Month: July 2017

Prepare Now for Easier 1099s in January ’18

Now is the time to contact vendors for any missing W-9 forms, so that you have a less frenetic year-end.

In fact, we recommend that you obtain a vendor’s W-9 before you pay any of their invoices. Don’t wait to the end of the year to begin the process.

Prepare Now for Easier 1099s in January '18If your company uses  independent contractors, you need to send them a 1099 form for their taxes.The IRS requires anyone providing a service who is not an employee and was paid $600 or more during the year, to be issued a 1099. There are exceptions for attorneys who have no dollar threshold, and payments to corporations, which are exempt from 1099 reporting.

Get detailed instructions for completing Form 1099-MISC.

Important deadlines for filing 2017 Form 1099-MISC

Copy B and Copy 2 of the 1099-MISC form (recipient’s copy)                     January 31, 2018

File Copy A of the 1099-MISC form (IRS copy)                                          February 28, 2018

If filing electronically                                                                                            April 2, 2018

Electronic filing requires software that generates a file according to IRS specifications. When reporting nonemployee compensation payments in box 7 of Form 1099-MISC, the due date remains January 31, 2018.

Recommendations

It is much harder to contact independent contractors for information if their services were used sparingly, or if they no longer provide services. That’s why we recommend that you:

  • Withhold payment to any vendor who has not provided your company with an updated Form W-9.
  • Keep an electronic file of all W-9 forms received.
  • Accept W-9 forms from all vendors – even if you believe the entity may be exempt from 1099 reporting. (Better safe than sorry!)
  • Incorporate the Form W-9 requirement in your initial vendor setup and contract agreements.

Remember, taxpayers may be subjected to fines for late 1099 forms, missing forms, or wrong/omitted taxpayer information. To ensure a stress-reduced year end, start collecting any missing taxpayer information during these summer months.

We’ve got your back

From 1099s to 1040s and more, we believe in making tax season as stress-less as possible for our clients. Contact me at [email protected] to learn more about our proactive tax planning and preparation services.

 

How Does the Net Investment Income Tax Apply to Rental Real Estate?

Taxpayers should be mindful that their rental income may be subject to taxes in addition to ordinary income tax.

What is the Net Investment Income Tax?

Net Investment Income Tax and Rental Real EstateThe Net Investment Income Tax (NIIT) is a surtax that took effect in 2013. The NIIT was intended to boost tax revenue from Medicare payroll taxes on earned income by broadening its reach to unearned investment income.

Net Investment Income Tax basics

The NIIT only applies to certain high-income taxpayers. Specifically, taxpayers with adjusted gross income of more than $200,000 (single filers) or $250,000 (joint filers) are subject to the surtax on investment income that exceeds the thresholds. Note that these amounts are not indexed for inflation.

NIIT imposes a 3.8% surtax on income from investments. Investments includes portfolio income items such as interest, dividends and short-term and long-term capital gains. Royalties, rental income and business income from activities that are treated as passive are also subject to the surtax.  Read my post on passive activities in rental real estate to learn more.

What about self-rentals?

It is common for recipients of rental income, which include taxpayers who own rental properties directly or through pass-through entities (partnerships, LLCs or S Corporations), to also be involved with the business operations conducted on the property. The common scenario is a business owner that also owns the real estate in which he operates. The real estate is held in a separate entity that collects rents from the operating entity. Check out my previous post on IRS rules for self-rentals to learn more.

The NIIT is intended to apply to passive investment income, rather than income generated from an active trade or business. Therefore, it should not penalize a taxpayer who separates its real estate from business operations. This was clarified in an Internal Revenue Bulletin that made it clear that, if an individual derives rental income from a business activity in which the individual is materially participating, the 3.8% tax will not apply.

Does the surtax apply to real estate professionals?

While losses from real estate activities are passive per se, the losses of a real estate professional are considered ordinary losses and available to offset other ordinary income. Net rental income is generally included in the calculation of NIIT and is therefore subject to the 3.8% surtax. There is an exception if the following three conditions are met:

  • the taxpayer is a real estate professional
  • the rental activity rises to the level of trade or business; and
  • the taxpayer materially participates in the trade or business.

If all three of the conditions are met, the income from the rental real estate activity can be excluded from the calculation of net investment income.

What about sales of real estate?

Gains from the disposition of property (other than property held in an active trade or business) is subject to NIIT, including gain on the sale of stocks, bonds, mutual funds and real estate. The gain from the sale of rental property is also subject to NIIT unless the rental activity is part of an active trade or business.

If the real estate activity is considered a passive activity, any gain on the sale of property would generate gain that would be subject to the net investment income tax. However, if the taxpayer qualifies as a real estate professional, and the activity is considered an active trade or business, any gain on the sale of the property may be exempt from the net investment income tax. The characterization of the property for purposes of taxation of the gain on disposition is determined based on the treatment of the property during its operation.

With the 3.8% Medicare surtax on net investment income, real estate professionals should have a renewed focus on tax implications relating to their level of participation in real estate businesses.

We’ve got your back

If you’d like some additional insights into net investment income tax as it relates to real estate investments, contact me at [email protected] or (201) 655-7411.

Food Industry Trends and More: Notes from the Summer Fancy Food Show

Maria Rollins at the Summer Fancy Food ShowWhenever a local industry trade show aligns with a KRS service offering or niche I look forward to an opportunity to get out and network with its exhibitors. I also find that the breakout education sessions are extremely relevant and offer insight to the business challenges faced by industry members. Recently I had the opportunity to attend the Specialty Food Associations’ Summer Fancy Food Show in New York City.

