Congress has once again extended the “extenders,” a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. This package of tax breaks has repeatedly been temporarily extended for short periods of time (e.g., one or two years), which is why they are referred to as “extenders.” Most of the tax breaks expired at the end of 2014, but now, in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (i.e., the 2015 PATH Act), the extenders have been revived and extended once again, but this time Congress has taken a new tack. Instead of just rolling the package of provisions over for a year or two, it actually made some of the provisions permanent and extended the remaining provisions for either five or two years, while making significant modifications to several of the provisions.

I’m writing to give you an overview of the key tax breaks affecting business that were extended by the new law. Please call our office for details of how the new changes may affect you or your business.

The extended business credits and special depreciation and expensing rules include:

1. . . . the research credit; made permanent; additionally, beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability, and the credit can be used by certain even smaller businesses against the employer’s portion of the Social Security portion of the employer’s payroll tax (i.e., FICA) liability;
2. . . . the minimum low-income housing tax credit rate for nonfederally subsidized new buildings; made permanent;
3. . . . the military housing allowance exclusion for determining whether a tenant in certain counties is low-income (differential wage payment credit); made permanent;
4. . . . the Indian employment tax credit; extended through 2016;
5. . . . the new markets tax credit; extended through 2019;
6. . . . the railroad track maintenance credit; extended through 2016; the new law modifies the credit to apply to expenditures for maintaining railroad track owned or leased as of Jan. 1, 2015 (rather than Jan. 1, 2005, as under prior law);
7. . . . the mine rescue team training credit; extended through 2016;
8. . . . the employer wage credit for activated military reservists; made permanent; beginning in 2016, the provision modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under prior law;
9. . . . the work opportunity tax credit; extended through 2019; the new law also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 50% of the first $6,000 of wages;
10. . . . qualified zone academy bonds; extended through 2016;
11. . . . three-year depreciation for racehorses; extended through 2016;
12. . . . 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements; made permanent;
13. . . . 7-year recovery period for motorsports entertainment complexes; extended through 2016;
14. . . . accelerated depreciation for business property on an Indian reservation; extended through 2016; the new law also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules;
15. . . . 50% bonus depreciation; extended for property placed in service during 2015 through 2019 (but 2016 through 2020 for certain property with a longer production period and certain aircraft); the 50% rate is phased down to 40% for property placed in serviced during 2018 (but 2019 for the long production period property and aircraft) and 30% for property placed in serviced during 2019 (but 2020 for the long production period property and aircraft); phase down is also required for the $8,000 increase, for bonus-depreciation eligible cars, of the first-year depreciation and expensing dollar cap for cars; the provision makes qualified building improvements (no longer just qualified building leasehold improvements) bonus depreciation eligible and permits most plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted rather than when income-producing;
16. . . . the election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation; extended for property placed in service during 2015; the provision modifies the AMT rules beginning in 2016 by increasing the amount of unused AMT credits that may be claimed in lieu of bonus depreciation;
17. . . . the enhanced charitable deduction for contributions of food inventory is made permanent; the new law modifies the deduction by increasing the limitation on deductible contributions of food inventory from 10% to 15% of the taxpayer’s adjusted gross income (15% of taxable income in the case of a C corporation) per year and also modifies the deduction to provide special rules for valuing food inventory;
18. . . . increase in elective business expensing (up to $500,000 annual write-off of eligible business property costs that is phased out once those costs exceed $2,000,000 for the year) is made permanent; made permanent too is the allowance of expensing for computer software and qualified real property (certain leasehold improvement, retail improvement and restaurant property; the $500,000 and $2,000,000 limits are indexed for inflation for tax years beginning after 2015; expensing is allowed for air conditioning and heating units placed in service in tax years beginning after 2015; the $250,000 cap on the expensing of qualified real property is eliminated for tax years beginning after 2015; the election and the specifics of the election are made revocable;
19. . . . the election to expense mine safety equipment; extended through 2016;
20. . . . special expensing rules for certain film and television productions; extended through 2016; the new law modifies the rules to apply to the cost of live theatrical productions;
21. . . . the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico; extended through 2016;
22. . . . the exclusion from a tax-exempt organization’s unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity; made permanent;
23. . . . the special treatment of certain dividends of regulated investment companies (RICs); made permanent;
24. . . . the definition of RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act; made permanent;
25. . . . exceptions under subpart F for active financing income; made permanent;
26. . . . look-through treatment for payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules; extended through 2019;
27. . . . the exclusion of 100% of gain on certain small business stock; made permanent; the new law also permanently extends the rule that eliminates such gain as an AMT preference item;
28. . . . the basis adjustment to stock of S corporations making charitable contributions of property; made permanent;
29. . . . the reduction in S corporation recognition period for built-in gains tax; made permanent;
30. . . . the empowerment zone tax incentives; extended through 2016; the new law modifies the incentive by allowing employees to meet the enterprise zone facility bond employment requirement if they are residents of the empowerment zone, an enterprise community, or a qualified low-income community within an applicable nominating jurisdiction; and
31. . . . the American Samoa economic development credit; extended through 2016.

