Renting Out your Home or Vacation Home?

Dear Client:

You must consider the vacation home rules when you

• rent a bedroom in your home and also use it personally, or
• rent your beach home (or any other home you own) and also use it personally.

Personal Use of the Dwelling

Rent or use by relatives. Personal use includes more than meets the eye. You have personal use of a dwelling when you rent to or allow use by a relative. The rent charged makes no difference.

Paying and non-paying relatives who use your vacation home complicate your deductions. Such use by your relatives is personal use by you. The relatives who come with this personal-use taint include your

• mom and dad,
• brothers and sisters (whole and half),
• sons and daughters,
• grandchildren and grandparents, and
• spouse.

Planning tip. Do not rent to the tainted relatives.

Co-owners

Co-owners must count both use by their relatives and use by themselves as personal use. Thus, if you own a rental home with others, make sure you know about the personal use by the co-owners and also use by their tainted relatives.

Charitable Donations

Charitable donations produce personal use. No matter how much the charitable donor pays for use of your dwelling unit, the IRS counts the charitable use as personal use by you.

If you donate a week of vacation-home use to your school’s annual auction, you have a week of personal use. It makes no difference what the successful bidder pays for that week of use.

Double whammy. Your charitable gift of the right to use your dwelling unit for the week does not produce a deductible contribution for you. The IRS regulations deny a charitable contribution deduction for a gift of the right to use property.

Thus, the charitable gift penalizes you twice. First, the days you donate are days of personal use by you. Second, your donation of the days does not create a charitable deduction for you.

Swaps

Swaps produce personal use. Similarly, you have personal use when you swap dwelling units with a friend or under an exchange agreement. Swaps and bargains produce personal days. You count as personal use of your dwelling unit any days that you

• allow a person to use your unit under an agreement that lets you use another dwelling, whether or not you charge rent; or
• charge less than fair rent.

Example 1. You and Nelson swap one week of vacation-home use. Nelson’s use of your dwelling unit during the one-week swap counts as personal use by you.

Example 2. You and Johnson rent each other’s mountain homes for a week at fair market rent. Johnson’s rental of your dwelling unit during that one week counts as personal use by you. Example 3. You charge your child’s favorite teacher only 67 percent of the fair rent to use your beach home for a week. The teacher’s use of the beach home counts as personal use by you.

Repair Days

Repair days do not produce personal use. Tax law says that you do not use your dwelling unit on days when your principal purpose for such use is repair or maintenance. To qualify the day as a repair day, you must work substantially full-time repairing or maintaining the dwelling unit.

Example 4. You and your spouse arrive Thursday evening at your lakeside cottage after a long drive, but in time for a late dinner at the cottage. You spend a normal workday on both Friday and Saturday getting the unit ready for rental. Your spouse does no work on the house and simply relaxes at the beach.

You depart Sunday, a little before noon. According to the IRS’s examples, your principal purpose for that trip is maintenance. You do not count Thursday, Friday, Saturday, or Sunday as days of personal use. The repair days are non-use days.

Example 5. You own a mountain cabin that you rent in the summers. You spend a week at the cabin with your family. The family members work substantially full-time repairing the cabin. You spend about three to four hours each day during that week helping, and the rest of the time fishing, hiking, and relaxing. According to the IRS, your family’s principal purpose of that week’s stay is maintenance; therefore, the days are not days of personal use.

Again, the repair days are non-use days.

Rented Fewer Than 15 Days

Tax-free income. If you rent your dwelling for fewer than 15 days, you do not report the rental income or any rental expenses on your tax return. The income is tax-free. You do not share it with the government.

Planning tip. Do you have an event coming to your area that might command high rents? Examples include a major golf tournament, Olympic event, or other activity that could allow you to rent at a high rate for a short period.

Say you have a summer home on the beach next to a major golf tournament. You rent the home for $10,000 a week for two weeks. You have $20,000 of tax-free income.

Personal Residence or Rental?

The amount of personal use determines how you will treat your tax deductions on the dwelling. You have a tax code-defined rental of the dwelling when your personal use is either

• 14 days or less, or
• 10 percent or less of the days rented.

Example 6—rental. You rent your resort home 260 days. You use it personally for 26 days. Ten percent of your resort home is a personal home. Ninety percent is a rental property.

Example 7—hobby rental. With 30 days of personal use of the resort home in example 6, you have a residence. Your deductions on the rental part during the current tax year may not exceed your rental income (i.e., you have no tax shelter possibility).

