Since the passage of the Tax Cuts & Jobs Act of 2017, there has been much ado regarding the Section 199A Qualified Business Income tax deduction. Most issues have been addressed and clarified, but there still remains confusion among real estate investors who rent multiple properties, courtesy of a wide range of criteria that must be considered.
First off, an investor or investors’ real estate activity needs to rise to the level of a trade or business in order to qualify for the Section 199A deduction. They must be able to prove they engage in the rental of multiple properties on a regular basis in pursuit of profit. A casual investor who rents out property “sporadically” or uses the property for a residence or vacation home on a part-time basis will likely not qualify.
For real estate investors who have multiple properties being rented out through multiple entities, Section 199A regulations allow for an aggregated group of multiple trades or businesses to be treated as one trade or business in order to qualify for the Section 199A deduction. It is important to note that residential rentals and commercial rentals generally cannot be grouped together because they are not the same type of property.
If the various trades or businesses focus on either residential or commercial properties, a few requirements must also be met to aggregate. The same person or group of people must own 50% or more of each trade/business. The ownership must exist for the majority of the taxable year and all items attributable to each trade or business must be reported on returns within the same taxable year. Also, the trades or businesses must not include any “out of favor” service trades or businesses. This refers to trades or businesses which rely on “a skilled service” to earn profits.
The IRS also offers an optional rental “safe harbor” to deem rental activities eligible for the Section 199-A deduction. Requirements are nuanced, and also exclude certain rental real estate arrangements from rental “safe harbor.” Most notably, they exclude real estate rented or leased under a triple net lease, defined as a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance and to be responsible for maintenance activities for a property in addition to rent and utilities.
As with any section of the tax code, the requirements listed in this blog are just the broad brush strokes. Visit www.irs.gov for complete details or speak to a tax saving professional for tax information targeted for your trade or business. With a 20% tax deduction dangling like a carrot on a stick, we think it’s worth the effort.
In any case, if you have questions or would like to discuss Section 199-A and how it may apply to your circumstance, call Tax Saving Professionals at 772-257-7888 or use our convenient Contact form to schedule an appointment. And remember, "It's your money, We'll help you keep it."
There’s been “much ado” about the creation of the new 20% tax deduction for “Qualified Business Income” (QBI) in the Tax Cuts and Jobs Act of 2017. Although the deduction “tax relief” for small businesses (pass-through entities) in order to free up more funds to help them grow and create more jobs, high-income professions which generate profits directly from their owner’s skills and talent (think doctors, lawyers, accountants, entertainers) were classified as “specified service trades or businesses” (SSTB) and essentially excluded from the QBI deduction.
While most middle-class business owners will qualify for the deduction based on their income (up to $157,000 for individual filers and up to $315,000 for married couples filing joint returns), the exclusion from the QBI deduction is aimed at high-income earners classified as a “service business,” generating taxable income above those specified thresholds. The Legislative Text of IRC Section 199A states a Specified Service Trade or Business would include:
“…any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”
Due to the broad definition, questions immediately arose.
-Are pharmacists, medical technicians or veterinarians treating non-human patients regarded as SSTB’s in the healthcare industry?
-If a business provides widespread services such as “tax preparation” or “insurance products,” is that considered a product or skill?
-What is the classification for a business offering a vast array of skilled services?
-Does a business that provides “a specialized service” and sells products to generate income qualify for QBI?
Just a few examples of the many questions that have surfaced, it’s no wonder the issuance of proposed regulations on the Qualified Business Income Deduction (IRC Section 199A) by the IRS was highly-anticipated by tax professionals and business owners alike. Issued on August 8, 2018, they provide much-needed direction to determine what businesses should be classified as a Specified Service Trades or Business and excluded from the QBI Deduction. Following are some of the highlights.
Specific information regarding the healthcare and financial industries provides clarification on which skilled professionals should be considered as SSTBs.
Multi-purpose and blended businesses are also addressed. The proposed regulations do not allow a single business to separate non-SSTB profits from SSTB profits. The entire business is either a non-SSTB that could qualify for a QBI Deduction (under income thresholds) or an SSTB entity that does not qualify.
One of the most notable proposals is the 80/50 Spin-Off rule which aims to prevent a tax strategy (commonly known as crack and pack) that spins off portions of an SSTB into a separate entity or investment in order to shift income. (think a doctor buying real estate then renting it back to himself or herself as office space.) Basically, if a business has 50% or more common ownership with an SSTB which provides 80% or more of its services to the business, by regulation, it will be regarded as an SSTB in its entirety.
