Tuesday, November 05, 2019

Tax Tips for Family Members Working in a Family Business

One of the advantages of someone running their own business is hiring family members. But when including family members in business operations, certain tax treatments and employment tax rules apply. Here are some facts to know when working with a spouse, parent or child.
Both spouses carrying on the trade or business
If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. But, the spouses can elect not to treat the joint venture as a partnership by making a qualified joint venture election.
Qualified joint venture
Spouses may elect treatment as a qualified joint venture instead of a partnership. A qualified joint venture conducts a trade or business where:
  • The only members are a married couple who file a joint return,
  • Both spouses materially participate in the trade or business, and
  • Both spouses elect not to be treated as a partnership.
Only businesses owned and operated by spouses as co-owners and not in the name of a state law entity, such as a limited partnership or limited liability company, are eligible for the qualified joint venture election. Find more information on joint ventures in Publication 541, Partnerships.
Spouses electing qualified joint venture status are sole proprietors for federal tax purposes. Each spouse must file a separate Schedule C to report their share of profits and losses. They don’t need an EIN unless their sole proprietorship must file excise, employment, alcohol, tobacco or firearms returns. One spouse cannot continue to use the partnership’s Employer Identification Number (EIN) for the qualified joint venture. The EIN must stay with the partnership; it’s used by the partnership for any year in which the business doesn’t meet qualified joint venture requirements.
Employment taxes
If the business has employees, either of the spouses as sole proprietors may report and pay the employment taxes. The spouse, as an employer, must have an EIN for their sole proprietorship. If the business filed or paid employment taxes for part of the year under the partnership's EIN, the spouse may be considered the employee’s “successor employer” for purposes of figuring whether wages reached the Social Security and federal unemployment wage base limits.   One spouse employed by another. The wages for the services of an individual who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes but not to the Federal Unemployment Tax Act (FUTA).
Child employed by parents. Payments for the services of a child under age 18 aren’t subject to Social Security and Medicare taxes, if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments to a child under age 21 aren’t subject to FUTA. Payments are subject to income tax withholding, regardless of the child’s age.
Payments for the services of a child are subject to income tax withholding as well as Social Security, Medicare and FUTA taxes if they work for:
  • A corporation, even if it’s controlled by the child's parent, or
  • A partnership, even if the child's parent is a partner, unless each partner is a parent of the child.
Parent employed by child. The wages for the services of a parent employed by their child are subject to income tax withholding and Social Security and Medicare taxes. They’re not subject to FUTA tax.
Employees complete Form W-4 so that their employer can withhold the correct federal income tax from their pay. The IRS encourages everyone to use the Tax Withholding Estimator to help them make sure they have the right amount of tax withheld from their paycheck. The estimator automatically links to Form W-4, Employee’s Withholding Allowance Certificate, which they can then fill out and submit to their employer

Friday, September 27, 2019

Offer In Compromise

Just received confirmation that an Offer-In- Compromise I have been working on was accepted.  It is a great feeling because it is a very good program the IRS has but it is difficult to get accepted.  If you feel you are a candidate for this program please call and we can discuss further, still very happy!

Wednesday, September 25, 2019

Per Diem Rates

IRS issues 2019 to 2020 per-diem rates for traveling away from home

Business travelers who incur expenses while traveling away from home have new per-diem rates to use in substantiating certain of those expenses (Notice 2019-55). The new rates are in effect from Oct. 1, 2019, to Sept. 30, 2020. The IRS on Wednesday provided the 2019–2020 special per-diem rates, including the transportation industry meal and incidental expenses rates, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.
The updated rates are effective for per-diem allowances paid to any employee on or after Oct. 1, 2019, for travel away from home on or after that date, and supersede the rates in Notice 2018-77, which provided the rates for Oct. 1, 2018, through Sept. 30, 2019.
Rev. Proc. 2011-47 provides the general rules for using a federal per-diem rate to substantiate the amount of ordinary and necessary expenses for lodging, meals, and incidental costs paid or incurred for business-related travel away from home. Taxpayers using the rates and the list of localities in Notice 2019-55 must comply with the rules in Rev. Proc. 2011-47.

