Weekly Tax Bites
We want you to have access to all of the tools and resources you need to make the best decisions for your business, your personal income taxes, and your life. Because of this, we do our best to find the best information and help you break it down so that you can understand it and know what to do with it. These tax bites come from the certified public accountants and business advisors at Ciuni & Panichi, and we would be happy to help you better understand it. Contact our Maryland tax lawyers today and see how we can be your guide through this year’s tax season.
Who’s subject to the 50% limit on meal and entertainment deductions?
In general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction. But which party? Last year, the IRS finalized regulations that address this question.
In the employer-employee setting:
- If the employer reimburses the employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit.
- If the employer doesn’t treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.
In a customer–independent contractor setting, the final regulations allow the parties to agree as to who will be subject to the 50% limit. If there isn’t an agreement, then:
- If the contractor accounts to the customer for meal and entertainment expenses reimbursed by the customer (i.e., properly substantiates the expenses), the 50% limit applies to the customer.
- If the contractor doesn’t, the limit applies to the contractor.
The rules surrounding meal and entertainment expense deductions are complex. Please contact us to ensure you’re making the most of the deductions available to you but not putting yourself at risk for back taxes, interest and penalties.
3 tax traps when donating real estate to charity.
If you’re considering donating a property to charity, here are three potential tax traps you need to be aware of:
- If you donate real estate to a public charity, you generally can deduct the property’s fair market value. But if you donate it to a private foundation, your deduction is limited to the lower of fair market value or your cost basis in the property.
- If the property is subject to a mortgage, you may recognize taxable income for all or a portion of the loan’s value. And charities might not accept mortgaged property because it may trigger unrelated business income tax for them.
- If the charity sells the property within three years, it must report the sale to the IRS. If the price is substantially less than the amount you claimed, the IRS may challenge your deduction.
These are only some of the traps that could reduce the tax benefit of your real estate donation. Please contact us to help ensure that you avoid these and other traps.
Employers: Have you amended your FSA plan?
Health care Flexible Spending Accounts (FSAs) allow employees to redirect pretax income to an employer-sponsored plan that pays, or reimburses them for, qualified medical expenses not covered by insurance. A maximum employee contribution limit of $2,500 went into effect in 2013. (Employers can set a lower limit, however, and there will continue to be no limit on employer contributions to FSAs.)
Employers that haven’t yet done so must amend their plans and summary plan descriptions to reflect the $2,500 limit (or a lower one, if they wish) by Dec. 31, 2014.
While you’re making those amendments, you may want to consider another amendment: allowing a $500 rollover.
Generally, an employee loses any FSA amount that hasn’t been used by the plan year’s end. But last year the IRS issued guidance permitting employers to amend their FSA plans to allow up to $500 to be rolled over to the next year. However, if your plan was previously amended to allow a 2½-month grace period for incurring expenses to use up the previous year’s contribution, you cannot add the rollover provision unless you eliminate the grace period provision.
Questions about amending your FSA plan — or adding FSAs to your benefits offering? Then contact us; we’d be pleased to answer these and other questions related to taxes and employee benefits.
Don’t lose tax benefits when combining business travel with vacation pleasure
Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you’re not careful, you could lose the tax benefits of business travel.
Generally, if the primary purpose of your trip is business, then expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:
- Air, taxi and rail fares,
- Baggage handling,
- Car use or rental,
- Meals, and
Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you. During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses.
For more information on how to maximize your tax savings when combining business travel with a vacation, please contact us. In some cases you may be able to deduct expenses that you might not think would be deductible.
Softening the blow of higher taxes on trust income
This year, trusts are subject to the 39.6% ordinary-income rate and the 20% capital gains rate to the extent their taxable income exceeds $12,150. And the 3.8% net investment income tax applies to undistributed net investment income to the extent that a trust’s adjusted gross income exceeds $12,150.
Three strategies can help you soften the blow of higher taxes on trust income:
1. Use grantor trusts. An intentionally defective grantor trust (IDGT) is designed so that the trust’s income is taxed to you, the grantor, and the trust itself avoids taxation. But if your personal income exceeds the thresholds that apply to you (based on your filing status) for these taxes, using an IDGT won’t avoid the tax increases.
2. Change your investment strategy. Nongrantor trusts are sometimes desirable or necessary. One strategy for easing the tax burden is for the trustee to shift investments into tax-exempt or tax-deferred investments.
