Monthly Archives: May 2014

Renting your home calls for tax planning

Internet sites linking travelers to property owners with space to spare continue to grow in popularity. Whether you travel or not, you might be considering the possibility of signing up and offering for rent all or part of your main home. If so, establishing sound recordkeeping procedures from day one is a good idea.

In addition to a bookkeeping system to keep track of the income and expenses related to your rental, a calendar detailing the days your home was rented will be useful at tax time. The reason? Deductible expenses may be limited when rented property is also your personal residence. Having a written record helps determine which tax reporting rules apply.

For example, say you rent your primary home to a vacationer for 15 days or more during a year. All of the rental income is taxable. However, expenses such as interest, property taxes, utility costs, and depreciation are split between the time your property was rented for a fair rental price and the days you used it personally. The portion related to the rental is deductible up to the amount of your rental income.

What if you have rental expenses in excess of your rental income? You may be able to carry them forward to next year.

Different rules apply when your home is rented for less than 15 days, and when the property you offer for rent is your vacation home or timeshare. Please give us a call. We’ll help you plan a tax-efficient rental program.

Do you need to file an FBAR?

So you included Form 8938, Statement of Specified Foreign Financial Assets, with your 2013 federal income tax return to report your interests in certain foreign financial accounts. Do you also need to file a separate Treasury Department report known as the FBAR? This report is easy to overlook, since it’s not an IRS form and has special filing requirements.

Here’s an overview.

  • What’s an FBAR? FBAR is the short name for Form 114, “Report of Foreign Bank and Financial Accounts.” You use the FBAR to report your individual or joint financial interest in, or signature authority over, a financial account in a foreign country — in some cases even if you have included Form 8938 with your federal income tax return.

    Filing an FBAR is generally required when the aggregate value of your foreign accounts exceeds $10,000 at any time during the calendar year. Because the account value triggers the filing requirement, you may need to file an FBAR even if your foreign account generates no taxable income.

    Note: Form 114 is new for 2013. It replaces Form 90-22.1, which was used in prior years.

  • What are foreign financial accounts? Financial accounts include deposit and custodial accounts, such as stocks, securities, and mutual funds you hold at foreign financial institutions or foreign branches of U.S. financial institutions. You don’t have to include financial accounts held at a U.S. branch of a foreign financial institution, or foreign real estate or personal property you own directly.
  • When is the FBAR due? Form 114, which you and your spouse can file jointly to report your 2013 foreign accounts and assets, must be submitted electronically by June 30, 2014. No extension of time is available, though you can amend an incorrect return after the initial filing.

While there’s no tax due with the FBAR, failure to file can lead to penalties. If you overlooked the filing requirement in prior years, please contact our office. We’ll help you get caught up.

Recent court ruling affects IRA rollovers

Sometimes the things you think you know can lead to trouble. That’s especially true when what you think you know turns out to be wrong. For example, when taking distributions from your IRA, being wrong about the rules can lead to additional taxes and penalties.

As illustrated by a recent court case, the 60-day rollover rule is an example of an easy-to-misunderstand situation.

Generally, distributions taken from your traditional IRA are included in income in the year you receive them. Unless an exception applies, the distributions may also be subject to a 10% penalty when you’re under age 59½.

The 60-day rollover rule adds flexibility to the general tax treatment. Under this rule, as long as you replace all or part of a distribution within 60 days of receiving it, the amount repaid is not considered income and the 10% penalty does not apply. You can use the rollover rule once per year. A rollover allows you to take a short-term loan from an IRA with no tax consequences one time in a twelve-month period.

What if you have multiple IRAs? Can you use the 60-day rule for each account? Those were the questions raised in a recent Tax Court case. Based on long-standing IRS guidance, the taxpayer believed the answer was yes.

The court disagreed, saying the 60-day rule applies across all IRA accounts. No matter how many accounts you have, you can make only one nontaxable rollover per year. You can still do unlimited direct trustee-to-trustee transfers from one account to another.

In light of the decision, the IRS will issue new regulations effective January 1, 2015.

Please call if you plan to transfer or withdraw money from your IRA accounts. We’ll help you understand the tax consequences.

Affordable Care Act Update

The Affordable Care Act has undergone multiple legislative and administrative changes since enactment in 2010. Here’s the status of several of the tax provisions.

