Maybe your spouse helps out at your small corporation without pay. Although wages are taxable and fringe benefits cost your company, you could be missing out on tax-saving opportunities for hiring your spouse. Consider the following:
You’re saving money in the company 401(k), but what about your spouse? If certain requirements are met, your spouse can contribute to the plan while the business deducts contributions made on his or her behalf. Frequently, your spouse can build a tidy nest egg within the tax law’s contribution limits.
If you’re paying a hefty bill for your spouse’s health insurance coverage, hiring your spouse as an employee will likely save money.The amount of your company’s payment is deductible by the business — just like it is for any other employee — even if you’re self-employed.
You typically can’t deduct your spouse’s travel expenses like you can for yourself if he or she is accompanying you on a business trip.However, if there’s a legitimate business reason for your spouse to make the trip, the travel expenses — such as airfare, hotels and 50 percent of the cost of meals — become deductible.
Is your spouse planning to attend school to improve business skills?If he or she enrolls in courses through an educational assistance plan, the cost is generally deductible by your business. For the employee-spouse, annual benefits of up to $5,250 are exempt from tax.
Does your business provide group-term life insurance coverage on a nondiscriminatory basis? Then you know the cost is deductible by the business and the first $50,000 of coverage is tax-free to employees. As a bona fide employee, your spouse can be covered under the plan.
There’s one catch: S corporation owners generally can’t deduct fringe benefits for any employee owning 2 percent or more of the company. This prohibition extends to coverage for an owner’s spouse. Carl Heinemann, your Chattanooga CPA, can help you determine when it makes sense to put your spouse on the payroll.
Suppose a relative wants to borrow money for a business venture or to buy a home. It’s true that family loans can raise problems. But if you’re going to do it, take the tax law into account. Otherwise, you could have an unexpected problem on your hands.
Here’s what to watch out for
It all has to do with “imputed interest” rules that may apply if you don’t charge the going rate of interest on the loan. Essentially, the IRS treats the loan as if interest were required, even if you’re not charging any interest, or you’re imposing an unusually low rate. Thus, the interest is “imputed” to you — the lender — based on IRS figures.
In other words, the IRS treats it like you’ve received taxable interest from the relative, even though you may not be getting a penny. Thus, you could be facing a tax bill that you probably weren’t counting on.
Fortunately, the tax law provides two exceptions to these “imputed interest” rules:
If you lend your relative less than $10,000, you have no tax worries, unless the money is used to purchase income-producing property. You can charge no interest (or an extremely low interest rate) without any tax repercussions.
If the money is a gift, you also don’t have to deal with interest. You and your spouse can each give up to $14,000 ($15,000 in 2018) to an individual each year.
There are additional complexities for some family loans, but those are the main tax rules to address. If possible, stay below the thresholds for either of the two exceptions. Alternatively, charge an interest rate and use a formal loan document resembling one found at a bank. Carl Heinemann, your Chattanooga CPA, can help you with the details.
Are you trying to sell investment or commercial real estate? If you use an installment sale to help sell real estate, you can benefit from tax deferral and possibly lower your overall tax bill. But watch out for a little-known tax trap.
Here’s what to know
Generally, installment sale treatment is automatic for a sale where you receive payments in the tax year of the sale and at least one other tax year. For instance, if you sell real estate in 2017 and receive payments in both 2017 and 2018, you qualify. Part of the tax due on your gain is taxable in 2017 and part is taxable in 2018.
Note that real estate held longer than one year qualifies for favorable treatment of the capital gains tax. The maximum tax rate on long-term capital gains is only 20 percent, compared with the top ordinary income tax bracket of 39.6 percent.
Why an installment sale may be worthwhile
With an installment sale, you may benefit from the lower tax rate in several years by spreading out payments over time. This reduces your overall tax liability.
Caution: If you sell property to a related party that is then disposed of within two years, all the remaining tax comes due (barring certain exceptions). The tax law definition of “related parties” is more expansive than you might think. It includes:
A partnership or corporation in which you have a controlling interest
An estate or trust you’re connected to
Avoid any dire tax results by stipulating in the contract that the property can’t be disposed of within two years.
Finally, be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so give Carl Heinemann, your Chattanooga CPA, a call and we can take a look at your specific your situation.
Obtaining a legitimate college degree is an expensive proposition. According to a recent Edvisors education survey, the average college student graduates with $35,000 in student loan debt. And that’s not counting people who attend graduate school. Many will be paying off student loans — month after month, year after year — for decades.
