Are you missing an opportunity to reduce your property tax liability? Nearly all local taxing jurisdictions, including municipalities, counties, and boards of education, generate tax revenue through the imposition of property tax, which is one of the most substantial sources of local government revenue. For many businesses, property tax is the largest state and local tax obligation, and one of the largest regular operating expenses incurred.

Unlike other taxes, property tax assessments are based on the estimated value of the property, and thus, are subject to varying opinions. Businesses that fail to take a proactive approach in managing their property tax obligations may be missing an opportunity to reduce their tax liability.

Below are 10 common property tax myths, and the truths that counter them.

MYTH #1: If a property’s value does not increase year to year, the property tax liability should remain the same.
TRUTH: The annual tax rate is determined by the tax levy necessary to fund the applicable governmental budget for services such as schools, libraries, park districts, fire departments and police. Essentially, the governmental budget is divided by the total assessment within a jurisdiction to calculate the tax rate. The tax rate is applied to a property’s individual assessment to calculate tax. Rates can fluctuate annually and can result in higher or lower taxes even if your property value stays consistent.

MYTH #2: Fair market value is equivalent to assessed value.
TRUTH: Fair market value is an estimate of the price at which property would change hands in an arm’s length transaction. Assessed value is a valuation placed on a property by the assessor, which forms the basis of a property owner’s annual property tax. Assessed value is typically a percentage of the fair market value and takes into account factors such as quality of the property and market conditions. Taxpayers should reconcile jurisdictional ratios in order to understand what is considered the fair market value of their property.

MYTH #3: Property tax bills can be appealed.
TRUTH: Unfortunately, you cannot challenge your property’s value once you receive the tax bill. An appeal must be filed within a set window of time after receiving your assessment notice, which in some cases could be a year prior to receiving the tax bill. If an appeal is not filed during the determined period, a taxpayer would have to wait to appeal until the next year’s assessment.

MYTH #4: Obsolescence adjustments do not apply to newer properties.
TRUTH: Property is typically taxed on a value that takes into account the ordinary diminishment of value occurring because of factors such as physical wear, age, and technological advancements. Obsolescence is an additional form of impairment resulting from internal or external factors affecting value, such as functionality of equipment, processes that inhibit business, or external forces that have impacted financial performance. Regardless of the age of the property, obsolescence factors should be annually reviewed to determine the fair market value of property.

MYTH #5: Assessors establish annual property tax rates.
TRUTH: Property tax rates are set by local governments based on the budget necessary to fund governmental services. Property taxes typically fund city, municipality, county and school district services provided to the community. Assessors determine the value of your property so that the tax burden can be distributed. Assessors do not determine the property tax. The amount of tax payable is calculated by the tax rate applied to your property’s assessed value.

MYTH #6: During a property tax audit, the taxpayer’s role is complete once information is provided to the auditor.
TRUTH: Left alone, auditors can make inaccurate or aggressive decisions. They heavily rely on asset listings and balance sheets to determine if items have been appropriately reported. Taxpayers have a lot to gain by staying in contact with auditors throughout the process. Auditors should know the story that goes with the data. Are all assets on the list physically located on property? Are construction in progress (CIP) assets held on site or at a vendor? Is the supplies balance an annual or year-end balance? In the absence of taxpayer direction, auditors will make assumptions based on limited data. Once audit results are finalized, taxpayers can appeal, but now the burden of proof may have shifted.

MYTH #7: Reducing my property taxes makes me appear to be a bad corporate citizen.
TRUTH: For many businesses, property taxes are their greatest state and local tax burden and, on average, account for approximately 38 percent of the total state and local tax liability. Property owners should ultimately be paying their fair share of property taxes and not more. As property taxes are a cost of doing businesses, certain businesses that overpay may need to make decisions that result in reduced work force or reduced business output. The reductions necessitated by higher tax liabilities may have more negative impact on the community than ensuring that the property taxes remain fair.

MYTH #8: Assessor’s record cards are accurate.
TRUTH: A property record card is a document retained by the assessing jurisdiction that includes assessment information about your property used to determine the value. A property record card includes information such as building dimensions, total land acreage, zoning or use of property, construction detail and other elements to describe the property. Any discrepancies or outdated information may affect the value of your property. Property owners should obtain their property record cards to determine if errors exist that need to be corrected and could result in a lower assessment.