High-low substantiation method

For purposes of the high-low substantiation method, the per-diem rates are $297 for travel to any high-cost locality and $200 for travel to any other locality within the continental United States (CONUS), slightly higher than last year.
The amount of these rates that is treated as paid for meals for purposes of Sec. 274(n) is $71 for travel to a high-cost locality and $60 for travel to any other locality within CONUS, both unchanged from last year.
The notice contains a list of the localities that are high-cost localities (localities that have a federal per-diem rate of $248 or more, $7 higher than last year) for all or part of the calendar year.

Incidental expenses

Since 2012, incidental expenses have included only fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. The per-diem rate for the incidental-expenses-only deduction remains unchanged at $5 per day for any locality of travel.

Transportation industry

The special meals and incidental expenses rates for taxpayers in the transportation industry are $66 for any locality of travel within CONUS and $71 for any locality of travel outside CONUS, both unchanged after increasing $3 last year.

Thanks to By Sally P. Schreiber, J.D. for this information

Monday, September 23, 2019

Hardship Distribution on 401(k) Distributions relaxed!

Final regs. relax 401(k) hardship distribution requirements September 20, 2019

The IRS has amended the requirements for hardship distributions from Sec. 401(k) plans (T.D. 9875). The final regulations, issued on Friday, (1) eliminate the requirements that plan participants take loans from the plan to the extent they are available before they are permitted to take a hardship distribution from the plan and that participants may not make new contributions to the plan within six months of the hardship distribution. (2)They also change the casualty loss hardship distribution rules for disaster relief and the rules for determining the amount of plan funds available for distribution, while clarifying the requirement that funds not be available from other sources. Many of these changes were necessitated by amendments to the Code, including changes made by the Bipartisan Budget Act of 2018, P.L. 115-123 (BBA).
The final regulations eliminate the rules in existing Regs. Sec. 1.401(k)-1(d)(3)(iv)(B) (under which the determination of whether a distribution is necessary to satisfy a financial need is based on all the relevant facts and circumstances) and provide one general standard for determining whether a distribution is necessary. A distribution is not treated as necessary to satisfy an employee’s immediate and heavy financial need if the need may be relieved from other resources that are “reasonably available” to the employee (including assets of the employee’s spouse and minor children that are reasonably available to the employee).
Under the new regulations, a distribution is treated as necessary to satisfy an immediate and heavy financial need of an employee only to the extent that:
  • The amount of the distribution is not in excess of the amount required to satisfy the financial need (including any amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution);
  • The employee has obtained all other currently available distributions (including distributions of ESOP dividends under Sec. 404(k), but not hardship distributions) under the plan and all other deferred compensation plans, whether qualified or nonqualified, maintained by the employer;
  • The employee has provided the plan administrator with a written representation that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need; and
  • The plan administrator does not have actual knowledge that is contrary to the representation.
The employer may rely on the employee’s representation (unless the employer has actual knowledge to the contrary) that the need cannot reasonably be relieved from other specified resources.
The final regulations also modify the safe-harbor list of expenses in existing Regs. Sec. 1.401(k)-1(d)(3)(iii)(B) for which distributions are deemed to be made on account of an immediate and heavy financial need.

Casualty loss hardship

Because the casualty loss rules were amended by the law known as the Tax Cuts and Jobs Act, P.L.115-97, so that taxpayers only qualify for a casualty loss deduction if they are in a federally declared disaster area, the new regulations provide that only disaster-related expenses and losses of an employee who lived or worked in the disaster area will qualify for the new safe harbor, and the expenses and losses of the employee’s relatives and dependents will not, unlike under the IRS’s disaster relief provisions.
The BBA’s changes to the hardship distribution rules apply to plan years beginning after Dec. 31, 2018. The IRS provided flexible rules for the various effective dates in the regulations because of the necessity for plan amendments to implement the new rules.
 Thanks to Sally P. Schreiber, J.D. for much of this informaion

Wednesday, September 11, 2019

Travel is still deductible!