Excess deductions carried forward. When the law deems your dwelling a residence, the deductions attributable to the rental are limited to gross rental income. The good news is that you carry forward the deductions in excess of the gross income limit to next year.

Treatment as a Rental Property

If, based on your rental and personal use, tax law classes your summer home as a rental property, you should follow the IRS allocation method to get the best tax breaks.

Personal part of interest lost. If tax law classes your dwelling as a rental property, any mortgage interest allocated to your personal use is non-deductible consumer interest (ouch!).

Passive loss rules. The dwelling classified as a rental property faces the passive loss rules.

Seven-day rule. The dwelling that is a rental under the 14 days and 10 percent tests is not rental real estate under the passive loss rules if the average rental period during the year is seven days or less, as we explain in Know These Tax Rules If Your Average Rental Is Seven Days or Less.

As you can see, there’s much to know about vacation homes. If you would like me to help you make sure you have the rules in hand, please call me on my direct line at xxx-xxx-xxxx.

Sincerely,

Bob

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Proving Travel Expenses After Tax Reform 2018

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:

• every expenditure for lodging, and
• every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available. I suggest saving ALL receipts regardless of amount.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains:

• the name of the hotel,
• the location of the hotel,
• the date, and
• separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the:

• name and location of the restaurant,
• date and amount of the expenditure, and
• number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

• Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
• Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
• Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
• Costs for baggage and shipping of business items needed at your travel destination
• Costs for lodging and meals (meal costs include tips to waiters and waitresses)
• Costs for dry cleaning and laundry
• Costs for telephone, computer, Internet, fax, and other communication devices needed for business
• Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either:

• have the corporation reimburse you for the expenses, or
• have the corporation pay the expenses.

If you would like my help in planning the business and personal parts of your next trip, please don’t hesitate to call me.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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2018 Client Business Meals Update

Here’s the updated strategy on deducting business meals with your clients or customers: deduct your client and business meals as if tax reform never took place. At first glance it appeared that the new tax law that went into effect on January 1, 2018 would disallow business meal deductions along with entertainment. Looking deeper it appears that was not their intent.

Wow. Is this aggressive? Not if:
• the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or
• the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act (TCJA) states that client and business meals continue as deductions, or
• lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

• The name of the person you had the meal with.
• The name of the restaurant where you had the meal.
• A short description of the business discussed.
• If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

If you want to discuss the business meals deduction with me, don’t hesitate to call.

Note that meals associated with customer or client entertainment (eg, eating while at the theater or baseball game) are NOT deductible due to the new tax law in 2018. Business deductions for entertainment are gone-period.

Sincerely,
Bob (805) 264-3305

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The Unpardonable Sin in an IRS/FTB Audit

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS/FTB audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

  Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

  The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

  Technology & APP’s: With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

  If you would like an example of what a mileage log should look like, feel free to contact Bob at (805) 264-3305.

Robert W Craig, EA Tax Services
431 2nd Street, Suite 3
Solvang, CA 93463
email: rcraig1044@aol.com

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Tax Tips for Real Estate Agents

Tax Tips For Real Estate Agents

You, as a real estate broker or agent, have two ways to grow your real net income:

1. Financial Offense
2. Financial Defense

Financial offense boost your income. Get more listings, more showings, more closings, sell more expensive properties, add additional services and the like.

Financial offense is hard work! If it were easy, everyone would be doing it.

Financial defense is simply to cut costs, while maintaining the integrity of your business plan. If you are like most real estate pros, taxes are your biggest single expense—and your biggest roadblock to financial security.

A successful real estate pro can give away 40% or more of their income.

How do you stop the tax madness?

Tax planning guarantees results. You can spend hours and hours and thousands of dollars on speculative marketing efforts that take years to pay off for you. With increased income you spend $5 to net $1.

With taxes, if you save $5, you have $5 more in spendable income.

Tax planning gives you control. You can’t control the economy, interest rates, or any other external forces—but you can make sure you take advantage of every tax break the law allows.

Taking advantage of all the tax breaks and so called loopholes in the tax code is perfectly legal. But it is not all cut and dry, so it is filled with land mines and potential traps, the “red flags.”

To sum up, tax planning works. Together, both your offense and defense will govern the results you get from your business. To bring in the token sports cliché: ‘Offense sells tickets, defense wins games’. This applies to business as well.

