Tag: IRS

How to Handle Bad Debt and Taxes

When can you use bad debt to reduce business income?

How to Handle Bad Debt and Taxes Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

  • Loans to clients and suppliers
  • Credit sales to customers
  • Business loan guarantees

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

  • Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
  • Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
  • Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

Collection efforts are important

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

We’ve got your back

The tax experts at KRS can help you with important accounting issues such as bad debt. Contact us today at 201.655.7411. And did you know that KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources? Check it out today!

Accounting Concerns for Legal Marijuana Business Operations

Accounting Concerns for Legal Marijuana Business OperationsAccounting for the growing cannabis industry is unique. Here’s why.

The goal of any accounting system is to ensure that accurate financial information is available timely to users. An appropriate system will include processes and procedures for collecting, recording and classifying data and will assist in preventing and detecting waste or, even worse, fraud.

So why is accounting for the growing cannabis industry so unique?

Management, investors and other financial statement users require the same accurate financial information as any other industry. However, in this growing industry, businesses must comply with strict state and federal regulations to avoid substantial penalties or even the risk of losing their business.

Cannabusiness accounting and compliance

Proper and adequate accounting systems and controls are even more critical in a cannabis business where the business “touches the plant.” Growers, processors and distributors have unique accounting and compliance needs unlike any other industry. The potential for large cash transactions and banking restrictions common in the industry further emphasize the need for proper accounting controls and procedures.

As states begin to legalize marijuana for medical and recreational use, businesses will need to consider the unique challenges the industry faces at the onset. The federal government considers business operations in this space to be “trafficking in controlled substances.” As such, proper accounting and reporting should incorporate the nuances of Internal Revenue Code Sec. 280E and 471 relating to cost accounting and inventory. In addition, state regulations require industry tracking and reporting of “seed to sale.” Most states with legalized marijuana industry require businesses to have inventory control and reporting systems in place as well as an interface with state mandated tracking systems. Therefore, the accounting system must provide reports and analysis to support compliance with federal and local regulations.

In this highly regulated environment, the business can be audited at any moment. All records must be available and in order to prove compliance with state and federal regulations. Furthermore, the accounting for businesses in this industry will need to provide for transactions to and from related entities, segment or separate “lines of business” reporting and consolidation. Business structures often include related entity relationships and investments. These advanced accounting issues are uncommon for most young or start-up businesses in other industries.

While many businesses entering the Cannabusiness space are new businesses, they cannot approach their accounting and bookkeeping in a manner often seen with new business start-ups. It’s common for a start-up to lack a proper accounting system and accounting controls before the business is up and running. A Cannabusiness business must have their system and controls in place well before they start operations.

We’ve got your back

Cannabusiness is a developing industry with many complicated factors. If you’re starting a business in this space, don’t go it alone! Contact Managing Partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

Real Estate FAQs from Last Month

Answers to real estate FAQs on 1031s and more

My team and I regularly receive questions on real estate-related topics. In this blog post, I answer some of those questions as they are important and others likely need the answers.

Realty Transfer Fee

Question: What is the realty transfer fee and who can expect to pay it?
Answers to this month's real estate FAQs
Answer:  The Realty Transfer Fee, also known as “RTF,” is a fee imposed by the State of New Jersey to offset the costs of tracking real estate transactions. Upon the transfer of the deed to the buyer, the seller pays the RTF, which is based upon the property sales price.

The RTF rate is a graduated rate and there are two different structures, depending on whether the total consideration is over or under $350,000.

It is important to note that a 1% fee must be paid by the buyer on all real estate transactions over $1 million in all commercial and residential property classes. This is also known as the “Mansion Tax.”

1031 Exchange Identification Rule

Question: What happens if you list three properties as replacement properties for your 1031 exchange, but all properties are no longer available?

