Category Archives: Tax Tips

Keep your business tax info safe

Business taxes involve a lot of paperwork, and those papers typically contain a lot of personal financial information. Are you taking steps to make sure your records are secure? Here are a few tips to help:

  • Secure sensitive employee materials. As an employer, you’re required to collect Social Security numbers and other identification, such as copies of drivers’ licenses. Keep this sensitive information secure by restricting physical access to printed or copied documents, using passwords on your accounting software, and creating a unique identifier for employee IDs.

    Some states require that you safeguard the information obtained from job seekers, such as shredding applications after a certain period of time.

  • Protect important numbers. Truncate Social Security numbers on the paper copy of Forms 1099 that you send to your vendors. Instead of displaying the full nine digits, replace the first five numbers with asterisks or Xs.
  • Create an information privacy policy. Establish a company policy for protecting the information your customers provide. For instance, require your employees to shred account receivable records instead of tossing them in the trash, or employ the services of a document-shredding company.
  • Encryption is key. When sending data to your accountant for tax return or payroll preparation, be sure to use encrypted email or upload files to a secure digital storage service site.

Keeping accounting information from falling into the wrong hands is a growing concern for many businesses. Give Carl Heinemann, your Chattanooga CPA,  a call if you have questions.

Your health savings account refresher

Health savings accounts (HSAs) have been around a long time, and little has changed since they were first introduced in 2003. They offer tax benefits, many of which you can benefit from if you know how. Here’s a refresher on how HSAs work:

  • An HSA has two parts. These parts include a high-deductible health insurance policy and a savings account. The idea is simple: You buy a health plan with a high deductible, and you deposit cash into a savings or investment account to pay the policy deductible and other qualified out-of-pocket medical expenses.
  • Contributions are tax-deductible. The tax benefit comes from the way the savings account part of the HSA works, which is similar to a traditional individual retirement account. For example, you can claim a federal income tax deduction for contributions to your HSA, and the deduction is above the line, meaning you can benefit without having to itemize.
  • Contribution amounts change. For 2018, the maximum tax-deductible contribution is $3,450 when the insurance plan covers only you, or $6,900 when you purchase an insurance plan for your family. When you’re age 55 or older, you can contribute (and deduct) an extra $1,000.
  • There are rules around withdrawals. Interest, dividends or other growth in the account is tax-free as long as you use withdrawals for qualified medical expenses. But what happens if you use the money for other purposes? The withdrawals are included in income, taxed at your regular rate, and subject to a 20-percent penalty. If you are 65 or older, you can withdraw money from your account for any reason without paying a penalty.

Keep in mind that other rules apply, including the opportunity to fund an HSA with a tax-free rollover from your individual retirement account.

Call Carl Heinemann, your Chattanooga CPA, if you have questions about how you can make the most tax-savvy choices with your HSA.

Owe money to the IRS? You may have options

Are you up to your ears in tax debt or at odds with the IRS over your tax liability? You may have more payment options than you think.

Offer in compromise (OIC)

Essentially, an OIC is an agreement with the IRS to settle your tax liability for less than the full amount owed. Usually, the IRS won’t accept an OIC unless the amount you offer is equal to or greater than the “reasonable collection potential” (RCP) from assets you own – including real estate, autos, bank accounts and future earnings.

The IRS may accept an OIC for one of three reasons:

  1. There is doubt as to the tax liability
  2. There is doubt that the full amount owed can be collected
  3. The compromise is based on effective tax administration (In other words, requiring full payment would create an economic hardship or otherwise be inequitable)

The application fee for an OIC is generally $186, although there are certain exceptions.

Installment agreement

You may end up deciding to apply for an installment agreement instead if you can’t pay the full amount of tax you owe within the OIC payment parameters. An installment agreement allows you to make a series of monthly payments over time. The IRS offers various options for making these payments, including:

  • Direct debit from your bank account
  • Payroll deduction from your employer
  • Payment by the Electronic Federal Tax Payment System (EFTPS)
  • Payment by credit card
  • Payment via check or money order
  • Payment with cash at a retail partner

The user fee for installment agreements varies, depending on the type of payment, but the maximum fee is $225. Interest and possibly penalties will also be added to the amount owed.