For high-income small business owners engaged in some type of specified services with income over QBI thresholds, the new SSTB rules require careful planning in order to avoid pitfalls when planning tax strategies.
At Tax Savings Professionals, we have worked with thousands of clients over the past 18 years and can answer any questions you may have about the QBI Deduction, SSTB status or any other tax issue. Give us a call at (772) 257-7888 or click on our contact form today.
Can you believe it’s already September? If you’re a business owner, aren’t you excited about paying another quarterly estimate soon? No? Then don’t pay it!
By working with Tax Saving Professionals, you can redirect that next quarterly estimate into a Green Preservation Partnership that will effectively cut your taxable income this year by enough to wipe out the top 50% of your income from being taxed. (You still have the income, it’s just not going to be taxed!) Depending on what state you live in, the top half of your income is taxed at somewhere between 39.5% and 52%. Imagine keeping all that income instead of only 48% to 60% of it!
If you’d like to have the top half of your income not be taxed, putting more money in your hands for you to determine what to do with, contact me. It can be done, but you can’t do it alone. You need a professional with experience and a proven track record who is willing to work with you and your CPA to cut by 35 to 50% what you pay in taxes.
There’s not as much time left in this year as you think, when it comes to tax planning. By taking action NOW, you can avoid having to pay your quarterly estimate on September 15, and be guaranteed that you’ll pay 35 to 50% less in taxes for 2014 and years to come.
It costs you nothing to talk to me. It costs you up to double in taxes not to.
Did you know that you have a bill of rights? Probably, but not a “bill of rights” for taxes.
Well, there is a “bill of rights” for taxes and as a tax payer, you should be aware of them.
There is an article on the wires today that talks about red flags and why not to do something. If you have read the taxpayers bill of rights “you have the right to pay the correct amount of taxes”. Having the right and knowing how to exercise that right are two different things.
Red flags exist because historically the deduction is not taken properly which is with documentation ergo be prepared. The first of the CNN red flags was charitable contributions, for most of us this is not an issue, but for the 300K or higher earners and business owners this is the number one best deduction you can have to lower you AGI. Through conservation easements and historical building easements you can lower your AGI by 50% when approved by congress this year. It is a savvy tool, you will need help but that brings us back to the other tax payer right, the right to representation.
Home office- Red flag, don’t take no for an answer, we teach you how to document this for a proper deduction, the IRS was having such a hard time they put in an option to take the home office for $5 a sq. ft. this year to make it easy. If you take the later you probably will leave money on the table.
Bizarre deductions – is also noted, again there may be a good reason for such things. There are many things under health care that are allowed and may be bizarre, like a swimming pool. For some, this is a quality of life thing as it is a form of rehabilitation with a prescription from a doctor. Tax Saving Professionals is not in the business to justify all deductions, but all of us have a way to get a Private letter ruling which is an approval before taking a deduction from the IRS if you think it is bizarre. What we do is consult and provide the best possible interpretation of the tax code to your benefit as it is 73,954 pages long.
If all of this is new or news to you, then you might be overpaying your taxes. We service high net worth clients in excess of $300K per year and business owners with revenues of $1M and above.
CNN Money : IRS Red Flags
How safe is the information contained in your tax return? Not very, apparently, if your political views lean in the “wrong” direction.
Section 6103 of the Internal Revenue Code states “…no officer or employee of the United States,… shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise or under the provisions of this section” under threat of five years in prison.
Seems pretty straightforward, doesn’t it? However, the House Oversight Committee has discovered that apparently it’s not clear enough for some high-ranking IRS officials.
Here’s Patrick Howley’s article from The Daily Caller. Follow Patrick on twitter
Top Internal Revenue Service Obamacare official Sarah Hall Ingram discussed confidential taxpayer information with senior Obama White House officials, according to 2012 emails obtained by the House Oversight and Government Reform Committee and provided to The Daily Caller. Lois Lerner, then head of the IRS Tax Exempt Organizations division, also received an email alongside White House officials that contained confidential information.
Ingram attempted to counsel the White House on a lawsuit from religious organizations opposing Obamacare’s contraception mandate. Email exchanges involving Ingram and White House officials — including White House health policy advisor Ellen Montz and deputy assistant to the president for health policy Jeanne Lambrew — contained confidential taxpayer information, according to Oversight.
The emails provided to Oversight investigators by the IRS had numerous redactions with the signifier “6103.” Section 6103 of the Internal Revenue Code forbids a federal employee from “disclos[ing] any return or return information obtained by him in any manner in connection with his service as such an officer or an employee.”
Federal employees who illegally disclose confidential taxpayer information could face five years in prison.