For decades, the IRS has closely scrutinized deductions for travel and entertainment (T&E), expenses, often challenging write-offs claimed by business owners. But the Tax Cuts and Jobs (TCJA) wipes out most entertainment deductions, beginning in 2018. Nevertheless, business clients still must worry about the “T” part of “T&E.”
In particular, the tax law imposes strict recordkeeping requirements that must be met to support deductions.
The tax rules in this area continue to be tricky and fraught with numerous twists and turns. This is just a brief overview of what your clients need to know.
Starting point: Generally, you can deduct the cost of travel expenses when you’re away from home for business reasons. For instance, you might drive in your car or hop on a plane to visit a customer or supplier. For these purposes, your “tax home” is the general area or vicinity—for example, a city and its surrounding suburbs—of your principal place of business, regardless of the location of your home.
Assuming you meet the requirements, there’s a long laundry list of expenses that may be deductible, including the following:
  • Air, rail and bus fares;
  • Meals (limited to 50 percent of the cost);
  • Baggage charges;
  • Lodging expenses;
  • Car expenses, including the cost of gas, oil, repairs, parts, tires, supplies, parking fees and tolls;
  • Taxi fares or other transportation between the airport or station and a hotel, from one customer to another, or from one place of business to another;
  • Cleaning and laundry expenses;
  • Transportation costs for sample and display materials and sample room costs; and
  • Tips on eligible expenses.
Note that the TCJA generally eliminates deductions for meals claimed as entertainment expenses—such as a lunch or dinner with a customer following a substantial business discussion—but it doesn’t touch the deduction for 50 percent of the costs of meals incurred while traveling away from home on business.
However, travel expenses are deductible only to the extent they are reasonable. No deduction is allowed for expenses that are lavish and extravagant under the circumstances, but the IRS gives you plenty of leeway. For instance, a deduction won’t be denied simply because you flew first class or dined at an exclusive restaurant.
Furthermore, the primary purpose of the travel must be business-related. That doesn’t mean you can’t combine some pleasure with business, but the trip can’t be a disguised vacation. In this case, be sure to spend more days on business matters than you do sightseeing or relaxing. Of course, costs attributable to your personal activities are nondeductible.
If you’re traveling by car or another vehicle, an extra set of rules come into pay. Essentially, you must keep track of all your expenses attributable to business travel, including gas, oil, tires, insurance, repairs, licenses, registration fees, etc. In addition, you may claim a depreciation deduction for the vehicle, based on its percentage of business use. For example, if you use your car 80 percent for business, you’re entitled to deduct 80 percent of the regular depreciation allowance.
Alternatively, you may be able to use the IRS-approved standard mileage deduction for the year. With this method, you don’t have to account for all of your actual expenses, although you still must record the mileage for each business trip, the date, the destinations, the names and relationships of the business parties and the business purpose of the travel. The standard mileage rate for 2019 is (plus any business-related tolls and parking fees).
Finally, as we alluded to above, the recordkeeping requirements for travel expenses are tough. Have clients keep the proof needed in a log, diary, trip sheets or similar records along with documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. To simplify matters, encourage clients to use an accountable plan. The plan should meet the following requirements:
  • Expenses must have a business connection.
  • Employees must account to the employer for these expenses within a reasonable time.
  • The employer must require employees to return excess reimbursements within a reasonable and specific period of time.
Finish line: This in area of the law where your expert guidance can make a big difference. Help your clients protect their business travel deductions.
Thanks for Accounting.web for pulling this information together

Wednesday, July 31, 2019

New 1099-NEC to replace the 1099-Misc for Non Employee Compensation

Form 1099-NECThis form is slated by the IRS to replace the 1099-Misc form now used for Non Employee Compensation.