Answer: One of the requirements of a 1031 exchange is taxpayers must identify a list of properties for potential purchase within 45 calendar days. Whichever property is ultimately purchased must be on this list. The rule allows taxpayers to identify three properties without limitation. Those listed are property that may be purchased, however not all are required to be purchased. If more than three properties are identified, the IRS rules become narrower and stringent.

The list can be changed an infinite amount of times until midnight of the 45th day. If the taxpayer is beyond the 45th day, the list is unchangeable and only properties listed can be chosen to complete the exchange. If the properties are not available after the 45th day, a 1031 exchange cannot be completed and the transaction is not eligible for deferral under Code Section 1031.

Section 179 Expensing

Question: Did the Tax Cut and Jobs Act (TCJA) change 179 expensing for rental property owners?

Answer: A provision of the tax code, commonly known as Section 179 deduction, allows taxpayers to deduct the entire cost of eligible property in the first year it is placed in service. For rental real estate owners, eligible property includes the majority of improvements to the interior portion of a nonresidential building, provided the improvement is put to use after the date the building was placed in service

The TCJA expanded the definition of eligible property to include expenditures for nonresidential roofs, HVAC equipment, fire protection and alarm systems, and security systems.

We’ve got your back

Have a burning real estate question? Email me and I’ll answer it in an upcoming post.

IRS 2018 Tax Myths

With the 2018 filing season in full swing, the Internal Revenue Service offered taxpayers some basic tax and refund tips to clear up some common misbeliefs.

Myth 1: All Refunds Are Delayed

IRS 2018 Tax Myths
The IRS issues more than nine out of 10 refunds in less than 21 days. Eight in 10 taxpayers get their refunds faster by using e-file and direct deposit. It’s the safest, fastest way to receive a refund and is also easy to use.

While more than nine out of 10 federal tax refunds are issued in less than 21 days, some refunds may be delayed, but not all of them. By law, the IRS cannot issue refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) before mid-February. The IRS began processing tax returns on Jan. 29.

Other returns may require additional review for a variety of reasons and take longer. For example, the IRS, along with its partners in the state’s and the nation’s tax industry, continue to strengthen security reviews to help protect against identity theft and refund fraud.

Myth 2: Delayed Refunds, those Claiming EITC and/or ACTC, will be Delivered on Feb. 15

By law, the IRS cannot issue EITC and ACTC refunds before mid-February. The IRS expects the earliest EITC/ACTC related refunds to be available in taxpayer bank accounts or debit cards starting Feb. 27, 2018, if these taxpayers chose direct deposit and there are no other issues with their tax return. The IRS must hold the entire refund, not just the part related to these credits. See the Refund Timing for Earned Income Tax Credit and Additional Child Tax Credit Filers page and the Refunds FAQs page for more information.

Myth 3: Ordering a Tax Transcript a “Secret Way” to Get a Refund Date

Ordering a tax transcript will not help taxpayers find out when they will get their refund. The IRS notes that the information on a transcript does not necessarily reflect the amount or timing of a refund. While taxpayers can use a transcript to validate past income and tax filing status for mortgage, student and small business loan applications, they should use “Where’s My Refund?” to check the status of their refund.

Myth 4: Calling the IRS or a Tax Professional Will Provide a Better Refund Date

Many people mistakenly think that talking to the IRS or calling their tax professional is the best way to find out when they will get their refund. In reality, the best way to check the status of a refund is online through the “Where’s My Refund?” tool or via the IRS2Go mobile app. The IRS updates the status of refunds once a day, usually overnight, so checking more than once a day will not produce new information. “Where’s My Refund?” has the same information available as IRS telephone assistors so there is no need to call unless requested to do so by the refund tool.

Myth 5: The IRS will Call or Email Taxpayers about Their Refund

The IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. Recognize the telltale signs of a scam. See also: How to know it’s really the IRS calling or knocking on your door.

The IRS will NEVER:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill if taxes are owed.
  • Threaten to immediately bring in local police or other law enforcement groups to have people arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

For more information on tax scams see Tax Scams/Consumer Alerts. For more information on phishing scams see Suspicious e-Mails and Identity Theft.