The new legislation also includes a two-year delay in a pair of new taxes installed as part of the healthcare reform law: a levy on medical devices (which would have started in 2016) and another on high-end health insurance plans, known as the “Cadillac tax,” which would have applied beginning in 2018.

I hope this information is helpful. If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call.

Very truly yours,

Your Team at Monfalcone & Garris, P.C.

Many of us have a home office where we conduct our business or utilize part of our home for business purposes; however, you may not know this can conjure up tax savings.  To qualify you must use part of your home exclusively and regularly as your principal place of business.  According to the IRS, exclusively is defined as use of a specific area of your home only for your trade or business.  You do not qualify for the deduction if you use the area for both business and material personal use purposes.

Upon determining that you qualify for the deduction, you must choose a method to determine the amount of your deduction. There are two methods, the simplified method and the actual expense method to compute the business use of home tax deduction.  Utilizing the simplified method, you multiply the square footage by the prescribed rate. The allowable square footage is the portion of your home attributable to the business use of your home, but cannot exceed 300 square feet and the prescribed rate is $5.00.

For example, Suzzy Jean uses 65 square feet of the home exclusively and regularly for her designer jean company.  Her tax deduction for business use of home would be $325 (65 square feet X $5 = $325).

If you elect to use the simplified method you cannot deduct any of the actual expenses or depreciation related to the business use of your home.

If you elect to claim the deduction based on your actual expenses you may deduct, in full, any expenditure that is directly related to the business use portion of your home.  For example, painting or repairs in the area used for business.  You may also deduct the indirect expenses of keeping up your home such as rent, mortgage interest, insurance, taxes, utilities, repairs and general maintenance.  These indirect expenses must be deducted based on the percentage of your home used for business.  For example, if your home office space is 200 square feet and the entire home is 2,000 square feet then you may deduct 10% of your total indirect expenses.

It is important to note that you may not deduct business expenses in excess of the gross income limitation (your net income from the business).  Under the actual expense method, you may be able to carry forward some of these business expenses to the next year that were subject to the gross income limitation.  Under the simplified method there is no carryover provision; however, you may elect in and out of the simplified method in any given year.

This is a mere summary of how to claim a deduction for business use of your home; however, there are many exceptions and unique situations.  Please contact your tax adviser with any inquires you may have regarding business use of your home or other tax information.