Tips of the Month:

Tip #1. Picking the Right Broker or Agent, or How To Be The Broker/Agent That’s Right To Pick.

Do buyers actually go out and look for an agent? Probably most of the time they just stumble over them. At an open house, a cocktail or block party, a friend or relative who knows one is most likely the way we happen upon a broker or agent.

So, look at advice you may give someone on finding the best broker or agent, and make sure you are that person.

Recommendation – People look for referrals. Be out there, let people you’ve done great work for know that you did great work for them. Ask for the referral at the time you do the work when it’s fresh on their minds. And then follow up, don’t let em forget you. Get a testimonial.

Expertise – What is your expertise? Do you specialize in one area or another of real estate? This helps to nail down your target market. Then combine that with the recommendation side and hang with the people who can refer you the prospects that are most likely to own or want properties in your niche. Let them know, you are the professional who has done it before.

Commitment – How committed are you to putting the client first? This is a gut check one. People want a pro that’s totally committed. Are you that person? If not, become that person. Remind yourself each day where your bread is buttered. Fall in love with your prospects and clients. It makes the work more fun too. Are you just dabbling in real estate part-time?

Reputation – Reputations good or bad, are earned. They are earned by doing great work. Have letters of recommendation from clients and from your office managers, if applicable, for potential clients.

Drive – Kind of like commitment, but more action oriented. Drive can also be called determination. Do you have it? Are you part-time or full-time? All the drive in the world is useless if you’re not around when the client has a problem or wants to write or respond to an offer.

Flexibility – This goes somewhat with expertise, but how adept are you at sensing the right time to adjust pricing and adapting to changing real estate climates?

List/Sale Ratio – Do you close 70% or more of your listings? What is your listings average time on the market? A smart prospector may ask to see statistics, but even if they don’t, it should give you confidence in knowing the numbers. Also, if they are sub-par, it gives one a goal to work toward.

The Company You Work For – What is the company’s reputation? What is the company going to do for the client? Does your company have systems with strong marketing plans and tools, and systems to communicate these to the client? The company should have a strong reputation of backing up the client.

Bedside Manner – Maybe actually the biggest single factor for selecting a professional to represent a client is his or her bedside manner so to speak. How well do you connect? How well do you sense what the prospective client wants from you? And how willing are you to give them exactly what they want? People can sense these things so you need to have the right attitude and it will shine through.

I hope these are a help. You may have more traits that you have worked out yourself but the key is to become the real estate professional that the clients you want to work for are looking for. Then your confidence and energy will precede you in all your business dealings. These even work to improving yourself in your personal life too.

Tip #2

Successful agents spend more time by far, than unsuccessful agents, finding prospects proactively, presenting, and closing buyers and sellers. Therefore, these items should be priorities for the successful real estate agent.

Tip #3

Be able to help your clients, either with personal knowledge and experience, or by getting an outside advisor, with decisions regarding real estate investments. This helps them make buying and selling decisions quickly and makes you look good. Click Here to read my article on “Tax Tips for Real Estate Investors.”

Go get em!!!

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Tax Deductions – Travel, Meals & Entertainment

Travel, Meals and Entertainment Expenses

Commuting Expenses.  To open this section I want to be sure we understand that, in general, the costs of commuting between a taxpayers home and work location are nondeductible commuting expenses.  But under certain circumstances these commuting expenses can be deductible if:

1)      The expense is for going between the taxpayers home and a temporary work location outside the metropolitan area where the taxpayer lives and normally works.

2)      The taxpayer has one or more regular work locations away from home and the expenses are for going between home and a temporary work location in the same trade or business, regardless or distance or

3)      The taxpayers home is the taxpayers principal place of business, and the expenses are for going between home and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.

A temporary work location means a job or contract that is expected to last, and actually does last for one year or less.

What we strive for is to make as much vehicle mileage deductible as possible.  Learn the commuting rules above.  Mileage around town in the course of your business is generally deductible.  Having a home office really helps as your business miles are determined as you drive away from your home.

If you do not qualify for a home office, your miles to your business are nondeductible commuting miles, but all the rest of the miles you drive for business are deductible.  If you do not go into the office, the miles to your first client or job is commuting, then miles from job 1 to job 2 to job 3 and back and so on are deductible, and the miles from the last job or client is nondeductible commuting.  These are very important concepts as by knowing them you can design your day to optimize deductible miles.

Tax Commandment – Keep A Mileage Log!!!  More on this later.

