After years of uncertainty, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended a tax credit for research expenses for qualified small businesses. Generally speaking, the basic research credit is equal to 20 percent of the cost of qualified in-house expenses over a base amount and 20 percent of certain outside expenses, such as the university basic research credit. Alternatively, a business may claim a 14 percent simplified credit for the three preceding tax years.
What types of expenses qualify for the credit? They must be expenses that would otherwise be deductible as research expenses under the tax code and involve research undertaken to discover technological information to be used in developing a new or improved component for the business.
The credit had expired and been reinstated more than a dozen times since its inception in the 1980s before the PATH Act preserved it permanently. The latest version includes two key changes for small businesses.
1. AMT liability: Normally, credits like the research credit may only offset regular income tax liability. Now an eligible small business may claim the research credit against alternative minimum tax (AMT) liability. For this purpose, the business must have $50 million or less in gross receipts.
2. Payroll tax liability: Similarly, a qualified small business may elect to claim the research credit against up to $250,000 in payroll taxes annually for up to five years. In this case, the company must have less than $5 million in gross receipts.
These changes are effective for 2016 and thereafter. Earlier this year, the IRS issued some guidelines on the enhanced credit on an amended 2016 return. In addition, certain additional technical requirements must be met to qualify for the credit. While this credit has been simplified, the calculations are best left to the experts.
If you have questions about the eligibility of your business, please call Carl Heinemann, your Chattanooga CPA.
Do you own a prized piece of art that you’d like to donate to charity? If you meet the requirements for gifts of property, you may qualify for an enhanced tax deduction. But be aware of potential pitfalls along the way.
Normally, your deduction for donated appreciated property is based on the cost when you acquired it. For example, if you paid $7,500 for a sculpture and it’s now worth $10,000, your deduction is limited to $7,500. However, if the property would have produced a long-term capital gain had you sold instead of donating it (i.e., you’ve owned it for more than a year), you can deduct the full fair market value (FMV). In other words, you’re then entitled to deduct a higher amount, even though you never paid tax on the appreciation in value. In our example, after one year you could deduct $10,000, the sculpture’s FMV on the donation date.
The tax law generally limits your annual deduction for charitable gifts of property to 30 percent of adjusted gross income (AGI). If you can’t squeeze under the AGI threshold in a given year, the excess is carried forward for up to five years.
Yet there’s still another tax hurdle to overcome. If you donate property like artwork, the gift must be used to further the charity’s tax-exempt function. Otherwise, the deduction is limited to the property’s cost. For example, if you donate a family heirloom to a museum, you can claim the higher deduction based on FMV if it is prominently displayed. However, if it’s relegated to a dusty storeroom, your deduction is limited to the lower amount. In the event that the value of artwork has declined since you acquired it, your deduction is limited to the FMV, regardless of how long you’ve owned it.
Finally, the tax law imposes strict recordkeeping requirements on such charitable gifts, including independent appraisals for donations exceeding $5,000. If you have questions about your donation, give Carl Heinemann, your Chattanooga CPA, a call.
Gambling may not be for everyone but many people occasionally place wagers at the track or indulge in games of chance. You may be one of them. If you’re lucky enough to hit a jackpot, or even if you have relatively modest winnings, the IRS expects you to report those amounts as taxable income. On the other hand, you can reduce the tax on those winnings with deductible losses from your other gambling activities. Perhaps one of the best benefits of this tax deduction is that it can be claimed without meeting the usual tax law requirements for similar miscellaneous expenses.
The winning thresholds that require reporting vary by gambling activity, but generally, if you receive $600 or more from gambling activities during the year, you must report the income on your annual tax return. This includes winnings from trips to the casino and racetrack and even the bingo games at your local house of worship. It doesn’t matter if the money goes to a private business or a charity.
Fortunately, you can offset the tax by claiming gambling losses, up to the amount of your winnings. But you can’t claim any loss for the excess. You are strictly limited by this rule.
Now here’s the kicker: Normally, you can deduct only miscellaneous expenses above 2 percent of your adjusted gross income (AGI). But this doesn’t apply to gambling losses. Therefore, your losses are fully deductible down to the penny!
It’s important to keep track of your losses through detailed records. For instance, if you bet at the track, log your wagers for each race and supplement it with documentation like losing ticket stubs. Similarly, if you’re playing blackjack at a casino, list the amounts won and lost at each table. Bingo players should record the number of games played, the cost of cards, and amounts collected on winning cards. If your activities rise to the level of being a “professional” gambler, you can deduct all of your losses, even if they exceed your winnings. Give Carl Heinemann, your Chattanooga CPA, a call if you have questions about your situation.
August is the middle of hurricane season for the eastern and southern coasts. Other regions of the U.S. experience tornados, floods, and wildfires. If you’re victimized by a natural disaster this summer, you could experience dramatic financial and emotional loss. While it’s devastating to face this kind of catastrophe, it’s helpful to know you may be able to claim a casualty loss deduction on your tax return, even though the requirements are strict. If you live in an area that is deemed a federal disaster area, you may find faster tax relief.