MYTH #9: I pay more property tax in jurisdictions that tax both real and personal property.
TRUTH: Property subject to taxation for property tax purposes can vary by jurisdictions. The tax can be imposed on real estate or personal property. All states tax real property and approximately 38 states tax personal property. Regardless of types of property taxed, the governmental budget will determine amount of tax needed to fund services and the property tax burden will be distributed among taxable values. Therefore, a property owner’s tax liability may be as significant in a jurisdiction that only taxes real property.

MYTH #10: A tenant cannot appeal property taxes. TRUTH: Tenants may have the ability to directly appeal property values in situations where the owner provides written consent or the lease terms allow the tenant to appeal. Property taxes are typically passed through to the tenants, therefore it benefits the tenant to review the annual assessment to determine if an appeal opportunity exists to reduce the property’s assessment

The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act.  It is expected to expand the pool of nonexempt workers by more than 1 million.

The new rule is scheduled to take effect on January 1, 2020. Affected employers should consider prompt action to reduce the impact to their bottom lines

The new rule

Under the finalized overtime exemptions regulations, an employer generally cannot classify an employee as exempt from overtime obligations unless the employee satisfies three tests:

  1. Salary basis test. The employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of the work performed.
  2. Salary level test. The employee is paid at least $684 per week or $35,568 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.

The DOL’s final rule specifically increased the salary level test (previously $455 per week or $23,00 annually). Therefore, if an employee’s salary exceeds the new level, the employee will be ineligible for overtime if he or she primarily performs executive, administrative or professional duties. If their salary falls below it, the employee is nonexempt, regardless of duties.

Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee does not earn enough in such bonuses or payments in a given year to remain exempt, the employer can also make a catch-up payment within one pay period of the end of the year. However, the payment will count only toward the prior year’s salary amount.

Highly compensated employees

Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). The new rule provides a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $107,432 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $684 salary per week.

The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings of full-time salaried employees nationally.

The DOL opted against automatic adjustments to salary thresholds every three or four years. Instead, the final rule simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.

Preparation tips

Employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. Your business may already be well-prepared if you have previously gone through this process. Take care, though, to not rely on past findings as circumstances may have shifted.

A good first step is to check employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or consider redistributing workloads or scheduled hours to prevent newly nonexempt employees from working overtime.

This also is a good time to review employees’ job duties against the tests for the various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.

If, according to the final rule, you reclassify currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation. Reclassified employees may require some training on timekeeping procedures.

Plan accordingly

Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability.

Contact your trusted advisor to ensure your company is in compliance with the new rule, as well as all payroll tax obligations.

Owners of certain rental real estate interests have final guidance on what qualifies for the qualified business income (QBI) deduction.

QBI in a nutshell

QBI equals the net amount of income, gains, deductions and losses — excluding reasonable compensation, certain investment items and payments to partners for services rendered. The deduction is subject to several significant limitations; however, QBI generally allows partnerships, limited liability companies (LLCs), S corporations and sole proprietorships to deduct as much as 20% of QBI received.

Many taxpayers involved in rental real estate activities were uncertain whether they would qualify for the deduction. The final guidance leaves no doubt that individuals and entities that own rental real estate directly or through disregarded entities (entities that are not considered separate from their owners for income tax purposes, such as single-member LLCs) may be eligible.

Covered interests

The safe harbor applies to qualified “rental real estate enterprises.” For purposes of the safe harbor only, the term refers to a directly held interest in real property held to produce rents. It may consist of an interest in a single property or multiple properties.

You can treat each interest in a similar property type as a separate rental real estate enterprise or treat interests in all similar properties as a single enterprise. Properties are “similar” if they are part of the same rental real estate category (that is, residential or commercial). In other words, you can only hold commercial real estate in the same enterprise with other commercial real estate. The same applies for residential properties.

Bear in mind, if you opt to treat interests in similar properties as a single enterprise, you must continue to treat interests in all properties of that category — including newly acquired properties — as a single enterprise. If, however, you choose to treat your interests in each property as a separate enterprise, you can later decide to treat your interests in all similar commercial or all similar residential properties as a single enterprise.

Notably, the guidance provides that an interest in mixed-use property may be treated as a single rental real estate enterprise or bifurcated into separate residential and commercial interests.

Safe harbor requirements

The final guidance clarifies the requirements you must fulfill during the tax year in which you wish to claim the safe harbor. Requirements include:

Keeping separate books and records. You must maintain separate books and records reflecting income and expenses for each rental real estate enterprise. If the enterprise includes multiple properties, you can meet this requirement by keeping separate income and expense information statements for each property and consolidating them.