Which option is better? It depends on your personal situation. Call Carl Heinemann, your Chattanooga CPA,  to discuss what option is right for you.

Small business owners: Consider an SEP

One type of retirement plan that often fits the needs of small business owners is the Simplified Employee Pension (SEP). Typically, accounts are set up as SEP IRAs, much like traditional IRAs.

What to know about SEPs

As the name implies, it’s relatively simple to establish and operate a SEP plan. Unlike some other qualified plans – including 401(k)s – you don’t have to file annual reports with the IRS. Here are some other key aspects of SEPs:

  • The contribution limit is generous. For 2018, the maximum deductible contribution is generally equal to the lesser of 25 percent of compensation (20 percent of earned income of a self-employed individual) or $55,000. In comparison, the annual contribution limit for a traditional IRA is only $5,500 ($6,500 if you’re age 50 or older).
  • Employers make contributions. A potential downside for employers is that you generally have to make contributions on behalf of all full-time employees who are 21 and older and have worked for the business at least three of the last five years. Part-time employees are included if each earns more than $600 in 2018.
  • Contributions are discretionary. For instance, you can boost them in good years, cut them or even skip them in bad years, as long as you contribute the same percentage of compensation for all participants. This gives small business owners flexibility.
  • RMDs are necessary. As with other qualified plans, you must begin taking required minimum distributions (RMDs) after you reach 70 1/2. And, if you make withdrawals prior to 59 1/2, you could be hit with a 10 percent penalty tax on top of the regular income tax (unless a special exception applies).

Of course, you have other options. The qualified SIMPLE plan is similar to the SEP, but offers a lower contribution limit. For 2018, the limit is $12,500 ($15,500 if you’re 50 or older). Finally, you have until your tax return due date, plus extensions, to set up and fund a SEP for the tax year.

Call Carl Heinemann, your Chattanooga CPA, for assistance in setting up a SEP.

Saving for school? Check out the updated 529 plan

Now that your teens are heading back to school this fall, it’s a good time to start planning for their higher education. That means you may be interested in a Section 529 plan account that provides tax-favored savings.

And if you have younger children you’ll be happy to know that a recent tax law change has opened up Section 529 plans to kids attending elementary and secondary schools.

Here’s what you need to know about 529 plans

Section 529 plans are sponsored by individual states, state agencies or educational institutions. There are two basic types:

  1. Prepaid tuition plans: You acquire units or credits used toward future education at current prices. So you end up locking in tomorrow’s education costs today.
  2. Education savings plans: The plan invests in a portfolio for each participant’s account. Investment earnings vary and are then used to pay education costs.

With either type of plan, if you fund an account for a beneficiary (like your child or a grandchild), there’s no current tax due on the earnings within the account. And when the beneficiary finally enters school, payments for qualified expenses are exempt from tax. The list of qualified expenses includes:

  • Tuition and fees
  • Books
  • Supplies and equipment
  • Reasonable costs of room and board

Your younger children may now benefit

Beginning in 2018, the tax breaks for 529 plans are extended to tuition payments for grades K-12 at public, private or religious schools. For example, if you send your child to a prestigious college prep school, you can tap into the Section 529 account to pay for the tuition – with no tax consequences.

However, there is a limit for these younger kids. Plan contributions can only be used for up to $10,000 in school expenses annually.

It’s helpful to note that you can roll over unused 529 plan funds for a beneficiary to an account for another beneficiary. This might benefit families who have one child completing college and another in high school.

Call Carl Heinemann, your Chattanooga CPA, if you have questions about 529 plans and how you can save with other education savings accounts and tax credits.

