Month: April 2016

Are You Starting a Business? This Handy Checklist Will Help You Get off to the Right Start.

free business startup checklist
Get a free checklist that will walk you through the key steps to starting a business.

Starting your own business is an exciting endeavor but one filled with so many questions. Selecting a name and a location, picking out office furniture, and figuring out what equipment you’ll need are just the tip of the business iceberg.

Getting started on the right track with all the necessary financial details can have even the savviest of new business owners quickly drowning in paperwork and decisions.

Some issues you need to grapple with as you begin your business venture include:

  • Should your company be registered as a partnership, and S-Corp or an LLC? Are you going into business as a sole proprietor?
  • How will you track your daily expenses and financial transactions? Then there’s also:
    • Who will do this in your new company? With so much happening with a startup, are you better served outsourcing your bookkeeping to an experienced accounting firm?
    • Which expenses are mandatory to track in order to develop accurate financial forecasts, budgets, and cash flow reports?
  • Should your company’s accounting be on a cash or accrual basis?
  • What are your new venture’s tax responsibilities?

There is lots of information for business owners available from the IRS and the Small Business Administration. But for easily accessible info that takes you through all the critical accounting pieces of starting up a company, you can download our free business startup checklist at http://krscpas.com/go/business-startup-checklist/. With years of experience working with business owners in New Jersey and New York, we can help get you on the right track—and stay there!

Once you’ve downloaded the checklist and had a chance to look it over, give us a call to discuss your startup’s needs at 201.655.7411 or email [email protected] for a no-obligation initial consultation.

 

 

Passive Loss Limitations in Rental Real Estate

If you think purchasing a rental property will make a great tax shelter, you may need to dig a little deeper into “passive loss limitations” and how they may affect your real estate investment.

rental property and passive loss limitationsFirst, consider that your rental property (like many other businesses) may not yield positive cash flow at first. Improvements to the property, tenant issues, and other expenses may end up putting you in the negative column. If you do end up with a rental loss, you are subject to complex IRS rules regarding how much of your rental losses you may deduct from other income you earn during the year.

Rental property ventures are treated differently than other business investments by the IRS. In the rental property investment realm, these are “passive loss” limitations.

What is a Passive Activity?

The IRS recognizes two types of passive activities:

  • Rentals, including both equipment and rental real estate, regardless of the level of participation.
  • Trade or businesses in which the taxpayer does not materially participate.

To that second point, you are considered to materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis. Generally, real estate activities are passive activities even if you do materially participate. (There is an exception for real estate professionals, which I will discuss in a future blog.) Passive activity loss limitations are reported on your tax return using Form 8582. You can learn more here about passive and non-passive activities as defined by the IRS.

What Triggers Passive Loss Limitations?

Income tax losses from rental properties and limited partnership investments in which you do not materially participate are subject to the passive loss limitations. Generally, passive losses are limited to passive activity income. Any passive losses that have been disallowed are carried forward to the next taxable year.

Special Allowance for Rental Activities

There is a special $25,000 rental loss allowance but the real estate investor must meet two conditions to qualify, based on modified adjusted gross income (MAGI) and active participation in the activity:

1 – Taxpayers with MAGI of less than $100,000 may claim up to $25,000 in rental losses. For every dollar over $100,000 the allowance is reduced by 50%, and it is completely phased out/reduced to zero when the MAGI reaches $150,000.

2 – You must also actively participate in the running of your real estate. This is a simple level to attain.  You do not have to work any set number of hours to actively participate, you simply have to be the final decision maker about approving tenants, arranging for repairs, setting rents, and other management tasks.  If you manage your rentals yourself, you will likely satisfy this requirement.

Disposition of Interest

Time to sell? Generally, you may deduct the entire amount of previously disallowed passive activity losses in the year you dispose of your entire interest in the activity. If you dispose of your interest in a passive activity during a divorce or by gift, the suspended losses are not deductible and adjust the basis in the property.

If you are thinking of investing in rental property as a tax shelter, it is best to discuss this somewhat complex arrangement with a qualified tax or real estate professional, or certified public accountant with expertise in real estate transactions and accounting.

If you’d like some additional insights into passive loss limitations as they relate to real estate investments, contact me at [email protected] or (201) 655-7411.

How to Increase the Value of Your Business

 

increase the value of your business
Reducing costs can help you increase cash flow and, as a result, the value of your business.