Performing rental services. For enterprises in existence less than four years, at least 250 hours of rental services must be performed each year. For those in existence at least four years, the safe harbor requires at least 250 hours of rental services per year in any three of the five consecutive tax years that end with the tax year of the safe harbor.

The rental services may be performed by owners or by employees, agents or contractors of the owners. Rental services include:

Financial or investment management activities, studying or reviewing financial statements or reports, improving property, and traveling to and from the property do not qualify as rental services.

Maintaining contemporaneous records. For all rental services performed, you must keep contemporaneous records that describe the service, associated hours, dates and the individuals who performed the service. If services are performed by employees or contractors, you can provide a description of them, the amount of time employees or contractors generally spent performing those services, and time, wage or payment records for the individuals.

This requirement does not apply to tax years beginning before January 1, 2020. The IRS cautions, though, that taxpayers still must establish their right to any claimed deductions in all tax years, so be prepared to document your QBI deduction.

Providing a tax return statement. You must attach a statement to your original tax return (or, for the 2018 tax year only, on an amended return) for each year you rely on the safe harbor. If you have multiple rental real estate enterprises, you can submit a single statement listing the requisite information separately for each.

Excluded real estate arrangements

The safe harbor is not available for all rental real estate arrangements. The guidance excludes:

The guidance states that taxpayers that do not qualify for the safe harbor may still be able to establish that an interest in rental real estate is a business for purposes of the deduction.

Next steps

The final safe harbor rules apply to tax years ending after December 31, 2017, and you have the option of instead relying on the earlier proposed safe harbor for the 2018 tax year. Plus, you must determine annually whether to use the safe harbor.

Contact your trusted advisor to determine whether you are eligible for this and other valuable tax breaks.

Bitcoin and other forms of virtual currency are gaining popularity worldwide. Yet many businesses, consumers, employees and investors are still confused about how they work and how to report transactions on their federal tax returns. The IRS recently announced that it is reaching out to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or did not report them properly.

The nuts and bolts

Unlike cash or credit cards, small businesses generally don’t accept bitcoin payments for routine transactions. However, a growing number of larger retailers and online businesses now accept payments. Businesses can also pay employees or independent contractors with virtual currency. The trend is expected to continue, so more small businesses may soon get on board.

Virtual currency has an equivalent value in real currency and can be digitally traded between users. It can also be purchased and exchanged with real currencies (such as U.S. dollars). The most common ways to obtain virtual currency like bitcoin are through virtual currency ATMs or online exchanges, which typically charge nominal transaction fees.

Tax reporting

Virtual currency has triggered many tax-related questions. The IRS has issued limited guidance to address them. In 2014, the IRS established that virtual currency should be treated as property, not currency, for federal tax purposes.

As a result, businesses that accept bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.

From the buyer’s perspective, purchases made using bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the currency exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis.

Wages paid using virtual currency are taxable to employees and must be reported by employers on W-2 forms. They are subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.

Virtual currency payments made to independent contractors and other service providers are also taxable. In general, the rules for self-employment tax apply and payers must issue 1099-MISC forms.

IRS campaign

The IRS announced it is sending letters to taxpayers who potentially failed to report income and pay tax on virtual currency transactions or did nott report them properly. The letters urge taxpayers to review their tax filings and, if appropriate, amend past returns to pay back taxes, interest and penalties.

By the end of August, more than 10,000 taxpayers will receive these letters. The names of the taxpayers were obtained through compliance efforts undertaken by the IRS. The IRS Commissioner warned, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics.”

Last year, the tax agency also began an audit initiative to address virtual currency noncompliance and has stated that it is an ongoing focus area for criminal cases.

Implications of going virtual

Contact your trusted advisor if you have questions about the tax considerations of accepting virtual currency or using it to make payments for your business. If you receive a letter from the IRS about possible noncompliance, consult with your trusted business advisor before responding.

When President Trump signed into law the Tax Cuts and Jobs Act (TCJA) in December 2017, much was made of the dramatic cut in corporate tax rates. But the TCJA also includes a generous 20% qualified business income (QBI) deduction for smaller businesses that operate as pass-through entities, with income that is “passed through” to owners and taxed as individual income.

