Pay attention to the details when selling investments

The tax consequences of the sale of an investment, as well as your net return, can be affected by a variety of factors. You’re probably focused on factors such as how much you paid for the investment vs. how much you’re selling it for, whether you held the investment long-term (more than one year) and the tax rate that will apply.

But there are additional details you should pay attention to. If you don’t, the tax consequences of a sale may be different from what you expect. Here are a few details to consider when selling an investment:

Which shares you’re selling. If you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

Trade date vs. settlement date. When it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.

Transaction costs. While transaction costs, such as broker fees, aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.

If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.

Tangible property safe harbors help maximize deductions

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

2 safe harbors

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

Deduct all of the mileage you’re entitled to — but not more

 

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

2017 Q1 Tax Calendar: Key deadlines for businesses and other employers

 

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

 

January 31

• File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
 

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

 

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

Crowdfunding and Kickstarter campaigns: what are my tax consequences?

 

Crowdfunding and Kickstarter campaigns have become very popular over the last few years for entrepreneurs, inventors, individuals, and companies to raise funds to support their endeavors. If you are new to crowdfunding, an entrepreneur will ask for money via an online platform and anyone throughout the world can donate money for their cause. While the IRS has not provided much guidance on funds raised from crowdfunding and Kickstarter campaigns there can be tax ramifications from funds received.

In a typical crowdfunding endeavor an entrepreneur typically asks for donations and depending on the size of the donation the donor may receive something in return such as a free hat, T-shirt, or tickets to an event. In some cases, money may be donated with nothing in return other than the pure satisfaction of helping someone out. In some situations the donor may be donating funds in exchange for equity in a company or they will be paid back the donation amount plus interest. Each of these scenarios carries different tax consequences. In this blog post we will go through each of the listed scenarios and the various tax implications to the donee.

1. 1. Funds in exchange for a hat, T-shirt, tickets to an event etc.:

Under IRS Code Section 61(a), “except as otherwise provided by law, gross income includes all income from whatever source derived.” In this case money received from crowdfunding would be taxable to the donee who received the money whether or not they provided gifts in exchange for said donation. However, any gifts provided that would be considered an ordinary and necessary expense (in this case they would be, because you may not have received the donation had a gift not been offered) can be deducted from the fundraising income received. Keep in mind while the gross income is reportable the donee will most likely have ordinary and necessary expenses that can be deducted against gross income.

2. 2. Funds in exchange for “pure satisfaction”:

Just like in the scenario above the gross proceeds are reportable as income. However, as mentioned before the donee will most likely have ordinary and necessary expenses that can be deducted against gross income.

3. 3. Funds in exchange for equity:

Just like you see on Shark Tank, in order to entice an investor you may have to give up some equity in your company. In these scenarios these contributions are considered capital contributions and are not included gross income and therefore not taxable.

4. 4. Donations paid back with interest:

In some cases an individual or a company is unable to obtain a loan from a bank, so they offer a crowdfunding solution that will pay back the investor their initial investment plus interest. This is considered a loan that must be repaid and the interest from these loans are deductible as interest expense to the donee and interest income to the donor.

The tax consequences of Crowdfunding and Kickstarter campaigns all depend on the various circumstances and situations. If you are thinking about starting or donating to a Crowdfunding or Kickstarter campaign be sure to consult the experts at CAPATA.

– Jeff Trapp

Tax Manager at CAPATA

Documentation is the key to business expense deductions

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records

In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.“ (TC Memo 2016-158)

Case 2: Documents destroyed

In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to ”undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.“

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared

Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

Are frequent flyer miles ever taxable?

 

If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.

Usually tax free

As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.

The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

Exceptions

There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.

For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.

The value of the miles for tax purposes generally is their estimated retail value.

If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.

Now’s the time to start thinking about “bunching” — miscellaneous itemized deductions, that is

Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.

Should you bunch into 2016?

If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:

• Deductible investment expenses, including advisory fees, custodial fees and publications
• Professional fees, such as tax planning and preparation, accounting, and certain legal fees
• Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.

But beware …

These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.

Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).

If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.

3 strategies for tax-smart giving

Giving away assets during your life will help reduce the size of your taxable estate, which is beneficial if you have a large estate that could be subject to estate taxes. For 2016, the lifetime gift and estate tax exemption is $5.45 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate tax isn’t large enough for estate taxes to be a concern, there are income tax consequences to consider. Plus it’s possible the estate tax exemption could be reduced or your wealth could increase significantly in the future, and estate taxes could become a concern.

That’s why, no matter your current net worth, it’s important to choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make.

Here are three strategies for tax-smart giving:

1. To minimize estate tax, gift property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

2. To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

3. To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss. You can then gift the sale proceeds.

For more ideas on tax-smart giving strategies, contact us.

3 mutual fund tax hazards to watch out for

Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxableaccounts, or are considering such investments, beware of these three tax hazards:

1. High turnover rates. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
2. Earnings reinvestments. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.)
3. Capital gains distributions. Buying equity mutual fund shares late in the year can be costly tax-wise. Such funds often declare a large capital gains distribution at year end, which is a taxable event. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year — even if you reinvest the distribution.

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, watch out for these hazards. And contact us — we can help you safely navigate them to keep your tax liability to a minimum.

How summer day camp can save you taxes

Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?

The power of tax credits.
Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Rules to be aware of.
A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Are you eligible?
These are only some of the rules that apply to the child and dependent care credit. So please contact us to determine whether you’re eligible.