We’ve Got Your Back

A trusted tax professional can provide helpful information and advice about the ever-changing tax code. Check out the New Tax Law Explained! For Individuals page and then contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

An Update: Real Estate Professionals and Passive Losses

Dreaded Passive Losses

An Update: Real Estate Professionals and Passive LossesA passive loss from a real estate activity occurs when your rental property’s expenses exceeds its income. The undesirable consequence of passive losses is that a taxpayer is only allowed to claim a certain amount of losses on their tax return each year.

When income is below $100,000, a taxpayer can deduct up to $25,000 of passive losses. As income increases above $100,000, the $25,000 passive loss limitation decreases or “phases out.” The phase out is $0.50 for every $1 increase in income. Once income increases above $150,000, taxpayers are completely phased out of deducting passive losses.

Rentals are passive, unless they aren’t

The general rule is that all rental activities are, by definition, passive. However, the Internal Revenue Code created an exception for certain professionals in the real estate business.

Who is a real estate professional?

As discussed in a previous post, for income tax purposes, the real estate professional designation means you spend a certain amount of time in real estate activities.

According to the IRS, real estate professionals are individuals who meet both of these conditions:

1) More than 50% of their personal services during the tax year are performed in real property trades or businesses in which they materially participate and

2) they spend more than 750 hours of service during the year in real property trades or businesses in which they materially participate.

Any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operations, management, leasing, or brokerage trade or business qualifies as real property trade or business.

Can I qualify as a real estate professional?

I get these questions quite often from taxpayers:  Do I qualify as a real estate professional?  If not, how can I qualify?

There have been many cases that appear in front of the Tax Court where a taxpayer argues they qualify as a real estate professional and the IRS has disallowed treatment and subjects the taxpayer to the passive activity loss rules of Code Sec. 469.

A recent case held that a mortgage broker was not a real estate professional (Hickam, T.C. Summ. 2017-66). The taxpayer was a broker of real estate mortgages and loans secured by a real estate. Although the taxpayer held a real estate license, he did not develop, redevelop, construct, reconstruct, operate, or rent real estate in his mortgage brokerage operation.

The taxpayer argued that his mortgage brokerage services and loan origination services should be included for purposes of satisfying the real estate professional test. The Court held that the taxpayer’s mortgage brokerage services and loan origination services did not constitute real property trades or businesses under Code Sec. 469(c)(7)(c).

We’ve got your back

If you invest in real estate, it can be difficult to keep track of tax laws and how they impact you. At KRS CPAs, we stay on top of all the laws – especially the changes under the new tax reform – and can help you avoid tax problems. Contact me at [email protected] or 201.655.7411 for a complimentary initial consultation.

2017 Tax Legislation: What Individual Taxpayers Need to Know

2017 Tax Legislation: What Individual Taxpayers Need to KnowThe new Tax Cuts and Jobs Act amends the Internal Revenue Code (IRC) to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. It is the most sweeping update to the U.S. tax code in more than 30 years, and from what we’re seeing, it impacts everyone’s tax situation a bit differently.

What works for one individual or family may not work for another, although their circumstances may appear to be similar on the surface.

Here are some of the key features of the tax reform legislation that you need to know about as an individual tax payer. (I’ll cover the impact on businesses in a separate post.)

Individual Tax Rates

There are still seven tax brackets, however the rates have dropped in all except the lowest bracket. The new maximum tax rate was reduced from 39.6% to 37%, which applies for those earning over $500,000 annually, if single, or $600,000 if married.

Here is a comparison of the old and new tax rates:

Comparison of new and old tax rates

While these changes are likely good for everyone, I do have some clients who are married, filing jointly and when I recalculated their taxes under the new law, the results were not what we expected. The husband and wife both work, and it turns out they’re only going to save $200 in taxes! So that’s why it’s important to work with your accountant and look at your situation individually.

