Business Tax

For many years, the mortgage interest deduction has been one of the most cherished tax deduction, and one that is not available in many other countries. However, the myth of this deduction is often stronger than the reality. That’s especially true in the wake of the 2017 Tax Cut and Jobs Act.

The TCJA did not directly affect the mortgage interest deduction. Many modifications in this area would probably be politically unacceptable. However, the TCJA did indirectly affect this deduction, and in a very big way.

There are no easy answers in the mortgage prepayment debate. Prepayment may or may not be a good idea, based on the homeowner’s financial status, financial goals, and other factors. All a certified tax coach, or anyone else, can do is give people as much information as possible. This data is even more important now, because the mortgage prepayment question often involves more than just the mortgage interest deduction.

Mortgage Interest and Property Taxes Before 2018

Before 2018, property taxes, school taxes, and all other state and local taxes were 100 percent deductible. This deduction supplemented the mortgage interest deduction. So, if a family paid $22,000 a year in mortgage interest payments and $5,000 in SALT (State And Local Taxes) property taxes, it made perfect sense to itemize. The $29,000 total mortgage write-off well exceeded the $12,000 standard deduction.

For this reason, many homeowners borrowed more money to take advantage of the mortgage interest deduction. Each installment payment does not have the same principal/interest division. At first, the bank applies most of each payment to interest. Later, after the interest is largely paid off, the payments go toward principal reduction. So, later in the repayment period, many homeowners refinanced their loans to increase their interest payments, and therefore their mortgage interest deductions.

Mortgage Interest and Property Taxes After 2018.

The 2017 TCJA doubled the standard deduction for married couples to $24,000. So, to realize a tax benefit, itemized deductions must be incredibly high. In most cases, that’s not true..

If they itemize under the new law, our hypothetical family only realizes a $2,000 deduction ($22k in mortgage interest against a $24k standard deduction). Given the ease of checking the standard deduction box as opposed to the complexity of itemizing mortgage interest, that’s not much of a break..

Additionally, our hypothetical family can only deduct $10,000 in SALT taxes under the new law. So, their $5,000 property tax bill is probably either not fully deductible, or not deductible at all.

As a result, prepaying a mortgage to pay down debt may be a good idea. That money could be invested elsewhere. Before embarking on this path, make sure that the bank applies extra money to the Unpaid Principal Balance (UPB). The bank does not automatically do so. Additionally, if the loan has a large prepayment penalty, an early payoff may be a zero-sum game, at best.

To see which approach is best for you, reach out to a certified tax coach near you. Ready to start saving real money on your taxes? Call us today at 925-240-2886 to schedule your free consultation. As a thank you for scheduling your consultation, we’ll provide you with a book, The Great Tax Escape.

The IRS collected roughly 128 million tax returns during the 2018 failing season. Even the world’s most advanced computers could not possibly look at all these deduction allowances. But the Service does not need to look at all of them. 90 percent of these people used the greatly increased standard deduction.

So, there were under 13 million itemized deduction returns. That’s still a lot, but it is a much smaller universe. Therefore, if the taxpayer itemized, the IRS will probably scrutinize the return. If there are statistical discrepancies, or a year-to-year amount discrepancy, enforcement action will almost certainly follow.

The IRS has almost unlimited time to examine returns. If a tax planning professional lacks the proper training, it is difficult to respond to enforcement inquiries in a way that deters the IRS from further action.

“Enforcement action” includes both formal audits, which have declined significantly in recent years, and informal audits, which are usually document requests.

Real Estate Rental

The 2017 Tax Cut and Jobs Act prompted many people to rent their homes, or a portion of their homes, for at least part of the year. The TCJA gutted many deductions, such as the SALT (State and Local Taxes) deduction, but left others largely intact, such as the rental activity deduction.