Business Meals & Entertainment expenses

With great fanfare, the Tax Cuts and Jobs Act (TCJA) eliminated deductions for business entertainment expenses, beginning in 2018. But, not completely.  Despite the fears of a number of tax commentators, guidance recently issued by the IRS preserves deductions for business meals incurred in connection with entertainment, albeit in limited circumstances (IRS Notice 2018-76, 10/3/18).

First, here’s some background information. Prior to the TCJA, you could deduct 50 percent of the cost of qualified business entertainment, as long as you met strict substantiation requirements spelled out in IRS regulations. This covered entertainment that was “directly-related to” or “associated with” the business.

Frequently, the cost of meals and beverages was included in such entertainment. For instance, if meals were held in a clear business setting, like a hospitality suite at a convention, they qualified as directly-related entertainment.

Similarly, if you treated a customer to a meal after a substantial business discussion, you could write off 50 percent of the cost as associated-with entertainment. But then the TCJA repealed the deduction for business entertainment.

Where did that leave deductions for business meals? Clearly, meals incurred while traveling away from home on business, such as a business trip to finalize a contract with a client, remains deductible, subject to the 50 percent limit.

But the rules weren’t as clear for meals incurred in connection with entertainment. Fortunately, the IRS has provided some leeway. In the 2018 Notice, it says that taxpayers may deduct 50 percent of the cost of business meals if:

The expense is an ordinary and necessary business expense paid or incurred during the tax year.  The expense is not lavish or extravagant under the circumstances.  The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished.  The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.

For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

Caution: The rules can’t be circumvented by inflating amounts charged for food and beverages in connection with entertainment activities.

To illustrate the new rules, the Notice provides three examples where business taxpayers attended games with business contacts.

Example 1: A taxpayer takes a customer to a baseball game and buys the hot dogs and drinks. The tickets are nondeductible entertainment, but the taxpayer can deduct 50 percent of the cost of the hot dogs and drinks purchased separately.

Example 2: A taxpayer takes a customer to a basketball game in a luxury suite. During the game, they have access to food and beverages, which are included in the cost of the tickets. Both the cost of the tickets and the food and beverages are nondeductible entertainment.

Example 3: The same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. In this case, the taxpayer can deduct 50 percent of the cost of the food and beverages.

The IRS is expected to issue new regulations with more details. In the meantime, you can rely on the 2018 Notice.

Thanks to Ken Berry, esq. for much of this information.

Thursday, July 18, 2019

Is that taxable boot?

Clients who are preparing to conduct a 1031 exchange often ask: Is it possible to have an exchange that is partially taxable? Many ask because they are concerned about whether they will be able to line up a property (or properties) of sufficiently high value.
To achieve full tax deferral in an exchange, clients must spend all of the proceeds from their sale and reacquire any debt paid off. But an exchange does not have to result in this outcome. It’s possible to receive some cash (after the exchange) or have some debt relief and still defer a portion of the tax liability. In this post, we will discuss one of the key topics in Section 1031, the topic of boot. 
In technical terms, boot refers to any sort of property received in an exchange that is not of like-kind to the relinquished property. This means it can take a variety of forms, not just cash or debt relief, although these are among the most common types. Here, though, I'll just cover cash boot and mortgage boot. 

Cash Boot

This kind can be received either voluntarily, such as when a taxpayer wishes to extract cash, or involuntarily, such as when a taxpayer is unable to locate a replacement property of sufficiently high value. In the former situation, taxpayers wish to extract a certain amount of cash in order to finance other purchases. This can be done, but the cash will be taxed to the extent of the gain. In the latter scenario, if a taxpayer owns a property valued at $1 million, with a $500,000 basis, and can only locate replacement properties worth $750,000, then they need to be prepared to pay taxes on the cash that will follow. This is often referred to as "buying down."  
As long as the exchange conforms to all of the legal regulations pertaining to receipt, a partial exchange involving cash boot will not result in a failure. In other words, just because cash boot is received doesn’t mean that the remaining gain cannot be deferred.