Alternative Minimum Tax

The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States federal government. AMT is a separate tax calculation that is run after the regular tax calculations are done. The taxpayer pays the higher of the two taxes. Although this was supposed to be a tax to ensure that everyone, including the wealthy, pay some tax, in the past it did hit many middle income wage earners.

Under the new law:

  • The amount exempt from AMT increases from $86,200 to $109,400, if married, and from $55,400 to $70,300 if single.
  • The phase-out of the exemption amount begins at $1,000,000 – instead of $164,100 – if married, and $500,000 – instead of $123,100 – if single.

So we expect we will be seeing fewer middle income wage earners subject to AMT.

Deductions, exemptions, and capital gains

The standard deductions have nearly doubled to $24,000 (married) and $12,000 (single), however there is no longer any personal exemptions allowed at any income level.

Individual deductions for state and local taxes (SALT) for income, sales, and property are limited in aggregate to $10,000 for married and single filers and $5,000 for married, filing separately. What this means in a high real estate tax state like New Jersey, where you’re probably paying more than $10,000 a year in real estate taxes, you’re going to be taking a hit starting in 2018.

Most miscellaneous itemized deductions – for example, tax preparation and investment expenses – that had been subject to the 2% of adjusted gross income (AGI) floor will no longer be allowed.

As far as capital gains, there were no changes to the tax rate. The maximum rate on long-term gains and qualified dividend income (before 3.8% net investment income tax) remains at 20%.

As the reform bill was being negotiated, there had been talk of doing away with the medical expense deduction completely, which would have hurt the elderly. Instead, they reduced the floor to 7.5% of AGI for tax years 2017 and 2018.

Fortunately, there were no changes to how securities are treated. You can continue to specify which stocks you’re selling, which means if have a lot of the same stock, you can pick your highest basis so that you have the lowest amount of capital gain.

The child tax credit increases from $1,000 per qualified child to $2,000, with $1,400 being refundable. Phase-out of the credit begins at $110,000 (single) and $400,000 (married).

You will no longer be penalized if you don’t have health insurance. Starting in 2019, the new legislation eliminates the Affordable Care Act’s individual mandate.

Mortgage interest and real estate

Before the tax law changed, you could deduct mortgage interest on mortgages up to $1 million, if you’re married, and $500,000 if you’re single. Interest on a Home Equity Line of Credit (HELOC) could be deducted up to $100,000. Under the new law, individuals are allowed an itemized deduction for interest on a principal residence and second residence up to a combined $750,000. Mortgages obtained before 12/16/17 are grandfathered and new purchase money mortgages may be grandfathered if the purchase contract is dated before 12/16/17.

Refinancing of grandfathered mortgages is grandfathered, but not beyond the original mortgage’s term and amount, with some exceptions for balloon mortgages. Interest on HELOCs is no longer deductible.

The rules for capital gain exclusion for a primary residence remain unchanged, which is good for the real estate market. When you sell your primary residence, you get to exclude $500,000 of gain. As the taxpayer, you must own and use the home as your primary residence for two out of the previous five years. This exemption can only be used once every two years.

You will still be able to do a like-kind exchange on real estate, but no longer on personal property. This type of exchange allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the gain on the sale of the first asset.

College savings plans, estates and gifts

If you have a Section 529 plan, you can now pay up to $10,000 a year per student for high school education. This had always been limited to college, but now if you are paying public, private or religious high school tuition, you can use some of your 529 here.

Under the new tax law, the estate, gift and generation skipping transfer (GST) tax exemptions are doubled to $11.2 million per US domiciliary.  These exemptions sunset after 2025 and revert back to the law in effect for 2017 with inflation adjustments. There’s a possibility for “clawback” at death if the law is not changed.