Travel Away From Home.  Expenses for transportation, meals and lodging are deductible for business travel away from the taxpayer’s tax home.  The term ‘tax home’ includes the entire city or general area where the taxpayer regularly conducts business.  The tax home is determined without regard to where the taxpayer’s family home is located.  Actually, a husband and wife can have different tax homes if each works in a different area.  The ‘tax home’ concept is important to understand.

I recall a client who lived in Solvang who took a job in Los Angeles, so he had to drive there every week.  Many times he’d get a motel and stay and drive back on weekends.  This was a permanent position (not temporary).  He wanted to deduct his miles back and forth as well as his lodging.  No dice.  He doesn’t qualify for any of the commuting exceptions above.  The IRS says it is his choice to work so far away from his job.  His tax home is in LA where he works, therefore, no deduction.

There are a number of special rules on tax home such as for; transients, airline pilots, military, etc.

To deduct travel expenses one must meet the ‘overnight rule.’  You must be away from your tax home longer than an ordinary work day, and must be away long enough that you cannot reasonably expect to complete the trip without sufficient sleep or rest.  And the rest period must be of sufficient duration that is necessary to secure lodging.  A cat nap at a rest stop is not sufficient rest for this purpose.

Once you meet the requirements, you can deduct ordinary and necessary reasonable costs of; transportation, bus, taxi, baggage, vehicle, lodging and meals, dry cleaning, telephone, tips, internet access, computer rental fees, etc.

Special rules apply when business travel is mixed with personal travel.  When a trip is made:

  • Entirely for business – all travel expenses are deductible.
  • Primarily for business – facts and circumstances must be looked at but usually the transportation is deductible for taxpayers cost (not spouse or children unless they are employees and an integral part of the business).  Same with meals, hotel, etc.
  • Primarily for personal reasons – The entire cost of the trip is nondeductible however, any direct business related expenses incurred at the location are deductible.

  Special rules are there for luxury water travel, conventions in North America, conventions outside of North America, cruise ship conventions, travel outside of the United States and the like.

Meals and entertainment.  The cost of entertaining a client, customer or employee can qualify as an ordinary and necessary business expense.  Entertainment activities can include the cost of meals (food, beverage, tax, tip).  Entertainment can be provided at facilities such as nightclubs, social clubs, sports facilities or theaters, or on hunting, fishing, vacation and similar trips.  However, a deduction is generally not allowed for the cost of renting or owning an entertainment facility such as for country club dues.

To qualify for a deduction, the entertainment expenses must be directly related to or associated with the active conduct of a trade or business, or for the production or collection of income.

Directly related:  The taxpayer must show that the main purpose of the event was business, engaged in business with a person or persons during a meal or entertainment activity and have more than a general expectation of receiving income or some other specific business benefit in the future.

Associated with:  The taxpayer provides entertainment or a meal directly before or after a substantial business discussion. The taxpayer must actively engage in a meeting, discussion or other business transaction to obtain income or some other specific business benefit.  It is not necessary that the taxpayer devote more time to business than to entertainment.

Note: Meals with business associates and coworkers are generally not deductible unless that taxpayer can establish a clear business purpose.

Lavish or extravagant:  Expenses are not allowed for entertainment that is lavish or extravagant (remember the ordinary and necessary discussion).  Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts. However, the expenses must be reasonable considering the facts and circumstances.

50% Deduction Limitation:  Per the IRS Code, expenses for meals and entertainment are only allowed at 50% (unless subject to Department of Transportation rules, then they’re 80% deductible).  So if you entertain a client or deduct meals while on business travel and spend $500, your deduction is only $250.

Record Keeping Requirements

  Most of us do not like the record keeping part of the tax system, but it is critical to your tax health.  It’s also important to your business health, as good records help you monitor and improve your business.  You can only control what you measure and, without good records, it’s hard to measure.

You simply cannot depend on the begging the IRS for mercy when it comes to your records.  Getting your tax records right is not difficult when you know what to do, set up a system to do it, and form the habit of doing what the system requires. 

What do you think is the unpardonable sin in an IRS audit?  If you said, lousy records you win the prize.  I’ve been in IRS audits with good records and bad, and believe me, good records saved the client taxes and, it saved the client fees for me to represent them in the audit.  Of course, bad records did just the opposite, but you already knew that.

Here are some guidelines to follow:

Set up separate business checking accounts.  Do not comingle with personal funds, or funds of separate businesses.  Deposit receipts only in the account that earns the money.

