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Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Do you drive a heavy vehicle for work? It could lighten your tax load. If you’re a business owner, your SUV, pickup truck or van may be eligible for 100% first-year bonus depreciation. But it must:
See below for some business vehicles that can do the heavy lifting.
Other rules apply. Contact your trusted advisor for details.
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.
Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.
While most smaller businesses are not yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?
Virtual Currency 101
Virtual currency has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies and is most commonly obtained through virtual currency ATMs or online exchanges.
Goods or services can be paid for using “virtual currency wallet” software. When a purchase is made, the software digitally posts the transaction to a public ledger. This prevents the same unit of virtual currency from being used multiple times.
Tax impact
Questions about the tax impact of virtual currency abound and the IRS has yet to offer much guidance.
In 2014, the IRS ruled that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting virtual currency payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.
When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ 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 received by the employee.
When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.
Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
Deciding whether to go virtual
Accepting virtual currency can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal or Venmo, in some cases) and attract customers who want to use virtual currency. It can also pose tax risks as guidance on the tax treatment or reporting requirements is limited.
It is important to research and contact your business adviser on the tax considerations when deciding whether your business should accept bitcoin or other virtual currencies.
As you may be aware, there have been several changes in due dates for some federal tax returns, which will be effective for the 2017 filing season or the 2016 tax year for calendar year-end filers. These modifications relate mostly to flow-through entities, including S corporations and partnerships that provide Schedule K-1s (partner’s/shareholder’s share of income, deductions, credits, etc.), containing investment information of partners/shareholders.
Due dates related to individual tax returns or estimated tax payments will remain the same; however, one new date will take effect next year that affects individuals.
What does this mean to you? As you gather tax documents for the coming tax season, we have compiled some suggested actions for your consideration to facilitate a smooth process.
Partnerships (Form 1065) — The due date is moved from April 15 to March 15 or the 15th day of the third month after the year-end.
S Corporation (Form 1120S) — No change, due dates remain March 15, allowing for preparation of Schedule K-1s as they relate to individuals and organizations
C Corporations (Form 1120) — Due date moved from March 15 to April 15; in most cases, returns will be due on the 15th of the fourth month after the year-end. However, although the due date of these returns has been pushed back a month, we encourage clients to submit the financial information necessary to complete these returns as soon as possible.
Individuals and Businesses — Foreign Bank and Financial Accounts Report (FBAR) (Report 114) — This form is required for individuals and businesses with a financial interest in, or signature authority over, at least one financial account located outside of the United States, and the aggregate value of all foreign financial accounts exceeding $10,000 at any time during the calendar year reported.
This due date change is the most significant for individual taxpayers; forms are now due April 15 rather than June 30. (For 2017 the due date is April 18 because April 15 falls on a Saturday and the Washington D.C. Emancipation Day holiday will be observed on April 17.) However, for the first time, a six-month extension to Oct. 15 will be available.
Please include any and all information related to foreign accounts when submitting your individual, partnership or corporate tax return documentation.
We understand that adjusting to this new system can be overwhelming. We have included a quick reference guide for tax deadlines from the AICPA HERE. Please feel free to contact our office (719-630-1186) if you have any questions or concerns related to due dates, your tax returns or any other tax or financial concern.
Shopping, anyone? If your business is in need of office equipment, computer software or perhaps an HVAC system, the purchase you make today could provide you with a tax break tomorrow — or, more specifically, when you’re ready to file your 2016 taxes. The Section 179 expensing deduction remains a solid potential tax-saving value for today’s companies.
Sec. 179 of the Internal Revenue Code allows businesses to elect to immediately deduct — or “expense” — the cost of certain tangible personal property acquired and placed in service during the tax year. This is instead of claiming the costs more slowly through depreciation deductions. The election can only offset net income, however. It can’t reduce it below $0 to create a net operating loss.
The election is also subject to annual dollar limits. For 2016, businesses can expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeds $2 million.
The expensing limit and phaseout amounts would have been far lower had Congress not passed the Protecting Americans from Tax Hikes Act in late 2015. The new law made the limits permanent, indexing them for inflation beginning this year. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, such as eligible leasehold-improvement, restaurant and retail-improvement property.
Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.