“Thanks, David. Thanks for the information on ,” White House official Lambrew wrote to IRS official David Fish in a July 20, 2012 exchange. “I am still hoping to understand whether the 50 percent rule is moot if the organization does not offer goods and services for sale to the general public. Do we assume that organizations like  do offer goods and services for sale?”
Another email from Montz to Ingram and others refers to the “ memo” and the “ letter” while discussing organizations that are not required to file 990′s.
Ingram appeared before Rep. Darrell Issa’s House Oversight Committee Wednesday and claimed she could not recall a document that contained confidential taxpayer information.
“Well one of the areas of interest is there’s a significant redaction that quotes the statute 6103. Do you know who is underneath that blackout?” Issa asked Ingram. “I don’t recall the document so I can’t help you with what’s underneath that redaction,” Ingram said. “Her response has not put concerns to rest,” Oversight staffer Frederick Hill said. ”This caught people’s eye.” Issa has requested unredacted copies of the emails, citing a prohibition from misusing Section 6103 “for the purpose of concealing information from a congressional inquiry.”
Ingram headed the scandal-ridden IRS office responsible for overseeing tax-exempt nonprofit groups before leaving to head the agency’s office in charge of Obamacare implementation.
An IRS voice mail message declined to comment on any media inquiries during the government shutdown, citing law.
For commercial buildings, IRC § 179D provides a deduction of up to $1.80 per square foot for energy-efficient features of the building’s construction or retrofit. A qualified person (defined as a professional engineer or contractor licensed in the jurisdiction where the real estate is located) must provide an analysis to the taxpayer. Special software prescribed by the IRS must be employed. This deduction is effectively an acceleration of depreciation deductions that would have otherwise been spread over a 39-year recovery life, and reduces tax basis accordingly.
This incentive was originally enacted as part of the Energy Tax Policy Act of 2005 (PL 109-58) and was originally set to expire on Dec. 31, 2007, for buildings placed in service after Dec. 31, 2005. However, as is the case with many deductions, this provision was extended an additional year by the Tax Relief and Health Care Act of 2006 (PL 109-432) and then until the end of 2013 by the EESA. Qualifying commercial buildings can include multifamily residential structures so long as they have more than three stories above grade.
Three primary building components are analyzed to determine the qualifying amount of the deduction, with each available for a deduction of 60 cents per square foot:
- Interior lighting systems
- HVAC (heating, ventilation and air conditioning) systems
- Building envelope (defined as the outer shell used to protect the indoor environment as well as to facilitate its climate control)
In each case, the analysis considers the extent to which the construction of the building provides energy consumption reductions from the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) 90.1-2001 baseline (as in effect April 2, 2003), which is a widely used industry standard. Since the majority of states’ standard building codes are based on the subsequently developed ASHRAE 90.1-2004 or later iterations, virtually all buildings in these states will qualify for some or all of the deduction, even if built to only the minimum standards. Engineers use a modeling guideline promulgated by the U.S. Department of Energy. The study, which must include a signed certification, is not attached to the taxpayer’s return but is instead maintained in the taxpayer’s file for future documentation in case of an IRS inquiry or examination.
Congress’ intent was to encourage energy-conscious construction. This is a great deduction for those seeking to build a new facility or retrofitting an existing building. In addition, many energy-efficient buildings across the country are owned by government agencies (which of course do not pay taxes). There was concern that the impact of the incentive would be dramatically reduced since it was not useful for these properties. To address this concern, Congress made the unusual decision to allow the building designer (typically the architect) to take the deduction, even though the designer has no ownership interest in the property. In this case, the deduction is particularly valuable, since no basis reduction is required. The building owner must approve the choice of the designer in writing.
The IRS has released further guidance in notices 2006-52 and 2008-40. The ARRA increased the carryback of net operating losses to up to five years for certain small businesses, so this deduction could provide an immediate cash benefit even if the current economic downturn has reduced or eliminated profitability in the current tax year.
This provision will expire for all buildings not placed in service before December 31, 2013, however, it is still possible that the provision will be extended for years after 2013.
A lot of business owners ask me if they can hire and pay their kids for modeling or acting in the business marketing campaigns.
A good example is one of our past clients who developed a line of hair care products called Kinky Curly that are sold in Target and Whole Foods. When she came to us her 4 year old daughter was already the face of the child product line and was pictured on all of the labels.
If she would have used another child besides her own, for the face of the products, she would have had to pay them for their modeling services (unless she had had a friend who would have been kind enough to give their child up for free). She was not paying her daughter because she did not know she could pay family just like other employees.