Consider these unexpected medical deductions

It may be easier to qualify for a medical deduction in 2018 than before, assuming you’ll itemize deductions. Specifically, the threshold for deducting unreimbursed medical and dental expenses has been lowered to 7.5 percent of adjusted gross income (AGI). That means only the excess amount above the threshold is deductible.

At the same time, other tax law changes increasing the standard deduction and reducing the tax benefits of itemized deductions might complicate your tax situation. As a result, a sizable medical deduction could tilt the scales in favor of itemizing.

Look beyond typical medical deductions

Certainly, you should bunch medical expenses in 2018 when it suits your needs. But you don’t have to only count on typical costs for doctor visits and prescription drugs.

Deductions for a wide variety of less common expenses have been approved by the IRS or the courts in the past, including amounts paid for the following:

  • Acupuncture
  • Alcoholism treatment
  • Artificial teeth
  • Birth control pills
  • Breast pumps and supplies
  • Chiropractors
  • Guide dogs and other service animals
  • Hearing aids
  • Lead-based paint removal
  • Medical care for transplant donors
  • Oxygen and oxygen equipment
  • Pregnancy tests
  • Psychiatric care
  • Smoking-cessation programs
  • Special diet foods prescribed by physician
  • Telephone equipment for the disabled
  • Vasectomies
  • Wigs for mental health purposes (e.g., to compensate for loss of hair due to an illness or medical treatment)

Note that the costs may be large or small. For instance, deductions have been allowed for installing a swimming pool to alleviate the taxpayer’s asthma as well as clarinet lessons to correct a child’s overbite.

Remember that the medical deduction threshold reverts to 10 percent-of-AGI in 2019. If you expect to clear the 7.5-percent mark in 2018 and will still be itemizing, move nonemergency expenses like medical exams and dental cleanings into this year. Otherwise, defer elective expenses to 2019, when you might have a shot at a deduction.

Give Carl Heinemann, your Chattanooga CPA, a call if you’d like help determining your tax savings with your medical deductions.

How to nail down the historic structures credit

Are you thinking of renovating a building you own in an historic part of town? Before you start knocking down walls, find out if the building qualifies as an historic structure. It could result in a tax credit reducing your bill by thousands of dollars.

However, be aware that beginning in 2018 recent tax law changes affect the credits for building renovations.

Claiming the credit

While the 10 percent credit for rehabilitating buildings placed in service before 1936 is no longer available for expenses incurred after 2017, you may continue to claim a separate credit that’s equal to 20 percent of qualified expenses for renovating historic structures.

For instance, if you spend $100,000 to update a brownstone with historic character, you may be able to cut $20,000 off the cost. Under the latest tax laws, this credit must be taken ratably over five years. That means a $4,000 credit is claimed each year for five years. So it’ll take a little longer to recoup your costs.

Unlike the rehab credit, it may be easier to qualify for the historic structure credit than you think. For example, there are no age restrictions or wall retention rules. And it doesn’t have to be a place where George Washington slept or an antebellum mansion. But there are two key requirements:

  • The building must be listed on the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior. Currently, more than 90,000 buildings are listed.
  • The rehabilitation must be certified as retaining the original historic character (but not necessarily the original use) of the building.

Finally, certain complex transitional rules may apply to projects that were underway before 2018. Call us if you have questions about your renovation projects and whether or not you’re qualified to claim this credit.

How to salvage a casualty loss deduction

You’ve likely heard about the volcanic eruptions in Hawaii and how they’ve caused extensive damage to the property of several U.S. taxpayers. And as we head into hurricane and tornado seasons, other disasters are likely. Luckily, there’s a silver tax lining in the dark clouds: You may qualify for a casualty loss deduction, despite recent tax law changes.

Deduction changes starting in 2018

The casualty loss deduction has generally been suspended for 2018 through 2025, but you can still claim a loss for damage in an area formally declared as a federal disaster area. These include Hawaii during the volcano eruptions or the hurricane damage areas in the U.S. Southeast last year.