If taxpayers rent a portion of their home for more than fourteen days, they may deduct a pro-rata share of expenses on Schedule E. These expenses include advertising, listing, and any other related costs. However, they must also report all rental income as well. Many taxpayers are overzealous about the former and overlook the latter. That’s a potentially disastrous combination.

Additionally, taxpayers may report rental losses, but they cannot manufacture them. For example, the Smiths cannot rent their guest house to someone for the summer and then claim a rental loss for the other nine months of the year, at least in most cases.

Charitable Expense Deduction

These deductions have long been a bedrock policy measure. Increasing charitable giving helps keep taxes lower and government bureaucracies smaller. So, the TCJA did not do much to upset this deduction.

However, the higher standard deduction forced many taxpayers into some financial sleight of hand. Since the standard deduction doubled in many cases, many taxpayers had to double their charitable giving to exceed the higher limit. As a result, many families doubled their 2018 charitable giving to claim the deduction, and they plan to give little or nothing in 2019.

There is nothing inherently wrong with giving more money to charity. But the IRS knows how much people in certain income brackets give to charity. Furthermore, the IRS has instant access to a taxpayer’s prior returns. If the 2018 giving amount is not statistically consistent or spiked tremendously, official inquiries are almost sure to follow.

At that point, it is incumbent on the taxpayer to establish all the elements of a charitable contribution deduction, i.e., an actual contribution to a 401(c)(3) organization. This showing is usually not a problem, assuming the taxpayer gave cash, there are no question marks about the recipient organization, and the taxpayer has the right documents.

Count on a certified tax coach near you to provide the support you need to weather a formal or informal audit. Call us today at 925-240-2886 to schedule your free consultation. As a thank you for scheduling your consultation, we’ll provide you with a book, The Great Tax Escape.

Choosing an Accountant Who Puts Your Goals First

There is an endless supply of do-it-yourself tax preparation tools and websites, and the sheer volume of options can lead you to believe the process of filing your returns is simple.

However, a DIY approach only works if you are satisfied with paying more than necessary. Tax preparation software handles all of the basics, importing income and considering common tax deductions. Unfortunately, when it comes to careful application of less-common tax-reduction techniques, these programs simply can’t compete with a skilled tax professional.

The Amazon Best Selling book, The Great Tax Escape, walks you through the process of choosing an accountant. Specifically, you will learn what to look for – and what to avoid – if you want a tax specialist who will help you keep your tax bill low.

Five Reasons to Hire a Highly-Qualified Accountant

As you know from your experience in business settings, companies that focus on their core mission are more successful. Devoting internal resources to creating excellent products and services, while outsourcing peripheral functions like IT and HR, makes it possible to innovate and deliver best-in-class solutions.

Focusing on your core mission is just as critical when it comes to tax preparation. The time you would spend trying to track down tax information is better applied elsewhere, and you are likely to pay more in the end anyway. These are five ways your accountant will free up resources for you to use in ways that will further your personal mission:

• The tax code is constantly changing, and deductions that were available last year may not be appropriate today. Conversely, expenses you couldn’t deduct in previous returns may now be permitted. A skilled accountant stays on top of these changes and applies them to your situation, so you don’t have to complete extensive research.
• Much of the tax code is spelled out and clarified based on specific cases. Unless you are following industry developments day in and day out, you are likely to miss all but the most significant decisions. Your accountant has years of experience with filing returns, and continuing education is required in every state. You can be sure that these professionals understand what works – and what doesn’t.
• Experience also helps when it comes to developing your long-term tax savings strategy. Accountants have watched businesses grow and change, and they know how to get results. Their expertise in complex decisions like choosing a business entity or whether to consider cost segregation can be invaluable.
• Different types of income are taxed at varying rates, and do-it-yourself filers often assume there is nothing that can be done to change their circumstances. Talented accountants know better. With the help of a skilled professional, it may be possible to move income from high-tax categories to low-tax categories, which can mean significant savings. .
• Finally, timing is always important in the financial world, and that holds true when it comes to your tax strategy. Accountants have a deep understanding of the economy’s ebb and flow, and they notice patterns that have played out over the course of their careers. They use this experience to advise on when and how to apply tax strategies for maximum savings.