After our guidance and a bit of research on other companies in her field actually paying their models (children and adults) she officially added her daughter to the payroll in her company. Her daughter started earning money for the future as well as learning the responsibility of money which is what we all wish for our children, right? I say the younger they start, the more successful they will be.
Now if you are still wondering if children can be paid for modeling or even acting in marketing and advertisements, take a moment and reflect back to almost every cereal commercial you have seen on television…Now let’s go to candy commercials and ads…toys store commercials an ads… remember all of the kids on those ads? Remember Mikey for Life cereal? Another famous child mascot/marketing tool was Melinda Lou “Wendy” Thomas whose father, founder of fast food brand Wendy’s, utilized her in his marketing.
These kids and their parents aren’t allowing companies to stick them up on their billboards, websites and TV commercials just for attention. No way! The kids who you see who are acting and modeling are getting paid to do it!
Another fact that we all tend to forget is that in show business it is who you know, right? That means that a lot of kids that you see in advertising were chosen because they may have been the child of the owner or someone else involved in the company. It really is simple as “We need a kid for the ad? Hey, I have the most adorable child in the world, let’s just use her!”
The same can apply to your child. If you have a marketing campaign that includes the need for children and would reach out to the public to entice them to use your services then why not hire your own children? They are, after all, the most adorable children in the world right?
company’s new ad campaign feature Cathy Bissell and 2 of their family dogs. The post further goes into studies that show that consumers see companies that are family owned in a more positive light and are more apt to purchase family owned products and services. So with that said, you may want to think about a campaign that pulls in the whole family.
ADWEEK’s article brings me back to a longtime friend of mine who is a veterinarian, and she has used her daughter Darby from about the age of 6, along with their golden retriever, in the clinics yellow page ads, and in radio ads as a voice in the clinics pet stories. She had shared her marketing strategies with me over 10 years ago and according to her at that time, she claimed that the ads had pulled in clients because they show people that she is a family friendly hometown vet and she has beat out other vets who simply throw up a picture of a Veterinarian in a white jacket. “People love their pets and they don’t want to drop them off at some strangers place, I let them into my family and we are no longer strangers.” Darby purchased her first car (Brand spanking new!) at the age of 16 using her own money that she saved up over the years. Isn’t that liberating?
So after people do realize that hiring family for marketing is not a new concept there are sometimes still a few questions remaining:
How old do my kids have to be for me to use them in marketing campaigns and if I hire them doesn’t the product have to be for young kids?
The product does not have to be for young kids and you can hire them at any age, think about the popular E Trade commercial running right now. It features talking babies and E Trade uses the babies because they are adorable. It catches people’s attention plain and simple. You can also use your teenagers as well. What teen would not jump at the opportunity to tell their friends they are an actor or a model?
We don’t really want our kids’ faces splashed for the public to see because we want to keep them safe from predators. Is there a way to use them without complete display?
You can definitely do marketing material in a discrete way. People tend to think that using their child as a model always uses their face. Get imaginative with your images, most company ads do.
When my company hires family for marketing do they have to pay taxes on the income?
It really depends on the persons age and which company you hire them from. Parent owned LLC,s have the benefit of hiring their kids under 18 and income paid to the child is exempt from FUTA and FICA taxes up to $6,100 in 2013(subject to change in the future years). Non Parent Partnerships and Corporations have will have the FICA added in and amounts over the $6,100 will be subject to FUTA taxes starting as low as 10%. It is best to get with a tax planning company to help you look at the rules of your company and state.
Will there be any substantive comprehensive tax reform in 2013? Can there be? Our nation’s legislators are drowning in what appears to be a sea of ineptitude. While the primary leaders of tax writing committees (Sen. Max Baucus of the Senate Finance Committee and Rep. Dave Camp of the House Ways and Means Committee) have been exhausting themselves in trying to push Tax Reform forward, their legislative colleagues have largely ignored those efforts.
Both Baucus and Camp will lose their positions on their respective tax writing committees soon. Baucus because of retirement and Camp due to term limits. I believe there simply isn’t the political strength of character to bring any meaningful Tax Reform to fruition.
The tax code was last thoroughly revamped in 1986, when Republican President Ronald Reagan struck a deal to pass legislation backed by a Democratic House of Representatives and a Republican Senate. Strong politicians on both sides of the aisle stepped up and came up with a more efficient tax code.
I listened in my classroom at NYU to my professors tell of their testimony before Congress and Treasury as that 1986 tax act was being negotiated. The list of complex topics was significant and the insights offered by my professors had manifested years before I arrived at NYU. In the end, the final bill dealt with these complex topics. But, it took real political willpower to enact the Tax Reform Act of 1986 into law.