Mortgage Boot

This type occurs when a taxpayer has an existing mortgage loan that is paid off by the sale and they fail to acquire a mortgage of equal value on the purchase.
Consider this example: A taxpayer owns a property, valued at $1 million, with a $450,000 basis and a mortgage loan of $200,000. When they sell, the mortgage loan will be paid off, so the exchange fund will have approximately $800,000.
However, this doesn’t mean that only $800,000 has to be spent in order to achieve full tax deferral. The taxpayer also has to either acquire a mortgage of at least $200,000 or bring in additional cash to balance out the loan. If they simply use the cash to purchase a property worth $800,000, they will have $200,000 of debt relief, or “mortgage boot,” and this amount would be taxable. To achieve full tax deferral, the taxpayer would need to purchase a property worth at least $1 million and bring in additional cash or acquire a new mortgage loan.
As you can see, there's a good reason clients bring this topic up. They want to know whether they can voluntarily take out cash to finance other things. They also want to know the potential consequences that can follow from a mortgage loan or a buying down in value. The good news is: Partial exchanges are permissible; these won’t necessarily cause the exchange to collapse. But, if full tax deferral is the goal, that taxpayer needs to understand how boot works and how it can avoided. 
Thanks to Jorgen Rex Olsen for this valuable information!

Wednesday, July 17, 2019

IRS Conference in Washington D.C in July

Had a great time in D.C. at the IRS tax forum.  Heard some very interesting topics such as updates on the Section 199A Qualified Business Income deduction, bonus depreciation allowed and other topics. 

Tuesday, June 11, 2019

Completed the CPA Peer Review Process

Our firm completed the CPA Peer Review Process.  We completed the final steps of the process on June 10th of 2019.  This enables our firm to continue to audit non profit firms for the next three years  at reasonable rates.

Thursday, May 30, 2019

Can I deduct my rental losses???

I often receive letters and emails from retired individuals in need of financial advice. Many of their queries mention that they attended one of those free lunch seminars offered by investment advisors and estate tax.
While I could ask what enticed them to attend, I’ve already heard the answer lots of times. They fell for the seminar promoters’ promises of free gourmet meals, along with tips on how to earn excellent returns on their investments, eliminate market risk and grow their retirement funds.
I also could ask them to tell me what happened right after they finished their meals. I also already know that answer. They were pitched investments in rental properties and other kinds of tax shelters. The promoters assured them that they would acquire properties that generate IRS-approved losses.
Just how would such losses benefit the investors, according to the promoters? Well, they could use them to erase taxes on their income from, say, salaries and business profits.Wannabe landlords want me to answer pretty much the same questions: Are those assurances reliable? How much are they allowed to deduct for rental property losses?
My answers are always the same. Potential investors should recognize that these kinds of promises are red flags because the IRS sets strict limits on losses from investments in tax shelter deals, such as limited partnerships.
How much does the agency allow owners of rental properties to write off for losses? It all depends.

