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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):
- 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.
Maxing out contributions to your company’s 401(k) plan is almost always a good idea. After all, when you contribute to a traditional 401(k) plan, your current tax bill is lowered. You aren’t taxed on contributions until the money is withdrawn in retirement, allowing your investments to compound tax-free until then. And if your employer matches a percentage of your contributions, you get an immediate return on investment. These are all good reasons to make regular contributions your 401(k) plan.
But sometimes forgoing 401(k) contributions, at least for a while, is the more prudent choice. Consider these three scenarios:
- You haven’t established an emergency fund. The rule of thumb is to have enough cash readily available to cover six months of expenses. Otherwise, unexpected events such as job losses, medical emergencies, or personal crises may force you into excessive debt. You may find yourself paying off high-interest credit cards or personal loans long after the misfortune is over, which will set you back in your plans to save for retirement. So, before maxing out 401(k) contributions, set aside enough money from each paycheck to protect yourself with an emergency fund.
- You’re laboring under a load of debt. A few hundred dollars on credit cards is no big deal. But high-interest balances of several thousand or tens of thousands of dollars may be cause for concern. It’s usually better to pay off some or all of those balances before contributing extra to a 401(k).
- Your company’s investment options are limited. Any matching contribution your company offers should be considered free money. But beyond the company match, survey other places to park your retirement money such as a Roth IRA or indexed mutual fund. Your company may offer funds invested in large-cap American companies exclusively. To diversify your portfolio, look outside your firm’s 401(k) plan for additional investment choices, such as emerging market or international funds that may garner higher returns over time.
Bottom line? Save regularly for retirement, but take a hard look at your overall financial situation before maxing out contributions to your company’s 401(k) plan.
If your company’s revenue starts to falter, payroll may be a place you look for spending cuts. But before opting for layoffs as a quick and easy means of recovering profitability, consider this: the decision to lay off employees carries its own set of costs.
For example, the more people who are laid off, the more remaining employees may find reasons to seek employment elsewhere. If skilled and productive workers leave the company, product quality and customer service may suffer. Those left behind may feel overworked and suffer from diminished morale, which can lead to production errors. Certain direct costs, such as severance pay and unemployment insurance rates, may actually increase. And when business picks up again, your company may incur additional costs to hire and train new employees. In the long run, layoffs may actually hurt profitability.
So before taking steps to reduce the size of your workforce, consider these five alternatives for reducing payroll and overhead expenses:
- Curtail nonessentials. Temporarily suspend company-provided meals and transit subsidies. Reduce travel and overtime as much as possible. Postpone buying the state-of-the-art equipment you’d like.
- Reduce work hours. Go from a five-day workweek to a four-day workweek to cut payroll costs by 20 percent. Give employees unpaid leave time, especially during school holidays.
- Hire interns. Some students may need to complete an internship to graduate from college. In exchange for college credit, they may be willing to work for minimal pay.
- Offer sabbaticals. Challenge your established employees to step away from the office for a period of time at reduced pay to attend training.
- Consider a virtual office policy. Perhaps some of your employees can work from home, enabling you to free up office space and the associated leasing costs.
Above all, keep your staff in the loop. Let them know why you’re making changes. Communicate the benefits of any short-term cuts, and stress your desire to avoid layoffs whenever possible.