That willpower does not appear to exist today. Congress is spending most of its time with political infighting, largely separated by party lines, unable to pass even the most basic legislation. Instead, it focuses its time on passing legislation that in the end has no real chance of ever being signed into law.
The current tax code is over 70,000 pages since enacted in 1986. “Since that date, it’s built up barnacles, loopholes, deductions, credits, 15,000 changes,” Baucus said.
Max Baucus and Sen. Orrin Hatch (the ranking Republican on the Senate Finance Committee) have challenged all other senators to submit proposed changes in the name of tax reform. Few have responded. As the Senate and House members mostly remain out for summer recess, little has been done to advance the prospects of meaningful tax reform ahead of next years’ congressional elections.
“Tax Expenditures” (subsidies provided in the form of tax breaks) are the current focus — what to eliminate, what to keep? This focus has kept the process bogged down and is politically inexpedient. This is the lobbyists’ playground.
To deal with this, the idea of using a “blank slate” to achieve tax reform has been suggested. While this is probably the best approach, it is an approach which, in my opinion, will take years to accomplish. Remember, the purpose of the tax code is ultimately to raise revenue. While there are many competing arguments on how best to accomplish that goal, it still remains the absolute goal.
Politics make the process a minefield for legislators, most of whom do not have the courage to face their many constituents and explain the pain that will be felt by eliminating one tax break in favor of another. The idea of accomplishing true tax reform in the foreseeable future is admirable but not likely. The Wall Street Journal puts the odds of any meaningful reform in 2013 or 2014 at less than 50%.
The home office deduction under IRC §280A has been a willing participant and giver of headaches for most taxpayers since its early adoption in 1976 as part of the Tax Reform Act of 1976. However due to the various abuses of the deduction and colorful history most tax professionals have given an early burial to an alive and vibrant tax deduction. In 1993, the Supreme Court case of Commissioner v. Soliman, 506 U.S. 168 (1993) changed the landscape and perception of the deductibility of the deduction by tax professionals. In the Soliman case, the Commissioner challenged the home office deduction taken by Dr. Soliman, an anesthesiologists working as a subcontractor for various hospitals. Dr. Soliman claimed as an independent contractor that his home was used as his principal place of business because the hospitals he contracted with did not offer office space for him to conduct his administrative paperwork. Commissioner v. Soliman, (1993). Moreover Dr. Soliman contended the office he used in is three-bedroom apartment was used exclusively for business purposes and included administrative duties, conducting medical research and consulting with other medical professionals. All of the mentioned activities met the exclusive-use test however a different result was reached with regard to the principal place of business test.
The Court used a facts and circumstance test stating the inquiry is more subtle with the ultimate determination of the principal place of business being dependent upon the particular facts of each case. Commissioner v. Soliman, (1993). Thus an analysis of the relative importance of the functions performed at each business location depends upon an objective description of the business in question. The Court further stated if the nature of the trade or business requires the taxpayer to meet or confer with a client or patient or to deliver goods or services to a customer, the place where that contact occurs is often an important indicator of the principal place of business and can be called the “focal point” of the business. Commissioner v. Soliman, (1993).
The Court held in favor of the Commissioner citing the practice of anesthesiology requires the medical doctor to treat patients under conditions demanding immediate, personal observation which is so exacting all patients are treated at hospitals, facilities with special characteristics designed to accommodate the demands of the profession. The actual treatment was the essence of the professional service and the most significant event in the professional transaction. The home office activities from an objective standpoint must be regarded as less important to the business of the taxpayer than the tasks he performed at the hospital. It is clear from the Court’s ruling that the principal place of business must indeed be the place where one performs in significant part all of his/her duties of value. In this particular case that is the operating room of the hospital and not the home office.
This ruling effectively eliminated the home office deduction for small business owners conducting work outside of their home and made it virtually impossible to take. Whether this was the intended impact by the Commissioner is not clearly known but the court did mention the result is compelled by the language of the statute and Congress must change the statute’s words if a different result is desired as a matter of tax policy. Commissioner vs. Soliman, (1993). The effect of the Soliman ruling was disastrous for self-employed individuals. Individuals such as handymen, realtors, building contractors, landscapers and many others were no longer entitled to the deduction. The Service quickly issued Notice 93-12 to cement its monumental high Court win. For the next six years after the ruling the home office deduction all but vanished, if attempted it was rejected by the Service to the dismay of many self-employed persons. Most CPA’s stopped advising clients on taking the home office deduction as there was just no viable way to meet the new arbitrary narrow standard enounced in the Soliman case. For every gray cloud there is a silver lining which for small business owners came in 1999. Under the home office deduction provisions of the Taxpayer Relief Act of 1997 effective for January 1, 1999, the home office deduction was given new life. Congress realized the ruling in Soliman effectively estopped small business owners from the deduction and hence changed its policy and direction regarding the deduction.