The good news? With smart financial management, graduates can liquidate their college debt in a reasonable time, freeing up cash for other priorities. Here are four tips for paying off loans quickly and efficiently:
Create a budget. Get a handle on where money is going. A budget can help prioritize, enabling you or your child to whittle down student loans more quickly. Several online tools are available. You can even use a simple spreadsheet listing monthly income and expenses.
Ask your employer. Your company or your child’s company may offer one-time loan payoffs in exchange for a lower starting wage or other concessions. Negotiate when interviewing. After taking a job, check with the human resources department about options.
Sign up for auto-deductions. Reducing payment steps makes it less likely to divert those funds to lesser priorities. As an added bonus, you or your child may develop the discipline to live on less while loans are being paid off.
Reduce your other bills. Talk to your cell phone provider. Postpone that expensive vacation. Hold off on the latest-and-greatest electronics. Instead, prioritize student loan payments. It’ll be worth it when you or your child can enjoy the benefits of a rising salary, increased cash flow and a stellar credit score in a few years from now.
Don’t forget to take advantage of possible education tax credits and deductions. Give Carl Heinemann, your Chattanooga CPA, a call for help determining what tax breaks are right for you.
The internet is where people go to discuss their favorite sports teams, politicians, recipes — you name it. This is especially true for customers. You can find out how much people love or hate your business by what you see via Facebook, Instagram, Pinterest, Twitter and other social media platforms.
More and more of your customers will be tech-savvy folks who expect businesses to engage with them using these platforms. But when your company steps into the no-holds-barred world of social media, be sure to avoid three common blunders:
Setting up too many accounts. Don’t assume your target customers will be trolling every available social media site. Identify two or three platforms that your most-sought-after clients favor, then learn the strengths and weaknesses of each platform.
Blending personal and business accounts. Once in a while, your customers may enjoy a personal photo. But your politics may offend. They may go elsewhere when you post comments about a recent Hawaiian vacation, or your favorite politicians. To avoid appearing unprofessional or trivial, keep your company’s social media site separate from your personal account.
Using social media for the hard sell (right away). Think of these internet gathering places as a casual party. You don’t walk in, immediately hand out business cards and grab the microphone from the host to advertise your latest product. Take it slowly. Get to know the attendees first. Educate, entertain and add value. Then talk about your business in response to a customer’s expressed needs.
Expect to spend at least three months of concerted effort to see tangible business results using social media platforms. The more time you dedicate to getting to know your clients and potential customers, the better you’ll be at providing them the products and services they want.
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As the holidays approach, you may decide to be extra generous this year by donating property to charity. As long as you observe the strict tax rules in this area, you may still be able to take advantage of tax benefits for 2017. The following questions will help you determine the value of your tax break.
Has your donation increased in value? Normally, your deduction for charitable gifts of property is limited to the property’s initial cost. However, if the property would have produced a long-term capital gain had you sold it instead of donating (aka you’ve owned it longer than one year) you may deduct its full fair market value (FMV).
For example, say you bought a painting for $10,000 five years ago that’s now worth $15,000. If you donate it to charity, you can deduct the FMV of $15,000. The $5,000 of appreciation remains untaxed… forever.
Has your donation decreased in value? If property has declined in value since you acquired it, your deduction is limited to its FMV regardless of how long you have held it.
Have you gotten a charitable appraisal? Whether or not property has increased or decreased in value, obtain an independent appraisal of its FMV. The IRS specifically requires independent appraisals for property donations exceeding $5,000. (The appraisal costs themselves may be deductible.)
Does your donation have a charitable function? If you donate property that isn’t used to further the charity’s tax-exempt function, your deduction is generally limited to the property’s basis. This could occur, for example, if you donate a family heirloom to a museum, but the artwork is never displayed.
What is your adjusted gross income (AGI) limit? Among other limits, your deduction for charitable gifts of appreciated property in 2017 can’t exceed 30 percent of your AGI. Usually, you’ll be able to squeeze under the 30 percent threshold. Any excess is carried forward for up to five years.
Other factors may come into play, such as special rules for donations of vehicles. Bottom line: follow the tax rules on year-end contributions and you’ll be happy you did. Give Carl Heinemann, your Chattanooga CPA, a call if you have questions about your charitable donations.
Under the tax reform plan recently announced by the Trump administration, most itemized deductions would be eliminated, except those for charitable donations and mortgage interest.
Because of this potential change, you may decide you want to accelerate certain deductible expenses you would have had in 2018 into 2017. Here are three key deductions to consider:
State and local income taxes. This is often a big-ticket item for residents of states with high tax rates. If payments are due on Jan. 1, 2018, pay them in December.