The IRS issued proposed regulations for the qualified business income (QBI), or Section 199A, deduction in August 2018. Now, it has released final regulations and additional guidance, just in time for the first tax season in which taxpayers can claim the deduction. Among other things, the guidance provides clarity on who qualifies for the QBI deduction and how to calculate the deduction amount.

Rental real estate owners – proposed safe harbor

One of the lingering questions related to the QBI deduction was whether it was available for owners of rental real estate. The latest guidance (found in IRS Notice 2019-07) includes a proposed safe harbor that allows certain real estate enterprises to qualify as a business for purposes of the deduction. Taxpayers can rely on the safe harbor until a final rule is issued.

Generally, individuals and entities that own rental real estate directly or through disregarded entities (entities that are not considered separate from their owners for income tax purposes, such as single-member LLCs) can claim the deduction if:

The 250 hours of services may be performed by owners, employees or contractors. Time spent on maintenance, repairs, rent collection, expense payment, provision of services to tenants and rental efforts counts toward the 250 hours.

Investment-related activities, such as arranging financing, procuring property and reviewing financial statements, do not.

Be aware that rental real estate used by a taxpayer as a residence for any part of the year is not eligible for the safe harbor.

This safe harbor also is not available for property leased under a triple net lease that requires the tenant to pay all or some of the real estate taxes, maintenance and building insurance and fees, or for property used by the taxpayer as a residence for any part of the year.

Aggregation of multiple businesses

It is not unusual for small business owners to operate more than one business. The proposed regs include rules allowing an individual to aggregate multiple businesses that are owned and operated as part of a larger, integrated business for purposes of the W-2 wages and unadjusted basis immediately after acquisition (UBIA) of qualified business property (QBP) limitation, thereby maximizing the deduction. The final regs retain these rules with some modifications.

For example, the proposed rules allow a taxpayer to aggregate trades or businesses based on a 50% ownership test, which must be maintained for a majority of the taxable year. The final regulations clarify that the majority of the taxable year must include the last day of the taxable year.

The final regs also allow a “relevant pass-through entity” — such as a partnership or S corporation — to aggregate businesses it operates directly or through lower-tier pass-through entities to calculate its QBI deduction, assuming it meets the ownership test and other tests. (The proposed regs allow these entities to aggregate only at the individual-owner level.) Where aggregation is chosen, the entity and its owners must report the combined QBI, wages and UBIA of qualified property figures.

A taxpayer who doesn’t aggregate in one year can still choose to do so in a future year. Once aggregation is chosen, though, the taxpayer must continue to aggregate in future years unless there’s a significant change in circumstances.

The final regs generally don’t allow an initial aggregation of businesses to be done on an amended return, but the IRS recognizes that many taxpayers may be unaware of the aggregation rules when filing their 2018 tax returns. Therefore, it will permit taxpayers to make initial aggregations on amended returns for 2018.

UBIA in qualified property

The final regs also make some changes regarding the determination of UBIA in qualified property. The proposed regs adjust UBIA for nonrecognition transactions (where the entity doesn’t recognize a gain or loss on a contribution in exchange for an interest or share), like-kind exchanges and involuntary conversions.

Under the final regs, UBIA of qualified property generally remains unadjusted as a result of these transactions. Property contributed to a partnership or S corporation in a nonrecognition transaction usually will retain its UBIA on the date it was first placed in service by the contributing partner or shareholder. The UBIA of property received in a like-kind exchange is generally the same as the UBIA of the relinquished property. The same rule applies for property acquired as part of an involuntary conversion.

Specified Service Trade or Business (SSTB) limitations 

Many of the comments the IRS received after publishing the proposed regs sought further guidance on whether specific types of businesses are SSTBs. The IRS, however, found such analysis beyond the scope of the new guidance. It pointed out that the determination of whether a particular business is an SSTB often depends on its individual facts and circumstances.

Nonetheless, the IRS did establish rules regarding certain kinds of businesses. For example, it states that veterinarians provide health services (which means that they’re subject to the SSTB limits), but real estate and insurance agents and brokers do not provide brokerage services (so they aren’t subject to the limits).

The final regs retain the proposed rule limiting the meaning of the “reputation or skill” clause, also known as the “catch-all.” The clause applies only to cases where an individual or a relevant pass-through entity is engaged in the business of receiving income from endorsements, the licensing of an individual’s likeness or features, or appearance fees.

The IRS also uses the final regs to put a lid on the so-called “crack and pack” strategy, which has been floated as a way to minimize the negative impact of the SSTB limit. The strategy would have allowed entities to split their non-SSTB components into separate entities that charged the SSTBs fees.

