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.
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.
Are you upgrading the offices or workspace of your small business? This may be an opportunity to make improvements to accommodate individuals with disabilities (including your own employees and visitors to the business premises) if you haven’t done so already.
These accommodations are legally required for larger businesses. The improvements may be pricey, but there’s a potential tax payoff.
Benefits of the Disabled Access Credit
If your small business qualifies under a special tax law provision, it can claim the Disabled Access Credit for half the cost.
Specifically, the credit is available for making the business premises more accessible to disabled individuals. A “qualified small business” is one that had gross receipts of $1 million or less or didn’t employ more than 30 full-time employees in the preceding tax year. The credit is essentially equal to 50 percent of the first $10,000 of qualified expenses. (Technically, the first $250 of expenses is excluded from the calculation, but then the credit applies to the first $10,250 of expenses.)
That means the maximum credit a qualified small business can claim in a given year is $5,000. Any excess may be carried back for one year and forward for up to 20 years.
The expenses need to be incurred to meet requirements established by the federal law protecting individuals who are disabled. Typically, the credit is claimed for costs related to:
The credit also applies to material expenses needed for individuals with hearing or visual impairments, and for modifying equipment for their use.
Finally, the disabled access credit is claimed as part of the general business credit on the tax return of your small business. Remember that a credit is more valuable than a deduction because it reduces tax liability on a dollar-for-dollar basis.
Most investors face a 15 percent tax rate on long-term capital gains. This increases to 20 percent for people at the top of the ordinary income bracket (39.6 percent). That’s not too bad, considering the higher tax rates on regular income.
But did you know that long-term capital rates are reduced to 0 percent in certain situations? This means you might be able to benefit from a reduced tax rate on your profits on the sales of assets.
How to qualify for 0% capital gains rate
Capital gains from transactions such as securities sales are taxed at ordinary income rates under a graduated rate structure. This structure ranges from 10 to 39.6 percent.
However, if you’ve owned assets like securities for longer than a year, the maximum tax rate on a gain is 15 to 20 percent if you’re at the top of the ordinary income tax bracket. Capital gains may be offset by capital losses and vice versa, so this rule applies to your net gains.
On the other hand, short-term capital gains from sales of securities held a year or less are still taxed at ordinary income rates.
If your capital gains fall within the parameters of the 10 to 15 percent ordinary income brackets — the two lowest brackets — the maximum tax rate on a long-term gain is 0 percent. This often benefits low-income investors (ex. young investors), but it can also favor adults during a year when their other income is low.
Here’s an example of how it could work: you file jointly and an S corporation loss reduces your taxable income to $65,900 this year. The upper dollar threshold for the 15 percent tax bracket for joint filers is $75,900. So, if you realize a $10,000 long-term capital gain in 2017, the entire gain is taxed at the 0 percent rate.
Keep this helpful tax break in mind when planning year-end securities transactions. The 0 percent tax rate might just help you hold on to more of your profits. Give Carl Heinemann, your Chattanooga CPA, a call if you have questions about your year-end planning.
As the end-of-year holidays approach, you may decide to be extra generous to your loved ones. Specifically, by giving your family members gifts that are usually sheltered by the annual gift tax exclusion. Not only does this reduce the size of your taxable estate, it can minimize the overall income tax bite for your family.
How does the annual gift tax exclusion work?
Under the annual gift tax exclusion, you can give each recipient cash or property valued up to $14,000 free of gift tax without eroding any of your unified estate and gift tax exemption. This exclusion is adjusted every year for inflation in increments of $1,000, but hasn’t budged in recent years. The exclusion is doubled for joint gifts made by married couples.
For example, suppose you have three adult children and seven grandchildren. You and your spouse could each give every child and grandchild a gift of $14,000 in December to celebrate the holidays. Then you both could give each family member another $14,000 in January. In just two months, you and your spouse could reduce your taxable estate by a total of $560,000 ($28,000 x 10 recipients x 2 years)!
Normally, you don’t have to file a gift tax return to benefit from the annual gift tax exclusion, but your spouse must consent to joint gifts on a return.
How does the family save?
Assuming you’re in a high tax bracket and the recipients are in a lower tax bracket, any subsequent earnings from the cash or property you gift will result in reduced tax.
Special rules come into play if you give gifts of property that have appreciated or depreciated in value. Call Carl Heinemann, your Chattanooga CPA, today if you’d like to discuss your situation.