For starters, you may deduct a casualty loss for damage caused by an event that is “sudden, unexpected, or unusual.” This includes destruction of property from natural disasters like hurricanes and even dented fenders or broken windshields from vehicle collisions. But you can’t deduct casualty losses caused by gradual decay or deterioration, like damage from a summer drought.
After you reduce your personal loss by any insurance reimbursements, the deductible amount is subject to two limits.
1. You can only deduct the excess above 10 percent of your adjusted gross income (AGI); and
2. You must reduce a loss by $100 for each event.
For example, if your AGI is $100,000 and you suffer a $25,000 loss to your home after insurance reimbursements, your deductible loss is $14,900.
Normally, you’re required to deduct casualty losses in the year the event occurs. However, for a loss suffered in an area that’s declared a federal disaster area, you can elect to deduct the loss on the tax return for the year immediately precedingthe disaster. Therefore, homeowners with a loss due to a hurricane in 2017 might amend their 2016 return to obtain faster tax relief.
The IRS requires you to submit detailed information with this special election. If you are faced with casualty loss from a disaster, call Carl Heinemann, your Chattanooga CPA, so we can go over the details.
Although inflation has been sleeping for several years now, the tiger may be waking up. In some sectors of the economy, low unemployment is causing wage rates to climb. Global economic growth is lifting prices for raw materials and commodities. And a decade after the subprime mortgage crisis, the pressures that prompted the Federal Reserve to squelch interest rates are beginning to ease.
If you’re searching for a hedge against inflation, Series I bonds are worth a look. They’re sold by the U.S. Treasury and like EE bonds, interest on I bonds is exempt from state and local income taxes. Federal income tax on I bond earnings and interest isn’t due until the bonds are sold. Every six months the U.S. Treasury computes I bond interest rates, which consist of two components: one fixed, one variable. The fixed rate doesn’t change over the life of the bond. The variable rate is revised every six months based on the rate of inflation.
Like interest rates in general, I bond rates have declined significantly in recent years. For example, in May 2000 the fixed rate on I bonds was set at 3.6 percent and the variable rate was 3.89 percent, resulting in a compound rate of 7.49 percent. Because inflation rates fell over time (due mostly to declines in energy prices), I bond rates dropped as well. This year the Treasury set the composite rate for I bonds at 1.96 percent.
So if I bond rates have been declining, why would anyone want to purchase them? For one thing, there’s the tax benefit, which is especially enticing if you live in an area with high state and local taxes. In addition, the government will revise rates upward if inflation heats up. Because the principal is not adjusted, I bonds won’t depreciate from their face value. Another benefit: if you use I bonds to pay for college, the interest may be exempt from federal taxes.
On the other hand, I bonds are not as liquid as a money market account, for example. That’s because I bonds can’t be redeemed unless held for at least a year. If you sell before holding the I bond at least five years, you’ll forfeit three months’ interest.
For a deeper look at the pros and cons of I bonds, visit TreasuryDirect (www.treasurydirect.gov), or give Carl Heinemann, your Chattanooga CPA, a call.
Scrutinize your operating budget and you may discover that shipping expenses — ever present and necessary for obtaining inventory and delivering products to customers — are squeezing your bottom line and cutting into profit margins. Taking some time to trim those costs may offer significant opportunities for savings.
Comparison shop and negotiate
The biggest names in the shipping industry — UPS, FedEx, DHL, and the U.S. Postal Service — aren’t the only games in town. And because they all compete with each other, it’s wise to shop around for the best price. If you ship large volumes of merchandise, you may find that some shippers are willing to lower your costs. Generally speaking, pricing schedules are based on volume. The more you ship, the lower your rate.
Shipping account number
Ask suppliers to use your shipping account number. This approach has two major advantages. First, it tends to increase the shipping volume on your account, which can lower your overall rate. Secondly, it can also keep vendors honest. For example, if you ship via FedEx, request that the supplier use your FedEx account number, so you can check online to verify actual shipping expenses. Include this requirement with each purchase order and your suppliers may not be tempted to pad their delivery invoices.
Shipping is expensive. Fuel surcharges, recipient signature fees, and extra charges for Saturday deliveries are common. Your pricing should reflect those costs. If you’re selling online and can’t afford to offer free shipping, consider increasing the price of your products to cover delivery expenses. Buyers may balk at paying $8 to ship a $15 item, but may be willing to spend $3 for shipping to obtain a $20 product. Your company garners the same sales revenue either way.
Slash packaging expenses
Your customers will gladly inform you that shipped items were damaged in transit, as they should. But ensuring that your products arrive in pristine condition requires well-designed and costly packaging. How can you reduce packaging costs? Consider using packages provided by your carrier. You won’t run afoul of their size regulations or end up paying “dimensional fees.” Order several boxes of each size to determine the optimal packaging for your needs. Other options that may work for you include recycling previously used containers or shopping online auction sites for inexpensive packaging materials.
Shipping costs will likely always be a part of your company’s expenses, but implementing a few of these ideas may reduce your bottom line. Please call Carl Heinemann, your Chattanooga CPA, for more information.