I was drawn to this particular show because we have many clients who are in the food and beverage industry. In addition, I am a “foodie” and was enticed by the thought of spending a day in New York City networking while sampling the latest in specialty foods and beverages.

The show lasted for four days and although I only attended the last day (usually the day with the most giveaways) I was able to get a flavor for many product and business trends. Here’s just a sampling of what I learned.

Hot product trends and business challenges

In light of the shift in consumer demand from processed foods to healthier options, I wasn’t surprised to see gluten-free, vegan, raw and “sugar conscious” products as the hot items on exhibit. Many of the dessert and snack items I sampled were marketed as gluten-free and many amount were also dairy-free and vegan.

As the gluten-free trend continues, manufacturers will face challenges in production when gluten-free and gluten products are manufactured in the same facility. The gluten-free trend will also continue to boost the need for gluten-free flour substitutes such as coconut, corn and rice flours, in addition to other ingredients needed to improve texture and consistency.

Shelf-life of gluten-free products can also be a business challenge. Many exhibitors stressed the shelf-life of their products since many of the ingredients in these gluten-free alternatives result in a shorter shelf-life compared to full gluten products.

Many of the beverage samples offered by exhibitors continued the “healthier” option theme and were low sugar alternatives to traditional sodas. Flavored waters and spritzers containing organic juices, apple cider vinegar or Acai berries were positioned as healthier alternatives to sugar-laden sodas.

I also saw many dairy-free and vegan products exhibited by small businesses and start-ups. Many of the small business exhibitors I spoke with are challenged with expanding their distribution beyond their local geographical region. Attending such premier show was an important way for these companies to get their products in front of the many distributors and buyers attending.

All the small businesses and start-ups I spoke to have e-commerce sites and will ship their products to consumers. We talked about how important e-commerce is to their growth and how it requires that they invest in technology. I also listened to panelist Monica Schechter, specialty and international food category manager at Jet.com and Walmart.com, who cited technology as a catalyst to finding new products and assisting with the discovery experience through online searching and shopping.

Turning a food idea into a successful business

My favorite experience at any trade show is talking to the exhibitors and learning the story behind their product or brand. Many are family businesses or friends who came up with an idea. They are passionate about their ingredients and the quality of the product they deliver to their consumers. As an accountant working with many start-ups and “well-seasoned” businesses, I find these stories are refreshing and often heart-warming. Common for start-ups, these stories usually include a business mistake or two they encountered along the way. After all, having a great idea is only the first step. A successful food manufacturer must build their brand, secure efficient manufacturing, seek distribution channels, set pricing, manage inventory, finance the business and market their product. The most successful businesses deliver their product more efficiently than their competitors.

My advice to small businesses and start-ups is to seek out help from professionals and mentors. I recently spoke to one food manufacturer who has grown a significant business and now offers advice to those entering the market. They are willing to share their challenges and how they overcame obstacles in growing their business.

How are start-up expenses treated for new rental properties?

When projecting taxable income from your new rental property be mindful of start-up expenses

Expenses incurred prior to the commencement of a business are not currently deductible. In the instance of rental real estate, costs incurred before a property is ready to be rented are considered start-up expenses.

What are start-up expenses?For tax purposes, be sure to track start-up expenses for your new rental property

Start-up expenses generally fall into three categories:

  1. Investigatory costs – amounts paid or incurred in connection with investigating the creation or acquisition of a trade or business.
  2. Formation/organizational costs – amounts paid or incurred in creating an active trade or business.
  3. Pre-opening expenses – amounts paid or incurred in connection with “any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business.”

How are start-up expenses treated for tax purposes?

Costs that have been identified as start-up expenses are treated differently for income tax purposes. The expenditures cannot be deducted automatically in a single year. Since these costs are deemed to provide a benefit over multiple years, they are treated as capital expenditures and must be deducted in equal amounts over 15 years. There is a special provision that allows taxpayers to deduct up to $5,000 in start-up expenses in the first year of active business, with the balance amortized over 15 years.

What about expenses to obtain a mortgage?

Certain settlement costs incurred in connection with obtaining a mortgage are required to be amortized over the life of the mortgage. Expenses such as mortgage commissions, loan processing fees, and recording fees are capitalized and amortized.

Points are charges paid by a borrower to obtain a loan or mortgage. Sometimes these charges are referred to as loan origination fees or premium charges. Points are essentially prepaid interest, but cannot be deducted in full in the year of payment. Taxpayers must amortize points over the life of the loan for their rental property.

When is a property deemed ready for rent?

There is considerable confusion about when property is ready for rent and rental activity begins for income tax purposes. It is important to establish this point in time as subsequent expenditures are no longer treated as start-up expenses requiring capitalization.

The rental activity begins when the property is ready and available for rent, not when it has actually rented. In other words, expenses incurred by the landlord while the property is vacant are not start-up expenses. For example, assume a taxpayer landlord has a vacant property that is being advertised for rental and has received a certificate of occupancy, but the landlord has not been able to find a tenant for three months. The costs incurred during that time period are not considered start-up because the property is ready and available for rent.

If a taxpayer does incur start-up expenses, they should be separated and capitalized in accordance with the Internal Revenue Code. Proper tax planning includes minimizing start-up expenses to the extent possible and/or keeping them below the $5,000 threshold.

We’ve got your back

If you have questions about start-up expenses for your new rental property, we’re here to help. Contact me at [email protected] or 201.655.7411.