The deduction is limited to the excess unreimbursed loss above 10 percent of your adjusted gross income (AGI), after subtracting $100 for each casualty event.

Example: Your AGI is $100,000 and a severe storm resulted in $50,000 of damage to your home. If you received $30,000 in insurance proceeds, the amount eligible for the casualty loss deduction is $19,900 ($50,000 – $30,000 – $100). That means you can deduct $9,900 ($19,900 – 10 percent of AGI, or $10,000).

Note that the tax law changes don’t affect deductions for unreimbursed losses to business property — they don’t need to be in a federally declared disaster area to be deductible. Those business losses remain deductible without regard to any AGI limit or $100-per-event floor.

Special rules may apply

Individuals may take advantage of a special rule for disaster-area losses: If it suits your needs, you can choose to deduct a disaster-area loss in the tax year preceding the year of the event instead of the year the event actually occurs. As a result, you may get your tax money even sooner.

Can you deduct medical expenses you paid for your relative?

New tax laws lowered the medical deduction threshold for 2018 to 7.5 percent of adjusted gross income (AGI) from 10 percent. But that’s still a pretty high bar to clear. Fortunately if you scour your records, you may find expenses to put you over the top — including amounts paid for relatives.

Here’s what counts for medical deductions

An expense generally counts toward the medical deduction threshold if it involves medical care for yourself or immediate family. Medical care costs can include such things as surgeries to equipment such as wheelchairs.

Medical expenses you’ve paid on behalf of other family members may also count, but it can get tricky. Typically, you can deduct medical expenses if the relative would have qualified as your dependent.

To have a relative qualify as your dependent, you must provide more than half of the relative’s annual support. He or she also can’t have more gross income than the $4,050 personal exemption listed in the tax code.

However, their expenses still count toward your medical deduction if they fail the dependency test solely because they had more gross income than the personal exemption limit.

Here’s an example: Mom receives $5,000 in annual income from investments, but her rent costs her $12,000 a year. So you help her out by paying the $7,000 difference. Although she wouldn’t qualify as your dependent due to the gross income limit, you still provide more than half of her support. If you then pay a $1,000 medical bill for Mom, the expense is added to your total.

Double-check to see if you can benefit from this little-known rule for medical expenses. The deduction threshold returns to 10 percent of AGI in 2019, so this may be your last chance. Give Carl Heinemann, your Chattanooga CPA, a call for assistance.

Your roadmap to business travel deductions

If you have a business trip lined up to a charming city or summer resort, you may end up tacking on a few days of vacation while you’re there. And guess what? Most expenses will remain tax-deductible if you stay within the tax law boundaries.

Deducting your business-vacation travel expenses

To claim deductions for domestic business travel, the primary purposes of the trip must be related to business. Simply put, you must clearly spend more time on business than pleasure. Clearly separate your travel days on your calendar between “business days” and “personal days.”

When it comes to writing off expenses, start with airfare or other round-trip transportation, lodging and 50 percent of the cost of your meals. Add on incidentals like cab fare to a business meeting. Just remember that costs related to the vacation part of the trip, such as extra hotel nights and sightseeing excursions, are nondeductible.

Here are a few hints for maximizing deductions on the trip:

  • Keep a close watch on business versus pleasure days. If the IRS ends up deeming the trip a disguised vacation, no deduction is allowed.
  • The 50 percent deduction for business entertainment has been eliminated. The IRS is expected to issue guidance on how this change affects deductions for meals with clients.
  • Don’t go overboard. You can’t deduct expenses that are lavish or extravagant. That means you probably shouldn’t splurge on the penthouse suite.
  • Keep business travel expense records. Without receipts and other proper records, your deductions are in jeopardy.
  • Know the rules around traveling with your spouse. Generally, travel expenses related to a spouse accompanying you on the trip are nondeductible unless there’s a valid business reason, such as when your spouse also works for your company.

Call Carl Heinemann, your Chattanooga CPA, if you’re thinking about adding a vacation to a business trip. We can help you understand what will and won’t be deductible.