The Taxpayer Relief Act of 1997 effectively retracted the arbitrary standard of Soliman and expanded the interpretation by adding two additional criteria that allowed more taxpayers to meet the principal place of business test. Under the new home office rules one can qualify for the deduction if 1) the taxpayer uses the home office to conduct administrative or management activities of his or her trade or business and if 2) the trade or business has no other fixed location where the taxpayer conducts substantial administrative or management activities. The two-part test will allow the deduction if the office is exclusively used on a regular basis as a place of business by the taxpayer and in the case of an employee, only if such exclusive use is for the convenience of the employer. In essence, these rules now recognize administrative and management services as a valuable component of all services offered by customers.
The Joint Committee on Taxation JCS-23-97 Section 932 offered four examples to help elucidate the once
enigmatic deduction: 1) taxpayers may take a home office deduction if they do not conduct substantial administrative or management activities at a fixed location other than the home office, even when those activities (billing) are performed by other people at other locations, any insubstantial administrative or management activities may be performed at fixed locations other than the home office: 2) taxpayers performing administrative and management activities at sites that are not fixed location of the business (such as cars or hotel rooms) in addition to performing the activities in a home office may still secure the deduction, i.e. taxpayer does not have to perform all there administrative and management services at home to qualify for the deduction: 3) taxpayers who conduct an insubstantial amount of administrative and management activity at a fixed location other than the home office, occasionally doing minimal paperwork at another fixed location may still take the deduction, this stipulation recognizes that as a practical matter, businesspeople often perform minimal paperwork at other locations. For example, a medical doctor may do a limited amount of paperwork at a hospital or clinic: and 4) Taxpayers conducting substantial nonadministrative or nonmanagment business activities at fixed locations other than their home offices will not be prevented from taking the deduction. For example, meeting with customers, clients or patients at another fixed location will no longer preclude the deduction. JCS-23-97 Section 932. Example 4 addresses the issues argued in Commissioner v. Soliman, (1993) thus a home office will be deemed the principal place of business if the taxpayer uses it for administrative or management activities of any trade or business and there is no other fixed location where the taxpayer conducts a substantive portion of these activities. This essentially disregards the importance of other nonadministrative and nonmanagment activities the taxpayer may engage in outside the home office. G Fleischman and T Payne. 1999. The New and Improved Home office deduction. Journal of Accountancy. March 1999.
In Conclusion, the home office deduction has been given new life by Congress based on the passage of the Taxpayer Relief Act of 1997. Congress believed that the Supreme Court’s decision in Soliman unfairly denied a home office deduction to a growing number of taxpayers who manage their business activities from their home. JCS-23-97 Section 932. Thus the statutory modification adopted by Congress will reduce the prior-law bias in favor of taxpayers who manage their business activities from outside their homes, thereby enabling more taxpayers to work efficiently at home, save commuting time and expenses, and spend additional time with their families. Moreover, the statutory modification is an appropriate response to the computer and information revolution, which has made it more practical for taxpayers to manage trade or business activities from a home office. JCS-23-97 Section 932. Self-employed taxpayers are not taking the deductions for a number of reasons but mostly because their CPA’s are advising it will raise a red flag with the IRS. Whether that is true or not is irrelevant depending on your level of documentation for the deduction. However what is important is that it is Congress’ intent that more self-employed people take the deduction and hopefully as with time CPA’s will become more practical and start advising their client to take this well deserved and beneficial deduction. The TIMES HAVE CHANGED.
Hiring your children in your business is a big tax benefit in itself.
Once you hire them and they are making earned income, they now pass the rules to open an IRA to start saving for their retirement.
Think about that for a minute…If your parents had made it possible for you to start putting away money into retirement as a child, how would that have changed things for you today?
I have asked myself this question and came up with a couple of answers. I would have been much closer to an affordable retirement then I am now and I absolutely know without a shadow of a doubt that I would have been more financially responsible.
Why do I know this? Because I have done this with my daughter and she, at 18, is far beyond understanding and respecting the dollar, then I was her age.
2013 IRA Contribution Limits:
As long as an individual has earned income, regardless of age, they can open up the IRA account and each year they can put up to what they earn with a maximum contribution limit of $5500, into the IRA. (Investment and passive income does not count)
IRA Contribution Deadlines:
The contributions deadline is the year’s tax filing deadline (i.e. Your daughter or son starts work in 2013. They will have until April 15, 2014 to make the contribution to her IRA.)