Many of us have gotten comfortable with paying our monthly bills online, so it is surprising that, in our practice, we see very few clients electronically making their quarterly estimated tax payments.  It is very easy to do so, and every bit as secure as paying your credit card or electric bill.  Recently the IRS rolled out the new Direct Pay service for individuals to make their quarterly estimated tax payments.  This service can also be used to pay an individual tax bill, but is available only for taxpayers who use a Social Security Number (SSN) rather than a Taxpayer Identification Number (TIN).  For more information, including plans for enhancements to Direct Pay, click here:

http://www.irs.gov/uac/Newsroom/More-than-150,000-Individuals-Pay-Their-Taxes-with-IRS-Direct-Pay

To sign up, follow this link:

http://www.irs.gov/Payments/Direct-Pay

Of course, electronic payment of federal estimated income taxes through the Electronic Federal Tax Payment System (EFTPS) has been available for quite a while.  The service is free and you can pay by phone as well as by using the Internet.  Additionally, the service is available for payment of all federal taxes, not just quarterly estimated taxes.  EFTPS can also be used for paying business taxes.

With EFTPS, you can schedule payments up to 365 days in advance and access up to 16 months of payment history.  The system is secure and includes verification steps which allow taxpayers to review their information before it is sent.  EFTPS is available 24 hours a day, 7 days a week, whether you are making payments by Internet or phone.

For a complete description of the EFTPS and to enroll, click on this link:

http://www.irs.gov/uac/EFTPS-The-Electronic-Federal-Tax-Payment-System

Currently in Virginia, there is no system equivalent to the federal Direct Pay system, but taxpayers can access VATAX Online for payment of taxes.  VATAX Online offers many of the same features as EFTPS and divides its services between individuals and businesses.

For individuals, information can be found here:

http://www.tax.virginia.gov/site.cfm?alias=individualOnlineFAQs#payments

For businesses, information can be found here:

http://www.tax.virginia.gov/site.cfm?alias=moreinformationaboutifile

Electronic payment of some business taxes is already required and it is possible that more taxes, including individual taxes, will require electronic payment in the future, so why not get started?

–James W. Bell, CPA

In today’s world, even with the growing popularity of telecommuting and teleconferencing, there are times when you need to travel for business. In order to deduct your travel expenses on your tax return, you need to keep adequate records. There are many strategies to track your business mileage.

The IRS allows a deduction of either the actual business related costs or a standard mileage rate. Either way, you need to maintain accurate mileage records. Sounds cumbersome, right? Well, it doesn’t have to be.

A simple yet effective mileage recording method is to use an inexpensive small wire-bound notepad. They can be found at many retail outlets for around $1. You’ll just want to make sure it is large enough to record the following information:

• Date
• Destination (City, Town, or Area)
• Business Purpose
• Beginning Odometer Reading
• Ending Odometer Reading
• Miles This Trip

Many office supply stores sell Auto Mileage Log and Expense Record books. They usually run around $8 each, and have pre-printed pages with space for recording mileage and maintenance/repair expenses.

Of course, like everything these days, if you have a smart phone, there is “an app for that”. The ones I looked at ranged in price, from free for very basic tracking to around $12. Some of the better ones calculate your business mileage and download the totals to an Excel report you can email to your accountant (and your accountant will love you for it – trust me). Like any other mobile application, be sure to read the user reviews before downloading. This can save a lot of time and frustration down the road.

One caveat – commuting miles (the miles driven from your home to your normal place of business and back) are not considered business miles. However, trips from your normal place of business to pick up office supplies, visit a client, or between normal places of business are business related.

Happy (business-related) Motoring!

Beginning in 2013, pursuant to the Affordable Care Act, a new 3.8 percent net investment income tax (NIIT) applies to taxpayer’s with a modified adjusted gross income (MAGI) above the applicable thresholds below (not indexed for inflation).

• Single filers – $200,000
• Married filing jointly (including surviving spouses) – $250,000
• Married filing separately – $125,000
• Head of household (with qualifying person) – $200,000
• Trusts and estates – $11,950 (for 2013) on undistributed net investment income

Investment income generally includes gross income from the following sources:

• Interest, dividends, non-qualified annuities and royalties
• Rents (unless received in the ordinary course of a trade or business which is not a passive activity)
• Capital gains on stocks, bonds, mutual funds and investment real estate (including a second home)
• Income from a passive activity trade or business

However, the aforementioned gross investment income items are reduced by certain expenses/deductions to arrive at the amount subject to the 3.8% NIIT.  The following expenses properly allocable to items of gross investment income include:

• Investment interest expense (to the extent allowed as an itemized deduction)
• Investment advisory and tax preparation fees
• Expenses related to rental and royalty income
• Business deductions allocable to a passive activity trade or business
• State and local income taxes
• Penalties on early withdrawal of savings
• Capital losses and capital loss carryovers to the extent of gains on stocks, bonds, mutual funds and investment real estate

For example, if a married couple filing jointly has $200,000 of wage income and $100,000 of interest and dividend income after allocable deductions (MAGI totaling $300,000), the 3.8% tax on net investment income applies to the $50,000 (the amount over the $250,000 MAGI threshold).

There are many tax planning ideas that should be considered by taxpayers subject to the 3.8% NIIT.  A few of the more prevalent considerations are as follows:

• Tax loss harvesting becomes more important, especially for taxpayers in the new 39.6% tax bracket
• Tax exempt income investments may be more desirable
• Owners of pass-through entities may want to take action to materially participate
• Aggregation tax election for taxpayer with multiple rental properties may be necessary

This is only a brief overview of the 3.8% NIIT and is not intended to be exhaustive, so please contact us to discuss the various tax planning strategies available to your unique situation.

-John Scaglione, RTRP

Did you know that businesses and individuals located in the Commonwealth of Virginia that don’t pay Virginia retail sales tax when they make on-line purchases of tangible personal property for use in Virginia are responsible for paying Consumer Use Tax?

What is Consumer Use tax?

Consumer Use tax is a tax imposed on the storage, use, or consumption of tangible personal property within Virginia for items purchased from dealers outside of Virginia. The primary purpose of the tax is to prevent Virginia sales tax from placing Virginia merchants at a competitive disadvantage with out-of-state retailers.

Who is responsible for paying Consumer Use tax?

Businesses located in Virginia and individuals that reside in Virginia that make purchases from an out-of-state source and do not pay the Virginia retail sales tax at the time of purchase are responsible for paying consumer use tax, however, if the total amount of purchases were $100 or less for the entire year, and only from out-of-state mail order catalogs you do not have to pay the use tax.  If the purchases were for any amount from sources other than mail order catalogs, then you must report these purchases and pay consumers use tax on the total amount of all untaxed purchases from all sources made during the calendar year.  Nonprescription drugs and proprietary medicines purchased for the cure, mitigation, treatment, or prevention of disease in human beings are exempt from consumer use tax.

What is the Consumer Use tax rate?

Effective July 1, 2013, the consumer use tax rates are:

• If you are located in Northern Virginia, the rate is 6%
• If you are located in Hampton Roads, the rate is 6%
• If you are located elsewhere in Virginia, the rate is 5.3%

The use tax is computed on the cost price of the property, which is the total amount for which the property was purchased including any services that are a part of the purchase.  Cost price does not include separately stated shipping or delivery charges but it does include a shipping and handling charge if listed as a combined item on the sales invoice.

How do you pay Consumer Use tax?

For individuals, you can report and pay this tax on Schedule ADJ with Form 760 Individual Income Tax Return, or Schedule 760 PY ADJ with Form 760PY for part-year Virginia residents.

For businesses, including partnerships and sole proprietorships, report such purchases on Form ST-7 Consumer’s Use Tax Return or Form ST-9 Retail Sales and Use Tax Return.  The return is due on or before the 20th day of the month following the period in which the use tax liability was incurred.

-Deb Launi

Keeping good business records helps monitor the progress of your business, helps prepare accurate financial statements and helps prepare an accurate tax return. Recordkeeping systems range from paper ledgers to complex accounting software. Regardless of the recordkeeping system used, businesses need to keep documentation to support the entries in the accounting records. Answers to some frequently asked questions regarding supporting documentation follow.

1) What income supporting documents should be maintained?

• Keep supporting documents that show the amounts and sources of your income. Some examples are: bank deposit slips, customer invoices, credit card charge slips.

2) What purchases and expense supporting documents should be maintained?