Alternatively, you may elect to deduct state and local sales taxes. This deduction, which is often a better option for residents of low-tax states, can be claimed in one of two ways:
• Deduct the actual sales tax paid during the year based on your records and receipts.
• Use the IRS table. In addition to the table amount, you can deduct tax paid on certain big purchases like cars and boats.
Mortgage interest and property taxes. As with state and local income taxes, you may be able to increase your current deduction by prepaying mortgage interest and property taxes. (Note that the proposed tax reform plan would repeal property tax deductions, but not mortgage interest.)
You may even consider using a home equity loan to consolidate debts if the interest would qualify as deductible mortgage interest. The loan is secured by your home, so use this technique sparingly.
Charitable donations. Although charitable donations aren’t on the list of proposed tax reform cuts, you can bolster your deduction by making donations late in the year. Be aware that you must observe strict recordkeeping requirements for monetary gifts of $250 or more.
Suppose you charge a donation on your credit card on Dec. 31. The gift is still deductible in 2017, even though you won’t pay the charge until 2018.
Finally, remember that itemized deductions are reduced for high-income taxpayers. Carl Heinemann, your Chattanooga CPA, can help you figure out what deductions are most beneficial for you.
Some tax planning moves for small businesses are more common, like acquiring property that qualifies for the generous Section 179 expensing allowance. But other strategies may fly under the radar. Here are three little-known ways to save:
Building improvements: Generally, amounts paid to improve tangible property must be capitalized and depreciated over time, but recent regulations provide a unique tax break. Under a safe harbor election, a qualified small business may deduct certain building costs above the maximum Section 179 allowance. The election is limited to $2,500 per invoice or item or $5,000 if you have an applicable financial statement (AFA) audited by a CPA.
Employee bonuses: Normally, employee bonuses are deducted in the year they are paid. However, for an accrual-basis company, bonuses are currently deductible if fixed by year-end and paid within 2.5 months of the close of the tax year. Thus, your small business may deduct year-end bonuses on its 2017 return if they are paid by March 15, 2018 (other than bonuses paid to majority shareholders of a C corporation, certain owners of an S corporation or a personal service corporation).
Start-up expenses: The tax law allows a small-business owner to claim a first-year deduction of up to $5,000 for qualified start-up costs. Any remainder must be deducted over 180 months. However, the $5,000 write-off is phased out on a dollar-for-dollar basis for start-up costs exceeding $50,000.
Some typical start-up expenses are:
An analysis of potential markets, products and costs
Advertisements for the opening of the business
Wages paid to train employees
Travel for securing prospective distributors, suppliers, customers or clients
Fees paid to outside consultants for professional services
There is one catch: You must be open for business before the end of the year if you want to claim this for 2017. So make sure that the public has access to your goods or services before Jan. 1.
Give Carl Heinemann, your Chattanooga CPA, a call and we can help you determine what types of small business tax breaks might be applicable to your specific situation.
Are you planning to make substantial home improvements in the coming year? Normally, you can’t deduct home improvement expenses on your personal tax return. However, you may be able to deduct the costs of medical improvements to your home.
It may be worth doing, but first there are several tax law obstacles to overcome.
Under current law, you may only deduct medical expenses in excess of 10 percent of your adjusted gross income (AGI). If you don’t clear that 10 percent for the year, you get no deduction. This is a high bar for many taxpayers.
To determine if you qualify for a deduction, add up the unreimbursed medical expenses that satisfy the tax law requirements. An expense counts toward the 10 percent only if it’s for medical care for you, your spouse or your dependent. Conversely, an expense that is just beneficial to your general health rather than a specific health issue, or one that’s done for personal motives (e.g., architectural taste) isn’t deductible.
When a homeowner makes an improvement for medical reasons, the deductible amount is limited to the cost above the increase in the home’s value. For instance, if a $10,000 improvement increases the value of your home by $4,000, $6,000 counts to the deduction. Improvements made by tenants are fully deductible, as they don’t benefit from the increase in the home’s value.
What sort of home improvements qualify?
An allergist may recommend installing central air conditioning or a swimming pool to alleviate a child’s asthma. Or, you might build an elevator or bathroom on a lower floor to benefit someone with a heart condition. Other improvements could include (but aren’t limited to):
Making doorways larger
Adding entrance or exit ramps
Modifying electrical outlets and warning systems
Don’t leave matters to chance. If you qualify for a deduction, obtain a written statement from a physician prescribing the improvement, and an independent appraisal of the increase in the home’s value.