Who Can Make Contributions to the IRA?
Another good thing to know about the contribution for planning purposes is that the child does not need to make the contribution. As long as they have the earned income you, as the parent can make the maximum allowable constitution, but remember that it will still be claimed on the child’s tax return.
Types of IRA’S:
There are two different IRAs that your child can set up as long as they meet that earned income rule.
A Traditional IRA:
This IRA allows the individual to put away earnings tax deferred until they withdraw the money for retirement which is currently at 59 ½. If they decide to do an early withdraw then there will be a 10% penalty (unless there is a qualifying reason) on top of the individual’s current tax rate.
Pretty simple right? This is a good choice for those who want the tax free benefits now, but… don’t jump into this one to quickly as now is not always better.
A ROTH IRA:
This IRA does not allow the individual to deduct the contribution in the year that they make it. So no big bang now but the ROTH has some other benefits that might be better depending on your situation. If the individual waits until retirement age of 59 ½ all withdraws are completely tax free, even the earnings on the original contributions. If the individual needs to do early withdraw, they can withdraw the original contributions without penalty or tax for any reason. This is great in case of an emergency but not so great if they feel like it is some extra play money. If they withdraw the earnings before retirement then there will be a 10% penalty (unless there is a qualifying reason).
How to Withdraw Money Penalty Free from an IRA?
As I mentioned above there are qualifying reasons for waiving 10% penalties in either IRA.
- Paying for their qualified college expenses
- Paying medical expenses greater than 7.5% of their adjusted gross income.
- Paying for a first-time home purchase (currently up to $10,000).
- Paying for the costs of a sudden disability.
Which is Best, a Traditional or a ROTH IRA?
In looking at the 2 choices above, I would say there is a bit of planning to do right?
Some things to review before making a choice:
What is your child’s tax bracket? If their earnings put them in a 0-15% tax bracket a ROTH might be top choice. When else are they going to be at such a low tax bracket?
Are you afraid that they might just squander the money once they get control? Once you decide to put this plan into action, as soon as they are able to grasp the concept, it is absolutely imperative that you have a serious talk/threat council,with your kids about financial responsibility. If after you have the talk and you still feel nervous but you want to go ahead and do it anyway, then the traditional IRA might be a better choice with that 10% penalty as a possible deterrent.
They can set up both a ROTH and a traditional but the max contributions will still be their earnings up to $5,500 per year combined.
Where Should I go to set up an IRA?
When opening up IRA’s it is best to shop around to get a good Idea of your choices of mandatory start up contributions and investment options. If you have a financial planner already they are a great start, if not your local bank or some of the popular investment services such as Charles Schwab, which has a great start up IRA for kids with a minimum contribution of $100.
Keep in mind that this is such an underutilized benefit that I have found that some uneducated reps for the companies may say that there is no such thing as a IRA for kids. Rather than saying, “Hmmm, I have not heard of such a thing”, and getting you to someone who does know, they will just say it does not exist.
Are There Any Negatives in My Child Setting up an IRA?
If there is a possibility that your child will file for financial aid for college then the IRA’s, because they are in their name, will be considered in their application.
Wyoming became the 1st state to enact a true Limited Liability Company in 1977. It was best described as a hybrid between a partnership and a corporation. Its popularity was slow to come as other states did not follow suit until the 1990’s. After that the LLC quickly became the entity of choice for business owners because if its ease of management, pass through taxation and in a lot of cases they were much less expensive to set up and run than a corporation. Statistics, today, show that 4 out of every 5 new business startups are set up as a LLC.
“Ease of management” is what made a LLC so popular. You could have the limited liability of a corporation without having to keep up with the arduous paperwork that was required for corporations. No meetings, no corporate record keeping, no reports. It was said to be as easy as running a sole proprietorship with asset protection. Business owners felt that they got the best of both worlds!
As its popularity grows though, the case law and the fine tuning of statutes that each state begins to modify language within Limited Liability Company regulations is changing the LLC forever. Each state has the ability to insert their own regulatory thumbprint on the laws, and until now the statutes were either lenient or lacking.
Now, most states have “Revised” acts in place and some written laws are demanding that LLC owners manage the records just like a corporation in order to keep their limited liability protection. Even if a state does not have a revised act in place as of yet, the opinions of the attorneys in that state who are watching case law closely are warning business owners to begin following the same formalities as a corporation.