• Keep supporting documents that show the amounts paid and the description of the purchase/expense. Some examples are: vendor invoices, store receipts, account statements, credit card purchase slips.

3) Is the credit card statement sufficient supporting documentation?

• Along with the credit card statement, you must keep credit card purchase slips, store receipts and vendor invoices to show the cost and date of the credit card purchase.

4) What supporting documentation is required for business meals and entertainment expenses?

• Keep receipts that include:
  • Name and location of the restaurant/entertainment
  • Date and amount of the expense
  • Write the business purpose of the meal on the receipt or a piece of paper to be included with the receipt
  • Also write the names of the recipients and their business relationship; include the name of the business and, employee that is present;

5) What records must be kept for business travel expenses?

• Keep receipts that include:
  • Name and location of the expense – for example the hotel name and city
  • Dates and duration of the expense
  • Write the business purpose on the receipt or a piece of paper to be included with the receipt

6) What records must be kept for asset purchases?

• Keep the following records to support the calculation of the annual depreciation expense and the gain or loss when you sell the asset. These records should be carried forward from the year of purchase to the year of disposition or sale.
  • Purchase invoices for the asset and any improvement costs related to the asset. The purchase invoice should include the date of the purchase and amount paid.
  • Sales invoices to substantiate the sale of an asset. The invoice should include the date of the transactions and the amount received.
  • Real estate closing statements

For more information regarding supporting documentation, refer to IRS Publication 583, Starting a Business and Keeping Business Records. For information regarding employee records refer to IRS Publication 15 (Circular E), Employer’s Tax Guide.

-Deb Launi

Need to find out how to setup a Household Employee?

First – a definition. If you hired any individuals to provide domestic services AND you can control what work is performed and how it’s completed, then you have a Household Employee. Such a worker is your employee regardless of whether the employment is full-time, part-time, or paid hourly or on a per-job basis.

This also goes for employees who you pay weekly or monthly. If you paid cash wages of $1,800 or more in 2012 to any one household employee then you must withhold and pay social security and Medicare taxes. If you paid wages of $1,000 or more in any quarter in 2012, then you are also liable to pay federal and Virginia unemployment tax. You will also be required to obtain an employer identification number and issue a W-2 to the household employee.

Please contact us for additional information on how to setup your household employee and comply with all federal and Virginia tax requirements.

As the end of the school year approaches, if you are a parent of teenaged workers you may be asked by your child for advice about how to complete tax documents for a summer job. Her employer will ask her for:

1) Form W-4, Employee’s Withholding Allowance Certificate

2) Form VA-4, Employee’s Virginia Income Tax Withholding Exemption Certificate

3) Form I-9, Employment Eligibility Verification

4) In the case of workers aged 14 or 15, a work permit.

The first two forms are for the employer to use in withholding income taxes on the wages earned. The third form documents that your child is authorized to work in the United States. The fourth form requires written parental consent for an underage child to work. All of these forms should be returned to the employer by the first day of work. This is a great learning opportunity for your child as an employee new to the workforce, so let her read the instructions and familiarize herself with the procedures and requirements. Be available for help if she should ask for assistance as she goes through the process. This is an excellent opportunity to discuss the significance of income taxes to individual taxpayers and to the government, and what is involved in succeeding as an employee. You might consider asking her if you could review the forms for completeness and accuracy before she gives the forms to her employer. Your review may reveal some items that she might not know or understand about the forms, especially if you have been filing tax returns for her for investment income. Your advice to her could avoid a returned form with a consequent delay in hiring, availability for work, and receiving pay for her work.

The following apply in general to teenaged workers with a summer job, but be sure that you and your child read the instructions carefully to know if you have an exception to the typical situation. In that case, enter the appropriate information on the forms. In all cases, your child, as the employee, must sign and date the forms for validation.