Learn more about why and how to choose the right accountant for all of your tax preparation needs. Contact us today by calling 925-240-2886 or request your free consultation online now. As a thank you for scheduling your consultation, we’ll provide a free tax planning book, The Great Tax Escape.

Critical Choices: How the Business Entity You Select Impacts Your Taxes

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under. The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued. When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation. With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated that operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows.

To learn more about your options for structuring your business request your free consultation today by calling us at 925-240-2886. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

 

The IRS is taking a special look at the tax situation surrounding executive compensation. This may sound simple, but there are a lot of complexities you need to know about. Click through for an introduction to the key issues.

Executive compensation has evolved dramatically in recent years — in creativity, complexity and dollar value. How so? Stock options, deferred compensation, fringe benefits and other noncash alternative forms of compensation are becoming increasingly popular, comprising larger and larger parts of executives’ overall compensation packages.

Why is the IRS taking note? There are multifaceted tax implications, including income and employment tax issues for both the employer paying the compensation and for the executive employee receiving the remuneration. The increasing use of noncash compensation and the use of partnerships and trusts — both domestic and offshore — add considerable complexity in determining current- and future-year tax liabilities for executives and employers.

Let’s take a look at some of the noncash compensation and what IRS agents ponder in tax examinations:

Nonqualified deferred compensation plans are agreements, methods or arrangements between an employer and an employee to pay compensation in the future. Employers generally deduct expenses only when income is recognized by the employee. The four categories are as follows:

• Salary reduction arrangements defer the receipt of compensation by allowing the participant to defer receipt of a portion of salary.
• Bonus deferral plans resemble salary reduction arrangements, but enable participants to defer receipt of bonuses.
• Top hat or supplemental executive retirement plans are maintained primarily for a select group of management or highly compensated employees.
• Excess benefit plans provide benefits solely to employees whose benefits are limited under employers’ qualified plans.

Unfunded and funded NQDC plans. In unfunded arrangements, the employer promises to pay deferred compensation benefits in the future. A funded arrangement generally exists if assets are set aside from the claims of the employer’s creditors — for example, in a trust or escrow account. If the arrangement is funded, the benefit is likely taxable.

NQDC plans may be formal or informal, but must be in writing. The plan must comply with operational requirements — not only must it be a valid NQDC arrangement on paper, it must also operate according to the plan’s provisions.

Fringe benefits. Any property or service that an employee receives in lieu of or in addition to regular taxable wages may be subject to taxation if provided in connection with performance of services. Among such services are qualified employee discounts, qualified moving expenses, qualified transportation fringes and qualified retirement planning services.

Among fringe benefits are athletic skyboxes/cultural entertainment suites, awards and bonuses, club memberships, corporate credit cards, personal use of a company car and executive dining room privileges. Additional examples are outplacement services, security-related transportation, spousal/dependent life insurance, chauffeurs, employer-paid parking, relocation expenses and noncommercial air travel. Employer-paid vacations, spousal or dependent travel, wealth management, and even an employer paying the employee’s share of FICA taxes round out the IRS’s list.

Golden parachutes. An excise tax of 20 percent is imposed on the recipient of such a payment, and the payer must withhold the tax if the payment is wages.

Recent changes?

The 2017 federal tax overhaul doesn’t alter the existing tax rules for nonqualified deferred compensation plans. Early versions of the bill targeted the repeal of a number of popular employer-provided benefits — qualified education assistance, dependent care assistance and adoption assistance programs — but none of the proposals were enacted. However, new changes may crop up, and even the current field is complex, so be sure to stay in touch with your tax and finance professionals.

Call us today at 925-240-2886 to schedule your free consultation. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.