Richard Keyt, Esq., an Arizona attorney recently wrote, “Although annual or regular meetings of members and managers are not required by Arizona statutory law, I recommend that all Arizona limited liability companies hold regular meetings and annual meetings of members and managers because it is a good business practice. An Arizona LLC that has a documented history of holding regular and annual meetings of members and managers will be in a strong position to convince an Arizona court that the members of the LLC are operating the LLC like any prudent business and should be entitled to the protection of the LLC shield”.
So, through either written law or opinion, members of Limited Liability Companies are now held to the same formalities of corporate owners. This includes the following operating requirements, that formerly LLC’s did not have to comply with:
- A written operating agreement among members.
- Documented Distribution of the shares between the members.
- Making sure not to treat the LLC as an extension of their personal affairs.
- Annual and regular meetings of the members documenting important events and transactions.
A recent article, “Owner Liability Protection and Piercing the Veil of Texas Business Entities” by Elizabeth S. Miller, Professor of law at Baylor University School of Law included in the Limited Liability Companies section, “Like the predecessor Texas Limited Liability Company Act (“TLLCA”), the LLC provisions of the BOC as originally enacted did not address whether or under what circumstances a claimant may “pierce” the liability shield of an LLC in order to hold a member liable for a debt or other liability of the LLC. In 2011, the BOC was amended to provide that Sections 21.223-21.226, which include strict standards for piercing the corporate veil in a case arising out of a contract of the corporation, apply to LLCs.3 See Tex. Bus. Orgs. Code § 101.002. One Texas commentator has argued that the statutory limitation of liability in the Texas LLC statute was intended to be absolute, i.e., that the legislature did not address veil piercing in the LLC statute because it did not intend for veil piercing to occur in the LLC context.”
The opinion explained that in court, the guidelines of holding a member of a LLC were not in existence and the courts were actually borrowing the veil piercing guidelines from Corporations. As of 2011, LLC’s now have their own guidelines in the Texas Business Organizations Code.
Texas is not alone, and as stated earlier, all states are revising if not having already revised LLC guidelines to keep up with corporate formalities right alongside corporations.
What does this mean for LLC owners? This means that the ease of management and paperwork guidelines for LLCs are now a thing of the past.
In addition to the changes to tax rates and deductions from the “Fiscal Cliff” compromise, there is another tax many clients may be unaware of: A 3.8% tax on investment income to partially fund the Affordable Patient Care Act better known as “Obamacare”. How could this tax potentially affect you in 2013?
Who Is Subject To The Tax?
Citizens and residents of the United States, bona-fide residents of United States Territories, bankruptcy estates and certain types of trusts and estates (Section 1411(a)(2)). The threshold amounts for the application of the tax are:
- Married Filing Joint & Surviving Spouse: $250,000
- Married Filing Separately: $125,000
- Single & Head of Household: $200,000
The tax is computed on the lesser of net investment income or modified adjusted gross income (If a taxpayer has no foreign earned income, modified adjusted gross income will equal adjusted gross income).
What Type Of Income Is Subject To The Tax?
- Interest, dividends, capital gains, rent and royalty income, and non-qualified annuities
- Income and gains from passive activities
- Income and gains from businesses involved in the trading of financial instruments and commodities and
- Gains from the sale of interests in partnerships and S corporations to the extent the taxpayer is a passive owner.
If you own a sole proprietorship, are a disregarded LLC or own an interest in an S corporation or partnership, you need to pay special attention to make sure that income from those activities is not included in net investment income. The following four exceptions allow you to be sure the income will not be included net investment income:
- The activity is engaged in an active trade or business AND
- The income from the entities is earned in the ordinary course of that trade or business AND
- The income from the activity come from the ordinary course of that trade of business AND
- The activity is not “passive” for you. This means you must meet one of the following seven tests:
- You participate in the activity for more than 500 hours during the year,
- Your participation in the activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year,
- Your participation is more than 100 hours during the year, and no other individual (including non-owners) participates more hours than the taxpayer,
- The activity is a significant participation activity in which you participate for more than 100 hours during the year and your annual participation in all significant participation activities is more than 500 hours. A significant participation activity is generally a trade or business activity (other than a rental activity) that you participate in for more than 100 hours during the year but do not materially participate in (under any of the material participation tests other than this test),
- You materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years,
- For a personal service activity, you materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or
- A generic facts and circumstances test.
- The activity is not engaged in the trading of financial instruments.
By incorporating proper tax planning techniques into your business plan, much of the effect of the “Obamacare” tax can be mitigated by us and your other financial professionals. Putting those techniques in place, however, needs to begin now. Doing so can prevent a nasty surprise when you file your 2013 taxes.