Pass-through and charitable deductions

If you own a business that is set up as a partnership, S-corporation, or sole proprietorship, income was passed through to your individual tax returns, where it was taxed as ordinary income. There is now a new 20% deduction for qualified business income from a partnership, S-corp, or sole proprietorship. There are some income limitations to this deduction, so be sure you consult your tax advisor on this one.

We still have deductions for charitable contributions. Under the new law, a contribution made to public charities is deductible, as long as it doesn’t exceed 60% of the taxpayer’s AGI – this is up from 50% of AGI.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation now that it is finally signed into law. Don’t lose sleep wondering what impact the new law will have on you and your family. Contact me at 201.655.7411 or [email protected].

 

Trade-in or sell your vehicle?

The decision to trade in or sell your vehicle is not so easy if you’ve used that vehicle for business.

Tax implications of trading or selling your vehicleSelling a vehicle outright or trading it in towards a new vehicle usually involves analyzing the economics of the transaction. However, tax factors can start to complicate things if that vehicle was used in your business.

Generally, a gain or loss on the sale of a business asset is determined by the difference between the sales price and basis (your cost for tax purposes). Basis is typically your original cost less depreciation deductions claimed for the asset over the years.

Under the tax-free swap rules, trading an old business asset for a new, like-kind asset doesn’t result in a current gain or loss. The basis in the new asset will be the remaining basis in the old asset plus any cash paid on the deal.

So if your car was used exclusively in business and depreciated down to a zero, or very low basis, trading in the car can avoid current tax. Here is an example:

Mary originally purchased her car for $35,000. The car is used exclusively for business and Mary has deducted depreciation of $33,000 over the years. Mary’s remaining basis is $2,000. Mary has an offer to sell her car for $7,000. If Mary accepts the offer she will have a taxable gain of $5,000. If, however, Mary decides to accept a trade-in of $7,000 for the car she will not recognize any gain. The basis in the new car will be Mary’s basis in the original car ($2,000) plus any cash she paid to trade-up.

Alternately, you would choose to sell the car if the depreciation was limited by annual depreciation dollar caps. In this situation, your basis in the old car may exceed its value. If you sell the car you will recognize a tax loss. If you trade the car in, you would not recognize the loss under the tax free swap rules.

What if you used the standard mileage allowance to deduct car-related expenses?

The standard mileage allowance has a built-in allowance for depreciation, which must be reflected in the basis of the car. For 2016, the deemed depreciation is 24¢ for every business mile traveled. This method may leave you with a higher basis when the car is sold. Therefore, the car should be sold rather than used as a trade-in to recognize the tax loss.

We’ve got your back

At KRS we assist our individual and business clients with all matters related to taxes. If you’re faced with trading in or selling your vehicle, and aren’t quite sure what to do, contact managing partner Maria Rollins at 201.655.7411 or [email protected]

2017 NJ Tax Changes Business Owners Need to Know

NJ Taxes

In my last post I reported on key federal tax changes that small business owners need to know about. This post covers three significant tax changes in New Jersey.

NJ sales tax rates reduced

The New Jersey Sales and Use Tax will be reduced in two phases between 2017 and 2018. The rate decreased from 7% to 6.875% on and after January 1, 2017. The tax rate will decrease to 6.625% on and after January 1, 2018.

Transition rules do apply:

  • For items sold before 1/1/2017 but delivered after 1/1/2017, use the 6.875% rate
  • Leases in excess of 6 months entered into before 1/1/2017, use 7%.
  • Lease extensions or renewals after 1/1/2017, use 6.875%.
  • If an agreement is less than 6 months – use 6.875% for all periods that begin after 1/1/2017.
  • Construction materials delivered after 1/1/2017, use 6.875%.
  • If the construction materials are for use in unalterable building contracts entered into before 1/1/2017, the seller must collect 7%.
  • Service or maintenance agreements entered into before 12/31/2016, seller must charge 7%. This is regardless of whether or not the agreement covers periods after 1/1/2017, unless the bill for such services was issued after 1/1/2017.