Record deductible expenses daily.  Okay, weekly is fine.  The longer things sit, the harder it is it seems to get it in, and the harder it might be to remember what it is for.

  Keep mileage logs.  To deduct your vehicle expenses, you need proof of business use.  This is true whether you operate as a sole proprietor, partnership, corporation, LLC or anything else.  If you are an employee of your corporation, you must submit business use substantiation to your corporation.  Partners reimbursements should be set up the same.

A great way to track your business mileage is in your appointment book so it reflects your business activity each day.  Further, the appointment book facilitates the use of a sampling method that allows you use a three month log to prove business use for the year if your mileage is fairly repetitive. 

Use a separate log for each vehicle and for each business or rental property if applicable.

If you don’t use an appointment book, there are special auto mileage logs you can buy at staples or office depot that fit in your pocket, software, or you can design your own.

You also need to show how many miles your business vehicle(s) went for the whole year, as well as how many business miles.  I suggest having an oil change as close to January 1st of each year as possible.  This gives you the beginning and ending miles for each year. 

Again, remember that information, expenditures, and mileage logs must be kept separately for each business vehicle.  Unless you plan to just take the standard mileage rate where you figure business miles and apply an IRS rate to it, you need to know how much was spent for vehicle #1, #2, etc separately along with their respective logs.

There is just no really fun way to do all this.  But if you want the maximum deduction, bullet-proof audit protection, and peace of mind, you must develop the habit of keeping up auto and all business records.

Records for travel and entertainment.  You need to prove, for each day of travel, where you were and why you were there.

For meals and entertainment, you need to record who, what, when, where, why, and how much.  A tip is to add a short note to each receipt with the name of the person you entertained, why you entertained this person, what relation this person has to your business, and what the meeting did for your business (the future benefit).  The receipt itself contains the remaining documentation; what, when, where, how much.  Be sure to write the tip on the receipt as well.

Important:  If you operate a corporation (C or S), you need to turn the documentation in to the corporation, and the corporation needs to either pay for the entertainment and travel expenses directly (with a corporate credit card) or reimburse you dollar for dollar for the amounts spent.  Do not neglect this step or you will lose deductions.

Proof for other business expenses.  For all expenses, from the purchase of your desk and computer to pens and staples, you need to:

  1. Prove what you bought.  Get receipts and save all your receipts!
  2.  
  3. You need to prove you paid for what you bought. Cancelled check, credit card receipt or other proof of payment.
  4. You need to show that what you bought is an ordinary and necessary business expense for your business.  Be able to prove they are not personal use items.
 

As a general rule, don’t pay in cash.  It’s like putting fresh meat in front of a bear.  The radar flips to high and all sorts of questions fly out of the auditors mouth:

  • Where did the cash come from?
  • How can you track the cash to the payment?
  • Was an ATM withdrawl evident before the cash payment?
  • Did you really spend the cash or just make up this deduction?
 

By using checks or credit cards, you don’t endure this line of questioning.  If you have to pay in cash, get a receipt and jot the answers to the above questions on it and save it.

When I walk into an IRS audit with receipts, documentation, and perfect logs, I blow away the auditor right off the bat, and the rest of the audit slides like a sled on snow.

When I walk into an audit with bad records, the auditor takes a more aggressive stance.  “If this record is bad, maybe there’s more to go after.”  As the old saying goes, “you never get a second chance to make a first impression.”  It’s as true here as anywhere.

Call me with any questions you may have. (805) 264-3305

Bob

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Tax Deal Made

Well, they did it. They drug it out to the last minute, but they did it. Weeelll, they did some of it. And I’d really like to thank all of them in Washington for dragging us through this during the holidays and leaving us to sort this all out this morning while at the same time trying to digest all the holiday turkey, food and fun.

Most taxpayers got the extension of the Bush-era tax cuts, a good thing. As you’ll read below, individuals making more than $400,000 single and married couples making more than $450,000 were not so lucky. For those of you in these income levels, we will be talking personally as soon as all the details are ironed out for where we go from here.

Also, the debt ceiling and spending issues have not been addressed, that’s been ‘kicked down the road ‘ a couple months. If we think this over the holidays bickering was nasty and ugly, I fear we ain’t seen nothin yet.

Tax changes included in Congress’ fiscal cliff legislation (01-01-2013)

Here is a summary of the provisions included in the bill, which the President is expected to sign.

Tax rates beginning January 1, 2013:
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint.