The proposed regs generally treat a business that provides more than 80% of its property or services to an SSTB as an SSTB if the businesses share more than 50% common ownership. The final regs eliminate the 80% rule. As a result, when a business provides property or services to an SSTB with 50% or more common ownership, the portion of that business providing property or services to the SSTB will be treated as a separate SSTB.

The final regs also remove the “incidental to an SSTB” rule. The proposed rule requires businesses with at least 50% common ownership and shared expenses with an SSTB to be considered part of the same business for purposes of the deduction if the business’s gross receipts represent 5% or less of the total combined receipts of the business and the SSTB.

Note, though, that businesses with some income that qualifies for the deduction and some that does not can still separate the different activities by keeping separate books to claim the deduction on the eligible income. For example, banking activities (taking deposits, making loans) qualify for the deduction, but wealth management and similar advisory services do not, so a financial services business could separate the bookkeeping for these functions and claim the deduction on the qualifying income.

REIT investments

The TCJA allows individuals a deduction of up to 20% of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, including dividends and income earned through pass-through entities. The new guidance clarifies that shareholders of mutual funds with REIT investments can apply the deduction. The IRS is still considering whether PTP investments held via mutual funds qualify.

QBI deduction in action

The QBI deduction generally allows partnerships, limited liability companies, S corporations and sole proprietorships to deduct up to 20% of QBI received. QBI is the net amount of income, gains, deductions and losses (excluding reasonable compensation, certain investment items and payments to partners) for services rendered. The calculation is performed for each qualified business and aggregated. (If the net amount is below zero, it’s treated as a loss for the following year, reducing that year’s QBI deduction.)

If a taxpayer’s taxable income exceeds $157,500 for single filers or $315,000 for joint filers, a wage limit begins phasing in. Under the limit, the deduction can’t exceed the greater of 1) 50% of the business’s W-2 wages or 2) 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property (QBP).

For a partnership or S corporation, each partner or shareholder is treated as having paid W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages paid by the entity for the tax year. The UBIA of qualified property generally is the purchase price of tangible depreciable property held at the end of the tax year.

The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly or the next $50,000 for single filers. The limit phases in completely when taxable income exceeds $415,000 for joint filers and $207,500 for single filers.

The amount of the deduction generally can’t exceed 20% of the taxable income less any net capital gains. So, for example, let’s say a married couple owns a business. If their QBI with no net capital gains is $400,000 and their taxable income is $300,000, the deduction is limited to 20% of $300,000, or $60,000.

The QBI deduction is further limited for SSTBs. SSTBs include, among others, businesses involving law, financial, health, brokerage and consulting services, as well as any business (other than engineering and architecture) where the principal asset is the reputation or skill of an employee or owner. The QBI deduction for SSTBs begins to phase in at $315,000 in taxable income for married taxpayers filing jointly and $157,500 for single filers, and phasing in completely at $415,000 and $207,500, respectively (the same thresholds at which the wage limit phases in).

The QBI deduction applies to taxable income and doesn’t come into play when computing adjusted gross income (AGI). It’s available to taxpayers who itemize deductions, as well as those who don’t itemize, and to those paying the alternative minimum tax.

Proceed with caution

The tax code imposes a penalty for underpayments of income tax that exceed the greater of 10% of the correct amount of tax or $5,000. But the TCJA leaves less room for error by taxpayers claiming the QBI deduction: It lowers the threshold for the underpayment penalty for such taxpayers to 5%.

Please contact your tax advisor to avoid such penalties and review your specific facts and circumstances regarding the QBI deduction.

Review our QBI Flow Chart using your facts and circumstances to answer the question, “Am I eligible for the new 20% Qualified Business Income (QBI) Deduction?”

The Colorado Department of Revenue issued the following statement regarding proposed sales tax rules to implement the U.S. Supreme Court’s South Dakota v. Wayfair decision and destination sourcing:

“As part of our rulemaking process to implement sales tax rules for in-state and out-of-state retailers, we have heard from legislators and the business community, and the Department of Revenue agrees it is important for the state to take the time to get this right.

“As such, the Department is extending the automatic reprieve for Colorado businesses and out-of-state retailers to comply with the emergency rules from the current March 31, 2019 deadline to May 31, 2019. We will evaluate the need for another extension as May 31 nears. This additional time will give the state legislature an opportunity to find innovative solutions to streamline and simplify our sales tax collection laws in accordance with the wishes of the residents of Colorado.