KRS Tip: Check all your vendor invoices to ensure you’re being charged the correct amount, before you pay the invoice. If it is the incorrect amount, have the vendor revise the invoice. If you go ahead and pay the incorrect amount, it is your responsibility to go back to the state – not the vendor – to get a refund.

Urban Enterprise Zone designation expires for 5 NJ cities

Under the UEZ designation, businesses in certain economically distressed areas are eligible for incentives, including tax free purchases on capital investments, tax credits to hire local workers and the ability to charge just half the statewide 7% sales tax.

The UEZ designations for Bridgeton, Camden, Newark, Plainfield and Trenton were permitted to expire. These zones can no longer collect sales taxes at reduced rates.

Changes to New Jersey estate tax

A NJ resident who dies and has assets worth more than $675,000 has had his or her estate subject to NJ estate tax. That may sound like a lot of money, but if you own even a modest home in the northern part of the state, you’ll probably hit the $675,000 threshold.

As part of the bill that raised the gas tax in the state, the exemption will increase from $675,000 to $2 million for estates of residents dying on or after 1/1/2017 and before 1/1/2018.

We expect that the increased exemption will change if there is a democratic governor elected this year.

We’ve got your back

New Jersey tax regs grow increasingly complex and it can be hard for business owners to know how to save taxes. At KRS we assist our clients in minimizing tax liabilities by providing them with comprehensive tax planning, preparation and compliance services.

Contact partner Maria Rollins at 201.655.7411 or [email protected] if your company needs expert advice and assistance with its 2016 taxes.

 

Moving Up from the Food Truck? Here Are Some Tax Topics to Consider

Useful Tax Tips for Expanding Your Fledgling Food Business

Tax considerations for food businessesCongratulations! You started a food service business in a food truck or completed a proof of concept on wheels or in temporary space. Now you have made a business decision to expand and operate a brick-and-mortar location.

Here are some tax considerations you should consider as you move forward with your business venture:

Choice of Business Entity

If you are creating a new legal entity for the brick-and-mortar location or never formally created one for the prior business, it is essential to consider a legal form that protects you from personal liability, such as a limited liability company (LLC) or corporation.

Unlike other industries, most successful restaurants have a substantial amount of daily foot traffic along with employees engaged in physical activities. These activities increase the likelihood a person could be injured on the premises. For instances where there are potential claims, an owner would want the business, not him personally to be responsible for any liability.

Along with the limited liability aspect of entity choice are income tax considerations. Every entity is different and you should meet with your tax professional to discuss the entity choice. Discuss the advantages and disadvantage of Corporations, S Corporations and Limited Liability Companies all of which provide legal liability protection, but have differing tax consequences. Tax issues that should be considered include:

  • Sale of the business
  • Use of losses
  • State tax issues
  • Compensation package
  • Complexity of organization structure

Tax Credits for Restaurants

There are several tax credits available to small business employers including restaurants, which may qualify for one or more of the following tax credits:

Cost Segregation Studies for Accelerated Depreciation Recovery

A cost segregation study is an in-depth analysis of fixed asset expenditures that identifies proper cost recovery periods for tax deprecation purposes.

Typically, restaurant building components are classified with longer depreciation recovery periods of 15 to 39 years. Utilizing a cost segregation study, certain items may be identified as having shorter recovery periods of 5 or 7 years. A shorter recovery period would accelerate depreciation expense and result in reduced current income tax liabilities.

Income from Gift Cards

The purchase and use of gift cards has significantly increased in popularity, as a result the IRS has focused more on compliance.

Amounts received for the sale of gift cards generally are included in income in the year of receipt, which may not be the same year the gift card is redeemed. However, taxpayers have the ability to elect a one-year income deferral method. Under this method, revenue from unredeemed gift cards can be deferred to the first taxable year following the year of receipt. As a restaurant owner, be sure to pay special attention to the tax treatment of gift cards to ensure compliance, and take advantage of income tax deferral opportunities.