2% Social Security reduction gone

AMT permanently patched
A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012.

Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above).

Itemized deduction and personal exemption phase-outs
The Pease itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single.

Estate tax
The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012).

Personal tax credits
The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017.

Other personal deductions and exclusions
The following deductions and exclusions are extended through 2013:

  • Discharge of qualified principal residence exclusion;
  • $250 above-the-line teacher deduction;
  • Mortgage insurance premiums treated as residence interest;
  • Deduction for state and local taxes;
  • Above-the-line deduction for tuition; and
  • IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
Business provisions
  • The Research Credit and the production tax credits, among others, will be extended through 2013;
  • 15-year depreciation and §179 expensing allowed on qualified real property through 2013;
  • Work Opportunity Credit extended through 2013;
  • Bonus depreciation extended through 2013; and
  • The §179 deduction limitation is $500,000 for 2012 and 2013.

Remember, these are only tax changes with regards to the fiscal cliff legislation. As I have stated in prior emails, there are a batch of new taxes that went into effect on January 1st as part of Obama’s 2010 health care reform legislation. To avoid confusion, I will follow up this email with a separate one addressing these new taxes.

I will have a bit of work sifting through all this in the next few days and as details emerge There are sure to be things that were slipped in to this bill that will need to be looked at. For example, there is apparently a $59 million break to algae growers to encourage biofuel production and I will need to see who of you this may affect…

Please email any questions you may have on any of this and how it may affect your situation. For now, gotta hit the books.

Take care,

Bob

Robert W. Craig, E.A. Tax and Business Services (805) 264-3305

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Year-End Payroll Tips for Employers

Year-end payroll tips for employers

The Winter 2010 edition of the SSA/IRS Reporter included an article by the American Payroll Association (APA) which noted some tasks that employers should perform in December and January to make year-end processing go more smoothly. We have listed those tasks below that were included in the APA article plus added a few others:

December
Remind workers who have had life changes, such as marriage, divorce, or a change in the number of dependents, to make the appropriate changes to their withholding on Form W-4.

Remind employees who wish to continue claiming exemption from withholding to submit a new Form W-4 by Feb. 15, 2012. Beginning Feb. 16, 2012, you must withhold based on a marital status of “single” with zero withholding allowances for employees who claimed exemption from withholding in 2011, but who have not submitted a 2012 Form W-4.

Collect benefit and payroll adjustment information and post to employees’ payroll records. This information should include relocation, educational assistance, group-term life insurance, third-party sick pay, company cars, manual checks, and void checks.

Order enough W-2 forms for all the employees who have worked for you this year, as well as some extras to allow for any mistakes. Consider preparing, printing, and filing W-2s online at the Social Security Administration (SSA) website, if you don’t do this already.

Verify employees’ names and Social Security Numbers (SSNs) at http://www.ssa.gov/employer/ssnv.htm.

Run a special payroll, if necessary, to record all manual and voided checks issued between the last regular payroll and December 31st.

Conduct a final review of the general ledger for hidden wages (generally, taxable noncash fringe benefits).

Verify that the bank reconciliation is complete through November and ask the bank to prepare an early cutoff statement for December.

Make sure your payroll system will be updated by January 1 to take into account any changes in federal tax-free limitations and state unemployment taxable wage bases.

Observation: The tax free exclusion for the combined value of mass transit passes, reimbursement for mass transit expenses, and payment of vanpooling expenses is currently scheduled to decrease from $230 a month to $125 a month, effective Jan. 1, 2012, unless legislation is enacted that makes this exclusion equal to the exclusion for qualified parking expenses ($240 a month in 2012). A provision included in H.R. 1, The American Recovery and Reinvestment Act of 2009, made the exclusion for the combined value of mass transit passes, reimbursement for mass transit expenses, and payment of vanpooling expenses equal to the exclusion for qualified parking expenses from March 2009 to December 2011, but that legislation is no longer in effect in 2012.

December-January
Obtain new forms, withholding tables, and publications. Review the new Social Security wage base, deferred compensation limits, mileage rates, and state unemployment wage bases.

Let employees know about changes to tax figures. The above communications may help reduce the number of questions that you receive from employees in the coming months.

January 1
Reset all year-to-date balances to zero.

Reset all wage bases, rates, and taxable limits.

January
Reconcile W-2 totals against the four quarterly 2011 Forms 941.