  • Individual penalty. The penalty for not having health insurance remains in effect, and will be due when you file your 2014 federal income tax return next year. The amount you’ll owe is 1% of your modified household income or a flat dollar amount, whichever is greater, unless you’re exempt or qualify for an exception.
  • Individual premium tax credit. If you chose to receive premium reductions in advance in the form of payments sent directly to your insurer during 2014, you will need to reconcile the amount paid on your behalf with the amount you were eligible to receive.
  • Business penalties. The $2,000 per-employee penalty for failing to offer affordable health insurance was delayed, and will not apply until 2015 when you employ 100 or more full-time-equivalent workers. When your workforce numbers 50 to 99, the penalty is delayed until 2016.

    As before, there’s no penalty when you employ fewer than 50 full-time workers.

  • Business credit. The federal tax credit for up to half of the cost of health insurance premiums for coverage you offer employees is still available for 2014, even if your state has not yet established a Small Business Health Options Program (known as a SHOP marketplace).

    To qualify for the credit, you must employ fewer than 25 full-time equivalent workers whose average wages are less than $50,800. In addition, you must pay 50% of the premium cost for employee-only coverage.

How to ruin your credit score

Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it.” The same could be said of good credit. It isn’t built overnight or by accident. Most Americans with stellar credit scores have exercised financial discipline for years. That’s why lenders are willing to offer them mortgages and car loans at favorable interest rates.

And like a good reputation, a strong credit score can be easily ruined. Here’s how to devastate your credit score in four simple steps.

  • Max out your credit cards and don’t make required payments. About 35% of your FICO score — the number between 300 and 850 (worst to best) that most lenders use when deciding whether to extend credit — comes from your payment history. Paying late or paying less than required minimums can wreak havoc on your FICO score and may signal to lenders that you’re overextended.
  • Co-sign on an irresponsible friend’s loan. There’s a reason why your pal needs a co-signer — he or she is perceived as a high credit risk. If your friend defaults on the loan, you’re responsible for the unpaid balance. As Shakespeare said, “Loan oft loses both itself and friend.” And remember this: if you co-sign for a loan, the status of the loan will appear on your credit report.
  • Close credit card accounts in quick succession. Shutting down a credit card or line of credit account may adversely affect your debt-to-utilization ratio (how much you owe in relation to your credit limits). As this ratio climbs, your credit score will tend to sink. Say, for example, you have three credit cards and each has a $1,000 limit. You carry a balance of $500 on one of those accounts. That’s a debt ratio of $500 to $3,000 or about 17%. If you close one of the accounts, the ratio will jump to 25% ($500/$2,000). Though you haven’t accumulated more debt, your credit score may be hurt.
  • Default on your installment loan or home mortgage. This is another sure-fire way to trash your credit score. A home foreclosure, for example, may cause your FICO score to plunge by 200 points or more. And because most negative information stays on your credit report for seven years (ten years for a bankruptcy), lenders may be reluctant to offer you money for a very long time.

Understand the benefits of the cash flow statement

Most businesses prepare three primary financial statements — the balance sheet, income (profit and loss) statement, and statement of cash flows. It’s the third of these statements that often provides the most insight into day-to-day operations. Why? The cash flow statement focuses on transactions that may not directly affect a company’s income, expenses, or financial standing at a given point in time.

The balance sheet may help a business owner to identify long-term trends such as declining receivables or increasing debt. But because that information is not directly stated on the balance sheet, it may be obscured, especially by end-of-period accruals. Similarly, some transactions may not show up on the income statement until it’s too late to take action. Such transactions might include equipment purchases and liquidation of long-term debt. To really know where cash is coming from and where it’s going, there’s no substitute for the statement of cash flows.

The cash flow statement provides information about three types of business activities: operations, investments, and financing. The operating section tells you how much cash you’ve received from sales and services, and how much you’ve used to cover payroll, vendor invoices, rent, taxes, and utilities. This section focuses on routine business transactions. The investing section deals with cash flows for capital expenditures (such as equipment and property purchases), as well as purchases and sales related to stocks and other investments. The financing section presents information about cash proceeds from loans, installment payments, and cash transactions with company owners.

By displaying these categories of cash flows, a business owner can tell at a glance the reasons for changes in cash balances from one period to the next. If done correctly, the cash flow statement can help an owner to budget for future periods and identify potential financial problems before they get out of hand. For example, if cash flows from receivables are declining over time, a business owner might want to revamp his or her credit policies or increase collection efforts. If substantial cash outflows are being used to finance obsolete equipment, maybe it’s time to sell off those assets and build up cash balances.

When used in concert with a company’s other financial documents, the cash flow statement can provide insight into a business’s current health and long-term viability. If you’d like help analyzing your company’s cash flow statement, give us a call.