You can use Sec. 179 expensing for both new and used property. A related tax break, bonus depreciation, applies only to new property. Be sure to consider all options when purchasing assets. Questions? Please call us — we can help you identify the right depreciation tax breaks for your business.
If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.
In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.
The business owner said the travel expenses were incurred “caring for his business.” That isn’t enough. “The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,” the court stated. In addition, businesses must keep and produce “records sufficient to enable the IRS to determine the correct tax liability.” (TC Memo 2016-158)
In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.
The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.
There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to “undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”
The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)
Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.
Now that the final quarter of 2014 has begun, many businesses and individuals are turning their attention to year end tax planning. This year, however, uncertainty over dozens of expired or expiring tax provisions complicates the planning process, particularly for business owners.
Fifty-seven provisions expired at the end of 2013 and six more are scheduled to expire at the end of 2014. Congress may extend many of these provisions (in some cases retroactively to the beginning of 2014), but that likely won’t happen until after the midterm elections on Nov. 4 — and perhaps not for a month or more after that date. In the meantime, there are many year end tax planning strategies for businesses and individuals that are available now. Others won’t take shape until after Congress acts.
Year end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired at the end of 2013:
Enhanced expensing election. Before 2014, Section 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, on a dollar-for-dollar basis, to the extent qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election, these limits have dropped to only $25,000 and $200,000, respectively, for 2014.
Bonus depreciation. Also expiring at the end of 2013, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it’s unavailable for 2014 (with limited exceptions).
Lawmakers are considering bills that would restore enhanced expensing and bonus depreciation retroactively to the beginning of 2014, but probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?
Keep in mind that, to take advantage of depreciation tax breaks on your 2014 tax return, you’ll need to place assets in service by the end of the year. Paying for them this year isn’t enough.
Other expired tax provisions to keep an eye on include the Work Opportunity credit, Empowerment Zone incentives, the health care coverage credit and a variety of energy-related tax breaks.
Congress is likely to extend the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit), as it has done repeatedly since the credit was first established in 1981. But regardless of whether the research credit is restored, it pays to investigate whether your business is eligible for the credit for previous tax years.
Even if you lack the documentation to support traditional research credits, you may qualify for the alternative simplified credit (ASC). Until recently, the ASC could be claimed only on a timely filed original tax return. But the IRS issued new regulations in June allowing most eligible businesses to claim missed credits for open tax years by filing an amended return.
Many businesses miss out on significant tax savings because they fail to recognize that they’re eligible for the manufacturers’ deduction, also called the “Section 199” or “domestic production activities” deduction. It allows you to deduct up to 9% of your company’s income from “qualified production activities,” limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Many business owners assume that the deduction is available only to manufacturers. But it’s also available for certain construction, engineering, architecture, software development and agricultural activities.
As always, consider traditional year end planning strategies, such as deferring income to 2015 and accelerating deductions into 2014. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year or accelerate deductions by paying certain expenses in advance.
If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year end bonuses accrued in 2014 even if they aren’t paid until 2015 (provided they’re paid within 2½ months after the end of the tax year).
But deferring income and accelerating deductions isn’t the best strategy in all circumstances. If you expect your business’s marginal tax rate to be higher next year, you may be better off accelerating income into 2014 and deferring deductions to 2015. This strategy will increase your 2014 tax bill, but it can reduce your overall tax liability for the two-year period.
Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible and doing so will lower your tax bill.
Like businesses, individuals often can reduce their tax bills by deferring income and accelerating deductions. To defer income, for example, you might ask your employer to pay your year end bonus in early 2015. And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2014 contributions to IRAs, and certain other retirement plans, after the end of the year.
Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2014 return even if you don’t pay your bill until next year.
Other year end tax planning strategies to consider include:
Investment planning. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some of your poorly performing investments at a loss.
Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.
In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the threshold by deferring income or accelerating deductions.
Charitable planning. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains. Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.
Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, the above-the-line deduction for qualified tuition and related expenses, and the credit for energy efficient appliances.
Most strategies for reducing your 2014 tax bill must be implemented by the end of the year, so it’s a good idea to start planning now. Uncertainty surrounding the fate of expired tax breaks complicates matters, so contact us today to develop contingency plans for dealing with whatever tax legislation is signed into law.