Run a report to verify W-2 information before printing forms. Make sure you have a Social Security number for each employee. Review the report for employees with: (1) wages over the 2011 Social Security wage base limit of $106,800; (2) benefits that must be reported in box 10 or 12 of Form W-2; or (3) statuses that must be checked in box 13 of Form W-2.

Buy postage for mailing W-2 forms.

If you offer any pre-tax deductions, prepare a notice for employees that explains the calculations in boxes 1, 3, and 5 of Form W-2.

W-2 electronic filing improvements. Beginning with this filing season, employers will be able to submit up to 50 W-2 forms to the SSA through W-2 Online (previously, up to 20 W-2 forms). Employers may now submit both current year and prior year W-2 forms electronically. Previously, only the current year could be submitted electronically.

W-2 deadline. W-2s must be mailed or delivered to employees by Jan. 31, 2012.

If you have any questions on the above, feel free to contact me at (85) 264-3305 or email rcraig1044@aol.com.

Thank you,
Bob
Robert W. Craig, E.A. Tax and Business Services
1444 Aarhus Drive, Solvang, CA 93463
Website: www.BobCraig.biz

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June 2011 Newsletter

Sales Tax Rate Drops July 1st

Effective July 1, 2011, the combined statewide sales and use tax rate will decrease from 8.25% to 7.25%. The temporary 1% increase implemented in April 2009 expires June 30, 2011.

Remember that district taxes are still applicable, so the tax rates in most areas of California will be greater than 7.25%. For the scheduled rates for your county to go into effect on 7/01/2011, go to: http://www.boe.ca.gov/sutax/pam71.htm and click on “Tax rates effective July 1, 2011.

If the governor has his way, rates will increase, but that probably won’t?(TM)t happen until later this year. So this is a reminder to all business clients to reprogram their cash registers to charge the lower sales tax beginning July 1. And for everyone, sales taxes after June will mean a few bucks off the stuff we buy, at least for now.

Mid-Year Checkup on Your Investments

My gosh, half the year is almost over. Maybe its a good time to review your investment portfolio. The market since March of 2009 has done pretty well looking at the numbers.

But be cautioned a lot of the upswing is being attributed to Fed stimulus (Quantitive Easing I and QE II) manipulating the markets. What happens if and when it stops? Are we looking at inflation? Or deflation? Where are interest rates headed? How will this affect my portfolio?

In light of all this, all portfolios should be periodically reviewed depending on a lot of factors. Such things like, allocation of assets, ones age, possibly moving closer towards retirement and a necessary reallocation to safer assets, the state of the economy and the world and other factors.

A lot of people were affected by market drops in 2001 and 2008/2009 as well as previous drops. No one has a crystal ball but we are in an unprecedented time in history and the best advice I can give in this newsletter is – Be Safe and don’t get caught by surprise.

Do I still Need My Living Trust?

Under federal law in effect for deaths in 2011 and 2012, married couples have a new tax break: Together they can transfer up to $10 million without owing any federal gift or estate tax. There is a new word out her too, called “portability.” This means that the surviving spouse gets to “tack on” the decedents estate tax exemption to his or her own.

In the past, the decedents exemption died with the decedent.

For many couples, this eliminates the need to create the “AB Trust” or bypass trust that has been traditionally used to avoid estate tax.

This has raised the question by many, “do we still need a living trust?” $10 million!!! “I don’t have anywhere near that.” Why mess with it at all?

Caution: This new law is only scheduled to be in effect in 2011 and 2012. What happens after that? Who knows?

Remember that living trusts do much more than potentially save estate tax…they are used to avoid costly probate. They spell out the decedents wishes, provide for beneficiaries who may need special treatment like special needs or children from a prior marriage or whatever.

So they’re not total toss-outs, they still have a big place in your plan. But, just like your investment portfolio, your current living trust may need revisiting.

Many are set up to require a new trust to be created at the passing of the first spouse…the bypass trust. My experiences is that lots of the trusts out there have a requirement to create this trust whether it is beneficial or not. It many cases under current law this will create an unnecessary burden and create the need to file additional tax returns as well as reducing flexibility.

You would be wise to read your trust carefully or get it looked at to determine if it should be amended or restated to give you the choice of creating a new trust at the death of the first spouse or not.

A trust vehicle called an “AB Disclaimer Trust” may be a potential solution for this problem. As always tho, its not for everyone so check with an expert to determine if it works in your situation. Note that for this to work it must be in place before the death of the first spouse.