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The IRS generally allows tax shelter losses only to be offset against income from similar investments. It prohibits the use of shelter losses to wipe out taxes on non-shelter income, such as wages and stock market profits. These tough anti-shelter restrictions are, however, subject to several exceptions for investors.
One of the exceptions authorizes limited relief for losses up to $25,000 suffered by relatively small-scale investors in rental properties, be they multi-family homes, condominiums, cooperative apartments or stores. To qualify, property owners must be “active” managers.
For most landlords, satisfying this stipulation is a slam dunk. All they have to do is help make decisions on such essentials as approving new tenants, deciding rental terms and okaying capital or repair expenditures. 
What they needn’t personally do is mow lawns, make repairs or answer middle-of-the-night calls from tenants. As long as the owners actively participate, they can delegate day-to-day operations to managing agents or others hired to collect rents and run the properties.
If lower- and middle-income landlords meet these qualifications, they can offset as much as $25,000 of their annual rental losses against other income. Note that the ceiling drops from $25,000 to $12,500 for married persons who are filing separate returns and live apart for the entire year. The law bars any offset for married couples who live together and file separate returns.
Fat cats should forget about the write-off. The full $25,000 deduction is available only for individuals with adjusted gross incomes (AGIs) below $100,000—before subtracting any shelter losses. More bad news: The offset phases out. It shrinks by $1 for every $2 of AGI beyond $100,000 and vanishes completely when AGI surpasses $150,000.
Even more bad news: There’s no inflation indexing for these dollar limits. They haven’t increased since they were introduced by the Tax Reform Act of 1986, when Ronald Reagan was in the White House. Other fine print worth noting: The break is authorized solely for an investor who owns at least a 10 percent interest in the property.
Claiming rental losses increases the likelihood of investors’ returns drawing the attention of the tax enforcers. The IRS suspects that many investors are incorrectly deducting losses. Investors who undergo audits will likely have to provide proof of their active participation in management decisions, ownership of at least a 10 percent interest and correct computation of their deductions under the AGI test.

Thanks to Julian Block for this timely information
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

Wednesday, May 22, 2019

2019 Inflation Adjusted Vehicle Depreciation Limits

The IRS on Tuesday provided the limitations on depreciation deductions for passenger automobiles first placed in service in 2019 and the amounts of income inclusion for lessees of passenger automobiles first leased during 2019 (Rev. Proc. 2019-26). Passenger automobiles include trucks and vans. The amounts in the revenue procedure are inflation-adjusted as required by Sec. 280F(d)(7), using the automobile component of the chained consumer price index for all urban consumers (C-CPI-U). The earlier consumer price index was replaced by the C-CPI-U by the law known as the Tax Cuts and Jobs Act, P.L. 115-97.
For passenger automobiles to which the Sec. 168(k) additional (bonus) first-year depreciation deduction applies and that were acquired beforeSept. 28, 2017, and placed in service during calendar year 2019, the depreciation limit under Sec. 280F(d)(7) is $14,900 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.
For passenger automobiles to which the Sec. 168(k) additional (bonus) first-year depreciation deduction applies and that are acquired after Sept. 27, 2017, and placed in service during calendar year 2019, the depreciation limit under Sec. 280F(d)(7) is $18,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.
For passenger automobiles for which no Sec. 168(k) additional (bonus) first-year depreciation deduction applies, the depreciation limit under Sec. 280F(d)(7) is $10,100 for the first tax year; $16,100 for the second tax year; $9,700 for the third tax year; and $5,760 for each succeeding year.
Sec. 280F(c) limits deductions for the cost of leasing automobiles, expressed as an income inclusion amount, according to a formula and tables prescribed under Regs. Sec. 1.280F-7. Table 4 of Rev. Proc. 2019-26 contains the income inclusion amounts for lessees of passenger automobiles first leased during 2019. It shows income inclusion amounts for a range of fair market values for each tax year after the automobile is first leased.
Thanks to Sally Schreiber, J.D. at the AICPA for this information

Tuesday, May 07, 2019

Optimizing Residential Real Estate Deductions

The tax deduction rules for residential landlords have changed dramatically in recent years, with the release of the final tangible property regulations in 2013 (T.D. 9636) and the creation of the qualified business income (QBI) deduction under Sec. 199A by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Landlords are now much more likely than before to be able to deduct most of their current expenditures.

The starting point is to determine whether an expenditure is for a betterment, restoration, or adaptation. A comprehensive remodeling or correcting a preexisting defect would be a betterment or restoration and would need to be capitalized. The mortgage interest and property taxes incurred during construction may need to be capitalized as well.

If the expenditure is not a betterment, restoration, or adaptation, the next step is to determine whether it can be expensed under the de minimis, small taxpayer, or routine maintenance safe harbor. The de minimis and small taxpayer safe-harbor elections apply to businesses and farms as well as to rental properties.