3. Distribute income. When a trust makes distributions to a beneficiary, it passes along ordinary income (and, in some cases, capital gains), which is taxed at the beneficiary’s marginal rate. Thus, one strategy for avoiding higher taxes is to distribute trust income to beneficiaries in lower tax brackets.
Some of these strategies may, however, conflict with a trust’s purpose. We can review your trusts and help you determine the best solution to achieve your goals.
Your 2013 tax return is filed. What tax records can you toss?
The short answer is: none. You need to hold on to all of your 2013 tax records for now. But this is a great time to take a look at your records for previous tax years and determine what you can purge.
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss most records related to tax returns for 2010 and earlier years.
But you’ll need to hang on to certain records beyond the statute of limitations:
- Keep tax returns themselves forever, so you can prove to the IRS that you actually filed. (There’s no statute of limitations for an audit if you didn’t file a return.)
- For W-2 forms, consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
- For records related to real estate or investments, keep documents as long as you own the asset, plus three years after you sell it and report the sale on your tax return.
This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.
Tax Day – April 15, 2014: Making the most out of your business’ NOL:
If during 2013 income tax return filing you found that your business had a net operating loss (NOL) for the year, the news isn’t all bad. While no one enjoys being unprofitable, an NOL does have an upside: tax benefits. In a nutshell, an NOL occurs when a company’s deductible expenses exceed its income — though of course the specific rules are more complex. When a business incurs a qualifying NOL, there are a couple of options:
1) Carry the loss back up to two years, and then carry any remaining amount forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.
2) Elect to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial. After all, it will offset income for up to 20 years. Doing so may be especially savvy when business income is expected to increase substantially.
In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. If you have questions about the NOL rules or would like assistance in determining how to make the most of an NOL, please contact us.
Don’t inadvertently miss filing deadlines
If you still file a paper return, it’s important to know the IRS’s “timely mailed = timely filed” rule: If your tax return is due April 15, it’s considered timely filed if it’s postmarked by midnight on April 15. But just because you drop your return in a mailbox on the 15th doesn’t mean you’re safe.Consider this example: On April 15, Susan mails her federal tax return with a payment. The post office loses the envelope and, by the time Susan realizes what has happened and refiles, two months have gone by. She’s hit with failure-to-file and failure-to-pay penalties totaling $1,000.To avoid this risk, use certified or registered mail. Alternatively, you can use one of the private delivery services designated by the IRS to comply with the timely filing rule, such as DHL Same Day service. FedEx and UPS also offer a variety of options that pass muster with the IRS. But beware: If you use an unauthorized delivery service — such as FedEx Express Saver® or UPS Ground — your document isn’t “filed” until the IRS receives it.
If you haven’t filed your return yet and are concerned about meeting the deadline, another option is to file for an extension. Doing so has both pluses and minuses, depending on your situation. Please contact us if you have questions about what you should do to avoid penalties for failing to file or pay.
Can I claim my elderly parent as a dependent?
For you to deduct up to $3,900 on your 2013 tax return under the adult-dependent exemption, in most cases the parent must have less gross income for the tax year than the exemption amount. Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.In addition, you must have contributed more than 50% of your parent’s financial support. If the parent lived with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence.If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.
The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.
It’s not too late to make a 2013 contribution to an IRA
Tax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible.Have you maxed out your 2013 limits? While it’s too late to add to your 2013 401(k) contributions, there’s still time to make 2013 IRA contributions. The deadline is April 15, 2014. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2013).A traditional IRA contribution also might provide some savings on your 2013 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2013 tax return.
If you don’t qualify for a deductible traditional IRA contribution, consider making a Roth IRA or nondeductible traditional IRA contribution. We can help you determine what makes sense for you.
Your 2013 return may be your last chance for 2 depreciation-related breaks
If you purchased qualifying assets by Dec. 31, 2013, you may be able to take advantage of these depreciation-related breaks on your 2013 tax return:
1. Bonus depreciation: This additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With only a few exceptions, bonus depreciation isn’t available for assets purchased after Dec. 31, 2013.
2. Enhanced Section 179 expensing: This election allows a 100% deduction for the cost of acquiring qualified assets — including both new and used assets — up to $500,000, but this limit is phased out dollar for dollar if purchases exceed $2 million for the year. For assets purchased in 2014, the expensing and purchase limits have dropped to $25,000 and $200,000, respectively.
Even though this may be your last chance to take full advantage of these breaks, keep in mind that the larger 2013 deductions may not necessarily prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations, future deductions could be more valuable, such as if you move into a higher marginal tax bracket.
Let us know if you have questions about the depreciation strategy that’s best for your business.