For Form W-4, if she will make less than $5,450 a year from employment and has less than $900 in investment income for the year, she may be exempt from paying income taxes. However, note that she cannot be exempt if she can be claimed as a dependent on your (or another’s) tax return and her income exceeds $950 and includes more than $300 of unearned income (for example, interest and dividends.) If your child qualifies for exemption from federal income tax by meeting the requirements of: 1) no tax liability in the prior year, and 2) expectation of no tax liability in the current year, she should complete boxes 1, 2 3, 4, and write “Exempt” in box 7. If your child does not qualify for exemption from federal income tax, use the “Personal Allowances Worksheet” to determine the number to use in box 5. Remember that your child does not take an allowance on Line A if they are treated as a dependent on your (or another’s) income tax return. Should your child wish to have additional income tax withheld from each paycheck, to cover unearned taxable income or self-employment tax, for example, enter this amount in box 6.

Explain to your child that even though she may be exempt from federal income taxes, she will still have Social Security and Medicare deducted from her pay. These funds will be credited to her account and she will begin to have a work history.

For the VA-4, there is the opportunity to be exempt from Virginia income tax under similar circumstances to the federal W-4. In general, your child can claim exemption by checking the box on line 3 for either of the following conditions: 1) no income tax liability for the previous year and no income tax liability expected for the current year, or 2) Virginia adjusted gross income expected to be less than $11,950 for the current year. Again, there are other special circumstances and conditions for Virginia individual income tax liability, so be sure to review the instructions to Virginia Form 760 with your child to see if any of these apply. If exemption does not apply, complete the Personal Exemption Worksheet on the VA-4 and enter the result on line 1. Your child can request that additional income tax be withheld from her pay if the employer agrees; enter this amount on line 2.

For Form I-9, your child enters identifying information in the first part of Section I, checks a box for employment eligibility (generally, as a citizen of the US), and signs a statement indicating awareness of the consequences of false statements or false documentation. Your child must provide identification to establish identity and employment authorization. This is generally either: 1) a passport, or 2) a school ID or driver’s license and a social security card or birth certificate. Other forms of identification may be used; check the list of acceptable documents in the instructions.

And finally, in general, if your child is at least 14 but not yet 16, she must apply for a work permit as a minor. The necessary forms can generally be obtained through your child’s high school. A parent or guardian of your child must sign a “Permission for Employment” form in the presence of the person issuing the permit. Note that there special work restrictions are placed on employers in regard to minor employees.

At the beginning of next year, when your child receives her 2012 Form W-2 Wage and Tax Statement to report her earnings, discuss with her the process of filing income tax returns. Even if she is not required to file because her total taxable income falls beneath the income filing requirements, she will probably wish to file for a refund if she had any federal or state income tax withheld. With all of this practice and guidance, your child will be well on her way to understanding the requirements and responsibilities of being an employee and a responsible income taxpayer. Job well done!

Links to forms and instructions:
http://www.irs.gov/pub/irs-pdf/fw4.pdf
http://www.uscis.gov/files/form/i-9.pdf
http://www.tax.virginia.gov/taxforms/Business/Withholding%20Tax/VA-%204.pdf
http://www.doli.virginia.gov/laborlaw/laborlaw_childworkpermits1.html

-Nancy B. Corley, EA

Moving? Want to become a landlord?

Converting a primary residence into rental property?

Maybe one day you’ll sell your home, but for now you’ve decided to rent it out. You might be able to shelter some of the rental income with tax deductions and depreciation write-offs. First you’ll have to navigate the complicated tax issues that come along with such a transition.

When you convert a primary residence into a rental property, many questions arise regarding the property’s depreciable basis. You’ll need to take into account whether the property was placed in service. You’ll also need to decide which depreciation method to use.

The basis for depreciation purposes is the lower of:

• The adjusted basis on the date of conversion (purchase price + capital improvements), or

• The fair market value of the property at the time of the conversion

Residential property is depreciated on a straight-line basis over 27.5 years beginning on the conversion date. The date placed in service as a rental is when the property is first available for rent, not when it is actually rented.

Obtaining an appraisal is often prudent. It helps establish the depreciable basis. The appraisal will also support the gain or loss reported on a subsequent sale.