Under the tangible property regulations and Notice 2015-82, expenditures for tangible property that would otherwise be capitalized can be expensed if the item costs $2,500 or less and the taxpayer makes the proper election. Taxpayers with applicable financial statements have a de minimis cap of $5,000 per item. The taxpayer makes the election annually by including a statement with the tax return citing "Section 1.263(a)-1(f) de minimis safe harbor election." The election is made in the year the tangible personal property is placed in service and is allowed in any year of ownership.


Landlords with average annual gross receipts for the three preceding tax years of $10 million or less and for units of property with an unadjusted basis of $1 million or less can elect to write off repairs, maintenance, and improvements if the total of these expenditures does not exceed the lesser of 2% of the unadjusted basis of the property or $10,000 during a given year. Items deducted under the de minimis election are also included in the routine maintenance safe-harbor calculation (Regs. Sec. 1.263(a)-3(h)(2)). The taxpayer makes the annual election by including a statement citing "Section 1.263(a)-3(h) Safe Harbor Election for Small Taxpayers," along with his or her name, address, and taxpayer identification number and a description of each eligible building property for which the election is being made. The election can be made on a building-by-building basis.


Recurring expenditures for repairs and maintenance that keep property in ordinarily efficient operating condition do not need to be capitalized and can be expensed in the year payment is made. However, they are included in the 2%/$10,000 small taxpayer safe-harbor calculation. No elections are required. Typical expenditures include those for painting; replacing worn-out or damaged plumbing, HVAC, and appliance systems parts; and certain structural repairs.


Sec. 179 does not apply to residential rental property or any of its components or improvements or to other property used in conjunction with the rental property.

For property placed in service after Sept. 27, 2017, 100% bonus depreciation is available for components with a recovery period of 20 years or less. Consideration should be given to depreciating versus expensing if the property is profitable and the taxpayer qualifies for the Sec. 199A QBI deduction, because the unadjusted basis of depreciable property is included in the Sec. 199A deduction calculation.


In January, the IRS released Notice 2019-07, which provides safe-harbor requirements for rental real estate to qualify as a trade or business under Sec. 199A. To qualify, the real estate must be owned directly or through a disregarded entity. Additional requirements to meet the safe harbor are:

  • Separate books are maintained for each real estate enterprise;
  • Annually, at least 250 hours of rental services are provided by the owner, agent, or contractor; and
  • Contemporaneous records, including time reports, logs, or similar documents are maintained that show the hours worked, a description of the service, the date, and who performed the service.

The notice also states that rental real estate businesses that do not meet the safe-harbor requirements may still qualify for the Sec. 199A deduction if they meet the definition of a trade or business under Sec. 162 other than the trade or business of performing services as an employee (Regs. Sec. 1.199A-1(b)(14)). Specifically excluded from the safe harbor are residences used by the taxpayer during the year and real estate leased where the tenant pays all the costs of ownership, commonly called triple-net leases. The safe-harbor rules are effective for tax years ending after Dec. 31, 2017.

If the activity does not meet the safe-harbor requirements, the key is whether it rises to the level of a trade or business rather than an investment activity. There is no definition of "trade or business" in the Code. However, the courts have held that activities with a profit motive and with continuous and regular involvement by the taxpayer are trades or businesses (Groetzinger, 480 U.S. 23 (1987)).

Landlords with multiple properties who actively participate in the rental activities clearly have a trade or business in real estate and therefore qualify for the deduction. It gets murkier if, for example, the landlord owns one residential property and uses a property manager to handle all the activities. Most experts agree that triple-net leases probably do not qualify as a trade or business, but even that situation should be reviewed, especially if the landlord owns and manages multiple triple-net leases.

Real estate trades and businesses are required to file Forms 1099-MISC, Miscellaneous Income, for vendor payments in excess of $600 and to complete the questions at the top of Schedule E, Supplemental Income and Loss, regarding the requirement to file the forms and whether they were filed. This could be problematic in defending a position that the activity rises to the level of a trade or business if Forms 1099-MISC were required but were not filed in previous years. Owners could also be subject to penalties for failure to file Forms 1099-MISC and for failure to supply copies to vendors.