“This is an opportunity to simplify sales tax for all parties: for businesses that collect and remit sales tax, for customers who pay it, and for those of us in state government whose obligation it is to carry out the tax laws passed by the state legislature. No one desires a streamlined and simplified sales tax collection and compliance system more than the Department of Revenue.”

If you have questions about sales tax in Colorado or in other states, please contact your tax advisor.

Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that is not the case; however, you can potentially deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s Tax Exempt Organization Search tool to find out.

Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:

Supplies, uniforms and transportation

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. As well as, the cost of a uniform you must wear during the activity may also be deductible (if it is required and not something you wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven, but you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she is volunteering, you cannot deduct the cost.

You also cannot deduct transportation costs you would incur even if you were not volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you will not be able to deduct your train fares. But, if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation.

Volunteer travel

Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include:

Lodging and meal costs also might be deductible.

The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally will not be deductible.

Volunteer Time

Donations of time or services are not deductible. It does not matter if it is simple administrative work, such as checking in attendees at a fundraising event, or if it is work requiring significant experience. Regardless of the service being costlier to the charity if it had to pay for it, such as skilled carpentry or legal counsel, this volunteered time is still not deductible.

Keep careful records

The IRS may challenge charitable deductions for out-of-pocket costs, so it is important to keep careful records. If you have questions about what volunteer expenses are and are not deductible, please contact your tax adviser.

Do you own a vacation home? If you both rent it out and use it personally, you might save tax by taking steps to ensure it qualifies as a rental property this year. Vacation home expenses that qualify as rental property expenses are not subject to the Tax Cuts and Jobs Act’s (TCJA’s) new limit on the itemized deduction for state and local taxes (SALT) or the lower debt limit for the itemized mortgage interest deduction.

Rental or personal property?

If you rent out your vacation home for 15 days or more, what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules.

Your deduction for property tax attributable to the rental use of the home is not subject to the TCJA’s new SALT deduction limit and your deduction for mortgage interest on the home is not subject to the debt limit that applies to the itemized deduction for mortgage interest. You cannot deduct any interest that is attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction (subject to the new SALT limit).

Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years.

If you itemize deductions, you also can deduct the personal portion of both property tax and mortgage interest, subject to the TCJA’s new limits on those deductions. The SALT deduction limit is $10,000 for the combined total of state and local property taxes and either income taxes or sales taxes ($5,000 for married taxpayers filing separately). For mortgage interest debt incurred after December 15, 2017, the debt limit (with some limited exceptions) has been reduced to $750,000.

Be aware that many taxpayers who have itemized in the past will no longer benefit from itemizing because of the TCJA’s near doubling of the standard deduction. Itemizing saves tax only if total itemized deductions exceed the standard deduction for the taxpayer’s filing status.

Year-to-date review

Keep in mind that, if you rent out your vacation home for less than 15 days, you do not have to report the income; but expenses associated with the rental (such as advertising and cleaning) are not to be deductible.

Now is a good time to review your vacation home use year-to-date to project how it will be classified for tax purposes. By increasing the number of days you rent it out and/or reducing the number of days you use it personally between now and year end, you might be able to ensure it is classified as a rental property and save some tax. Also, there could be circumstances where personal property treatment would be beneficial. Please contact your tax adviser to discuss your particular situation.

Starting early on your 2018 tax planning is especially critical this year, as tax reform has substantially changed the tax environment. Tax planning helps determine the total impact new laws may have on your particular scenario and identifies proactive tax strategies that make sense for you this year, such as the best way to time income and expenses. From this analysis, you may decide to deviate from tax approaches that worked for you in previous years and implement a new game plan.

Many variables

A tremendous number of variables affect your overall tax liability for the year. For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

Act now

Under the TCJA tax reform legislation, most of the provisions affecting individuals are in effect for 2018–2025 and additional major tax law changes are not expected in 2018.

Starting sooner will help prevent you from making costly assumptions under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

A large number of variables affect your overall tax liability for the year. It is especially critical this year because tax reform has substantially changed the tax environment. Planning early in the year can give you more opportunities to reduce your 2018 tax bill.

If you own a business, this is particularly important for the new qualified business income (QBI). New strategies are available to help you time income and expenses to minimize tax liability.

Now and throughout the year, seek your business adviser to help you determine how tax reform affects you and what strategies you should implement to minimize your tax liability.