The value of a business is based on two factors: the expected future cash flow of the business and the risk that future cash flow will occur when and in the amounts expected.

Cash flow and risk are the meat and potatoes of business valuation. The valuation report that is produced is just a detailed analysis of these factors. Continue reading “How to Increase the Value of Your Business”

Getting a New Jersey Divorce? Beware of Spousal Double Dipping

 

Getting a NJ divorce? Beware of double dipping
New Jersey courts allow double dipping: the nontitled spouse receives their share of business value, which is based on future income, and on top of that, receives a portion of that very same income as it is earned.

In a divorce case in which one spouse owns a business, the business is generally subject to equitable distribution; that is, each spouse receives their equitable share of the value of the business. Practically speaking, this does not mean that the business is sold and the proceeds divided but rather, that the nontitled spouse receives money or other property equal to their equitable share of the business value. The problem arises in the conflict between the income stream used to value the business and the income stream used to calculate spousal support.

Continue reading “Getting a New Jersey Divorce? Beware of Spousal Double Dipping”

Tangible Property Regulations and the IRS

Repair regulations provide guidance for classifying repairs and improvements

Deductible Repairs or Capital Improvements?

Are your property repairs deductible? The Internal Revenue Code, the Internal Revenue Service (IRS), and taxpayers have been in conflict over whether expenditures on tangible property are deductible now, or must be capitalized and recovered through depreciation over time. The distinction between deductible repairs and capital improvements has been determined largely through case law and is based upon facts and circumstances.

In an effort to reduce disputes with taxpayers, the IRS issued final regulations in September 2013. These are commonly referred to as the “repair regulations”, and provide rules regarding the treatment of expenditures for acquiring, maintaining, or improving tangible property.

Under the repair regulations, the IRS provided guidance to  determine whether an expenditure made for a building is an improvement. The first step is to determine the identifying unit of property.  In real estate, the unit of property would commonly be considered the building; however, there are special rules to determine the unit of property for buildings.

Determining the Unit of Property

When applying the improvements standards, the unit of property for a building comprises the building and its structural components (doors, windows, roof, etc.) plus each of the eight specifically defined building systems:

  1. Heating, ventilation, and air conditioning systems (HVAC)
  2. Plumbing systems
  3. Electrical system
  4. All escalators
  5. All elevators
  6. Fire protection and alarm systems
  7. Building security systemsfire protection systems can be considered a capital improvement
  8. Gas distribution systems

Improvement Standards

Once you have determined the unit of property, the next step is to determine whether an expenditure for the unit of property is a deductible repair or capitalizable improvement. An expenditure is a capitalizable improvement if it can be qualified as a betterment, restoration, or adaptation. They are defined as follows:

  • Capitalizable betterment:
    • Corrects a material condition or defect that existed before the taxpayer’s acquisition of the unit of property.
    • Is a material addition (including physical enlargement, expansion, extension, or addition of a major component) or a material increase in capacity of a unit of property?
    • Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of a unit of property.
  • Capitalizable restoration:
    • Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use.
    • Results in the rebuilding of the unit of property to a like-new condition after the end of its class life.
    • Replaces a part or a combination of parts that are a major component or a substantial structural part of a unit of property.
  • Capitalizable adaptation:

The amounts paid to adapt a unit of property to a new or different use that is not consistent with the taxpayer’s ordinary use of the unit of property at the time it was originally placed in service. For a building to qualify for the adaptation standard, the amount paid to improve it must adapt the building structure or any one of its building systems to a new or different use.

The Takeaway

The repair regulations attempt to resolve the controversies that have arisen over the years between the IRS and taxpayers over how to classify certain costs that are deductible in a current tax year versus fixed assets that have to be capitalized and depreciated over a number of years.

If you have any questions about whether improvements to your tangible property are currently deductible or must be depreciated over time, contact Simon Filip for a consultation at 201.655.7411 or [email protected].

 

 

Does Your Small Business Need Help with Bookkeeping Tasks?

Outsourced bookkeeping
Outsourcing your bookkeeping and back office tasks can free you up to focus on your business

Small-business owners bring expertise and commitment to their companies, but many find they are often too busy running their operations and taking care of their customers to deal with paperwork. We all know how quickly those stacks can pile up, and unfortunately, it’s all too easy to lose track of bills that must be paid. And what about reconciling the corporate checkbook on a timely basis?

Continue reading “Does Your Small Business Need Help with Bookkeeping Tasks?”