We’re looking a year and a half window and, depending on what changes take place after 2012, looking at maybe changing things up again after that. Additional expense, headaches, and uncertaintly – your tax dollars at work.

Business Standard Mileage Rate Increases for Last Half of 2011 — other rates also rise

The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will increase by 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to Dec. 31, 2011 to better reflect the real cost of operating an auto in this period of rapidly rising gas prices.

This rate can also be used by employers to reimburse tax-free under an accountable plan employees who supply their own autos for business use, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense will also increase 4.5¢ for the last half of 2011 from 19¢ to 23.5¢ per mile.

However, the prior standard mileage rates of 51¢ for business and 19¢ for medical or moving expenses, continue to apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes before July 1, 2011, and to mileage allowances paid: (1) to an employee before July 1, 2011, or (2) with respect to transportation expenses paid or incurred by the employee before July 1, 2011.

This requires separate mileage tracking…

This all means that if you deduct business mileage using the cents-per-mile method for 2011, you’ll need to track your business miles from January 1st thru June 30, 2011 and show them separately from the July thru December 31 figures in order to compute the deduction correctly.

IRS Audits on the Rise…Be on the lookout for an upcoming email update from me regarding the increase in audit activity at the IRS. Everyone including the federal, state, and local governments are looking for money.

The IRS, Franchise Tax Board, and the Employment Development Department are no different and are stepping up enforcement. Watch for my email but in the meantime…

Document everything and keep good records and mileage logs!

Thanks for reading and I’ll be back with you soon.

More to come. – Bob

Robert W Craig, E.A. Tax and Business Services

(805) 264-3305

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Independent Contractor versus Employee

Independent Contractor Checklist

Mistakenly classifying an employee as an independent contractor can result in significant fines and penalties. There are 20 factors used by the IRS to determine whether you have enough control over a worker to be an employer. Though these rules are intended only as a guide-the IRS says the importance of each factor depends on the individual circumstances-they should be helpful in determining whether you wield enough control to show an employer-employee relationship.

If you answer “Yes” to all of the first four questions, you’re probably dealing with an independent contractor; “Yes” to any of questions 5 through 20 means your worker is probably an employee.

1. Profit or loss. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk-not just the risk of not getting paid.)

2. Investment. Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely independent contractor status.)

3. Works for more than one firm. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive since employees can also work for more than one employer.)

4. Services offered to the general public. Does the worker offer services to the general public?

5. Instructions. Do you have the right to give the worker instructions about when, where, and how to work? (This shows control over the worker.)

6. Training. Do you train the worker to do the job in a particular way? (Independent contractors are already trained.)

7. Integration. Are the worker’s services so important to your business that they have become a necessary part of the business? (This may show that the worker is subject to your control.)

8. Services rendered personally. Must the worker provide the services personally, as opposed to delegating tasks to someone else? (This indicates that you are interested in the methods employed, and not just the results.)

9. Hiring assistants. Do you hire, supervise, and pay the worker’s assistants? (Independent contractors hire and pay their own staff.)

10. Continuing relationship. Is there an ongoing relationship between the worker and yourself? (A relationship can be considered ongoing if services are performed frequently, but irregularly.)

11. Work hours. Do you set the worker’s hours? (Independent contractors are masters of their own time.)

12. Full-time work. Must the worker spend all of his or her time on your job? (Independent contractors choose when and where they will work.)

13. Work done on premises. Must the individual work on your premises, or do you control the route or location where the work must be performed? (Answering no doesn’t by itself mean independent contractor status.)

14. Sequence. Do you have the right to determine the order in which services are performed? (This shows control over the worker)

15. Reports. Must the worker give you reports accounting for his or her actions? (This may show lack of independence)

16. Pay Schedules. Do you pay the worker by hour, week, or month? (Independent contractors are generally paid by the job or commission, although by industry practice, some are paid by the hour.)

17. Expenses. Do you pay the worker’s business or travel costs? (This tends to show control.)

18. Tools and materials. Do you provide the worker with equipment, tools, or materials? (Independent contractors generally supply the materials for the job and use their own tools and equipment.)

19. Right to fire. Can you fire the worker? (An independent contractor can’t be fired without subjecting you to the risk of breach of contract lawsuit.)

20. Worker’s right to quit. Can the worker quit at any time, without incurring liability? (An independent contractor has a legal obligation to complete the contract.)

If you have any additional questions or would like an appointment to review please call me at (805) 264-3305. Thank you, Bob

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