Have you recently opened or are you in the process of establishing your new food service business? If you’d like to speak to us about tax considerations please contact me at [email protected] or 201.655.7411.

2017 Federal Tax Changes Business Owners Need to Know

tips for the 2017 tax season

Tax season is upon us, and with it comes a variety of changes that business owners need to know about. Here’s an overview of some of the most important changes:

New tax filing deadlines

These deadlines apply for 2016 tax filings:

  • C-corporation filings are pushed back to 04/15/17
  • Partnerships, LLCs & S-corporations must file by 3/15
  • Certain 1099 Misc. and W-2’s must be filed with the IRS by 1/31/17

Note that if you are a KRS client, you will receive an email in the next day or so to get you started on your 1099s. Be sure you have all your subcontractor and vendor W-9s completed so that 1099 completion can be done quickly to meet the month-end deadline.

PATH Act eliminates some uncertainty

The Protecting Americans from Tax Hikes Act of 2015 (PATH) enacted at the end of 2015, made permanent many business-related provisions that had been up for renewal, including:

  • 100% gain exclusion on qualified small business stock
  • Reduced, five-year recognition period for S corporation built-in gains tax
  • 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements
  • Charitable deductions for the contribution of food inventory
  • As KRS partner Simon Filip said in Five Ways the PATH Act Can Reduce Your Tax Burden, “The PATH Act is a positive thing for a couple reasons. Any tax savings for small business owners is great. Also, it eliminates some uncertainty, which will make it easier for small businesses to plan their tax liability.”

Good news about the Section 179 tax deduction

Section 179 of the tax code defines the deduction a business can take on the price of qualifying equipment purchased or leased during the tax year. Qualifying equipment could include almost any big-ticket item you need to do business, such as a computer, certain software, office furniture or machinery.

The $500,000 deduction regarding equipment purchases less than $2M now permanent.

R&D credit can help reduce tax liability

New changes in R&D credit allows certain businesses to apply the R&D credit to the AMT or possibly offset payroll taxes. The PATH Act made the R&D tax credit permanent, which is welcome news for businesses investing in research and development.

Update on bonus depreciation

Bonus depreciation is a method of accelerated depreciation which allows a business to make an additional deduction of the cost of qualifying property in the year in which it is put into service.

  • 50% deduction of the costs of new equipment continues through 2019, decreasing to 40% in 2018 and 30% in 2019. Bonus depreciation is set to expire by 2020 unless there is further action by Congress.
  • Replaces the bonus allowance for a qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015.

Work Opportunity Tax Credit extended

The Work Opportunity Tax Credit gives employers a tax credit when they hire unemployed veterans, food stamp recipients and ex-felons. The PATH Act extends the credit through 2019 with an added 40% credit up to the first $6,000 in wages for employers who hire workers that have been out of work for at least 27 weeks.

Revised repair regulations can increase deductions

The IRS issued final tangible property regulations (aka, the “repair regs”) over three years ago. These regs continue to control the accounting for costs to acquire, repair and improve tangible property. They impact virtually all asset-based businesses and have reverberated into 2016, with additional “clean-up” expected in 2017.

For 2016 year-end planning, work with your accountant to see if either a de minimis expensing safe harbor or a remodel-refresh safe harbor can be applied. Both can yield substantial immediate deductions if followed.

We’ve Got Your Back

Tax laws grow increasingly complex and it can be hard to know how to save taxes. At KRS we assist our business clients in minimizing tax liabilities by providing them with comprehensive tax planning, preparation and compliance services. We’ve also developed resource pages, New Tax Law Explained! for Individuals and for Real Estate Investors, to help you stay on top of what you need to know about the evolving tax codes.

Contact partner Maria Rollins at 201.655.7411 or [email protected] if your business needs expert advice and assistance with its 2016 taxes.