Each situation will have to be evaluated based on the facts and circumstances. Vacation homes are especially problematic, due to the profit motive requirement. And, since they are rarely profitable, such properties would more likely reduce the deduction rather than increase it.
Thanks to Janet Hagy, CPA for this article.

Friday, April 26, 2019

Deducting Loan Origination Fees for business taxes

Deducting Loan Origination Fees on Business Taxes

I was recently researching the tax treatment of loan origination fees for a client, and found almost all the search terms I was using returned only information on personal mortgage loans, not business loans.  With a decent amount of searching, I came across a few nice articles that clearly spell out the tax treatment versus the financial accounting (GAAP) treatment of these fees, so I am sharing them here in hopes that when you go searching for the same info (as a business owner or accountant), you’ll find them all here together, in this nice little spot.
To clarify, there are different types of loan fees at closing — so, find this part out first — as that’s the key to how they’re treated.
First up, The Balance (a personal finance site that has a pretty decent “Small Business” section) discusses Deducting Interest Expenses on Your Business Taxes:
For mortgages on business property, you may end up prepaying interest from the settlement date to the closing date, as part of your closing costs.
The IRS says that when you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year.
You may not deduct interest that must be capitalized, that is, interest that is added to the principal balance of a loan or mortgage. This interest expenses must be depreciated along with the other costs of the business asset.
  • For sole proprietors and single-member LLCs, show these expenses in the “Expenses” section of Schedule C on Line 16. Note that interest expenses are divided between mortgage interest and all other interest expenses.
  • For partnerships and multiple-member LLCs, show these expenses in the “Other Deductions” section of Form 1065
  • For corporations, show these expenses in the “Other Deductions” section of Form 1120.
Meaden & Moore’s blog does a really nice job of explaining — through an example that culminates in a journal entry — the accounting treatment (Generally Accepted Accounting Principles, or GAAP) of not only how to amortize these fees over the life of the loan, but why (the matching principle).
These costs should be recorded as an asset and the related periodic expense should be charged to amortization expense. If these costs were expensed in full at the time of payment, expense for that period would be artificially higher than normal and potentially misleading. Utilizing the matching principle will allow a Company to align this expense with the term of the loan.
However, I only found one article that discussed what I was really looking for: the comparison of tax vs. GAAP rules for period expensing or capitalization/amortization of loan origination fees.
Loan Origination: Getting Tax and Financial Accounting to Mesh, by CFO.com’s Accounting & Tax department, offers an excellent general explanation of why tax and GAAP (financial statement accounting) systems differ.
We have seen that, with respect to many items of income and expense, tax accounting differs, diametrically, from financial accounting. This divergence, of course, is not surprising in light of the fact that the fundamental goals of each system also diverge.
Financial accounting has as its underpinning the doctrine of conservatism such that, wherever possible, net income is understated through the mechanism of accelerating expenses and deferring income. The fundamental objective of the tax accounting system, as we are all aware, is revenue collection such that the system strives to enhance net (or taxable) income and, to this end, income items are accelerated while expenses, wherever possible, are deferred. With each system, however, ”matching” (of revenues with the expenses incurred to produce such revenues) is also advertised as a central tenet. But frequently, this particular objective is sacrificed on the altar of the larger objectives — conservatism and revenue enhancement.
In the case of the bank in the particular example they use, the fees were deductible as a period expense for tax purposes (as opposed to being amortized, which is the requirement for GAAP) because the bank’s loan marketing activities were a core activity of its day-to-day business.
That case stands, broadly, for the proposition that expenses must be capitalized if they provide benefits that extend beyond the year in which such expenses are incurred.
Which means that in most situations, for both financial statement and tax purposes, these fees need to be written off over the period of the loan — but there are exceptions for tax purposes if the activities are central to daily operations.
Thanks to