvements over the years the home was your residence (add the cost of decks, new roof, windows, additions, driveways, pool, etc.). The new basis to start depreciation on your rental will be the lower of these two values and depreciated over 27.5 years.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax accounting services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Political Contributions

Mon, 23 Oct 2023 15:55:22 +0000

Q: I paid $500 for my favorite politial party. Can I write this off as a donation?

A: Unforutately political contributions are not tax deductible as itemized deductions on Schedule A of your 1040 as charitable donations or as an itemized deduction subject to the 2% threshold.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information. Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Due Dates for Business Returns-Tax Years Beginning After Dec 31, 2015

Mon, 23 Oct 2023 15:50:58 +0000

Revised due dates for partnership and C corporation returns: Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the December 31st year-end must file their returns by March 15th of the following year. The partnership return using a December 31st year-end will be due April 15th following the year-end.

Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, effective for returns for tax years beginning after Dec. 31, 2015 (i.e., for 2016 tax year returns filed in 2017):

• Partnerships and S corporations will have to file their returns by March 15th (vs. April 15th previously for partnerships) after their Dec 31st year-end.

• C corporations will have to file by the 15th day of the fourth month after the end of the tax year. However, under a special rule for C corporations with fiscal years ending on June 30th, the rule change won't apply until tax years beginning after Dec. 31, 2025 (still keep 75 days after year-end as their due date).

Revised automatic extension rules for corporations: effective for returns for tax years beginning after Dec. 31, 2015, the three-month automatic extension of time for corporate returns in Code Sec. 6081(b) is changed to an automatic six-month extension (this change conforms the statutory rule with the six-month automatic extension for corporate returns in Reg. § 1.6081-3(a)).

However, for any return for a tax year of a C corporation which ends on Dec. 31st and which begins before Jan. 1, 2026, the automatic extension period is five months (not six months). And, for any return for a tax year of a C corporation which ends on June 30th and begins before Jan. 1, 2026, the automatic extension period is seven months (not six months).

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional corporate accounting services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Husband & Wife Joint Business

Mon, 23 Oct 2023 15:49:34 +0000

An unincorporated business jointly owned by a married couple is generally classified as a partnership (filing Form 1065) for Federal tax purposes.

If the business is not an LLC, the married couple can elect to be taxed as a qualified joint venture file on their joint tax return (Form 1040) provided they are both materially participating in the business and their are no other partners. This election requires that husband and wife each file their separate business statement reporting the divided income and expenses attributed to each spouse on two separate Schedules (C or F) with separate Self employment tax (SE Tax) Schedules.

Spouses with a rental real estate business not otherwise subject to self-employment tax must check the box on Line 1 of Schedule C and should not file Schedules SE related to the rental real estate business.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional business tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Start-up and Organization Costs

Mon, 23 Oct 2023 15:47:05 +0000

Start-up costs are business costs that are incurred for training, travel, professional services, market surveys before the business start date.

Organization costs are amounts paid or incurred to create a corporation or partnership business entity before the entity starts.

The first $5,000 of start-up costs and the first $5,000 of organization costs can be deducted in the year incurred. The deduction is phased out dollar-for-dollar when start-up costs or organization costs exceed $50,000. The remaining amounts are amortized over a 180 month term, starting with the month the active trade or business begins.

The above information is of a general nature only and should not be relied upon for specific situations.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.

Owners or users of any virtual currency

Mon, 23 Oct 2023 15:44:27 +0000

Virtual or digital currency, such as bitcoin, is not new. What is new is Notice 2014-21, where the IRS states that this convertible currency should be treated as property for tax purposes (rather than as a currency). The notice also provides that “mining” a virtual currency (which is the process for obtaining the virtual currency by solving mathematical problems) produces income upon receipt using the fair market value (FMV) at that time. Treatment of virtual currency as property means that when it is used, such as to buy goods, its basis and FMV must be determined to measure the resulting gain or loss. The holding period of the asset and character of the income (ordinary or capital) must also be determined.

The above information is of a general nature only and should not be relied upon for specific situations.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment

NY State Tuition Deductions Perks

Mon, 23 Oct 2023 15:28:37 +0000

NY State Tuition Deductions Perks

Double-dipping, which is being able to benefit from the same expense at various times, does not happen often; however, it is allowed for educational expenses. To take advantage of this, taxpayers must utilize IRC Section 222 above-the-line deduction for undergraduate tuition,as well as make a contribution to New York’s 529 plan for a Qualified Tuition Program. In order to use the same expense, taxpayers must contribute any available cash to a 529 plan, and then withdraw funds that were contributed to this plan in prior years to pay the qualified tuition expense.

By doing this, the taxpayer can utilize the section 222 above-the-line deduction, the New York adjustment for the contribution to the 529 plan, as well as the itemized deduction for qualified tuition expense. NY taxpayers can deduct $5,000 if filing status is single or $10,000 if filing status is married filing jointly if the contribution was made by December 31 of the calendar year to be able to deduct in the current year NY tax return.

The above information is of a general nature only and should not be relied upon for specific situations.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.