Get Your Small Business Bailout Now
February 4th, 2014 at 5:13 PM
There are a number of good tax laws that benefit most small businesses that came into effect in September 2010 for both 2010 and 2011. Here is a summary of the benefits to your Small Business:
1. 100% bonus depreciation: This is so good that I had to read over the law twice and then drink some wine. If you buy new equipment in your business, you get to deduct 100% of the business use with no limit. Thus, you can buy new telephones, desks, chairs, computers, file cabinets, software, phone systems, tractors, etc. for your business and deduct 100% of the costs. This also applies to new SUVs and trucks and vans with a gross vehicle weight of over 6,000 pounds and having a truck chassis. Moreover, it doesn’t matter when you buy the new equipment in the year; you still get the full 100% write off. Even better, you don’t need to pay cash. You can finance the equipment and still write-off 100% of the cost.
Example: Marsha buys $50,000 worth of new equipment for her real estate office. She also has a farm where she buys a tractor and combine and other equipment for $500,000. Thus, she buys a total of $550,000 worth of equipment in 2011. If she only pays $50,000 in cash and finances the rest of her purchase, she may deduct the full $550,000.
Can I elect out of the 100% bonus depreciation? Let’s say that you don’t need this amount of depreciation. Let’s say that you expect to pay a lot more taxes in the future and be in a higher tax bracket. Can you elect out of the bonus depreciation? The answer is yes. In fact, you have various options. You can elect 50% bonus depreciation or can forego most of the depreciation by claiming regular depreciation, which would allow you to depreciate your equipment over 5-7 years depending on the equipment. You have to make this election before you file your tax return for the year that you purchased the equipment.
2. Higher Expense allowance under section 179: Well, all this is nice if you buy new equipment, but what if you want to buy used equipment in your business? Congress gave you a break too. In 2011, you can elect to deduct up to $500,000 of used equipment in your business such as desks, chairs, computers, telephone systems, cell phones, trucks with a 6 foot or larger cargo area, and other equipment. The catch is that this starts phasing out if you buy too much equipment, which is more than $2,000,000. Moreover, this election cannot create a loss in your business.
3. Cell phone record keeping is made easier: Starting in 2010 and thereafter, cell phone and similar devices used for business will have relaxed record keeping requirements for business use. This should allow most people to be able to deduct their cell phone purchases, and make it easier to deduct monthly cell phone bills if they can show it was used for business. See your accountant about this. I guess even Congress didn’t want people to do any logging of expenses while they are driving.
Mark’s elaboration: This should allow you and even most employees, who use their cell phones for business, to deduct the cell phone purchase. A monthly bill should be received and personal calls eliminated in order to show what portion of your monthly bill would be deductible. This could be done by separating your business or personal minutes. Try to get this detail from your phone company. It should be available upon request.
4. Increased start up deductions: For both 2010 and 2011, the new Jobs Creation Law increased your maximum deduction for qualified start up expenses to $10,000 from the previously $5,000. It starts phasing out if your costs exceed $60,000. These costs are generally those for investigation, creation or acquisition of a business that would have been deductible if the business was previously in existence. This applies to investigatory expenses, legal, travel and other costs involved in the consideration or acquisition of a business.
5. Qualified Small Business Stock (QSBS): This is a little known benefit for owners of small business stock. Previously, if you sold your stock in a qualified small business corporation where you were the original owner of the stock, you could avoid up to 75% of the gain. Yes, you read this correctly. Generally Qualified Small Business are those that are held for more than 5 years and in companies whose total assets are less than 50 million at the time of issuance of the stock.
The new law increases this exclusion to 100% for QSBS acquired after September 27, 2010 and before Jan 1, 2011.
6. Small business tax credits available for Alternative Minimum tax: Previously, small business tax credits were not allowed in computing alternative minimum tax. However, starting in 2010 and thereafter, small business tax credits are available to be used against any alternative minimum tax. Examples of small business credits are: investment credit, research credits, low income housing credits, disabled access credit, modifications of work place for disabled workers, empowerment zone credits, and more.
7. Special one year health insurance deduction for social security: Normally, health insurance premiums that are unsubsidized are deductible on your tax return even if it covers the whole family. But, it isn’t deductible in computing net income for social security tax. However, in 2010, and only in 2010, you can deduct health insurance premiums in computing your net income for social security and Medicare purposes.
USE THE GIFT LEASEBACK ON YOUR PARENT’S HOME
Let’s say that your parents are living in an appreciated home that has no mortgage left. They are not getting any deduction for interest since there is no interest. Moreover, they won’t be able to itemize deductions in order to deduct their property taxes since they don’t have enough deductions for them to itemize. Sound familiar.
Even if your parents have a mortgage, chances are that they are in a lower tax bracket than there adult children. Thus, even if they get deductions for interest and taxes, they don’t get that much in their deductions. What is the solution?
Both you and your parents can achieve a win-win with a little planning. You can get the deductions that your parents aren’t getting, and they can continue living in the house at a net cost of zero! How can you do this? The answer is to use the Gift-Leaseback technique in which you buy the house and lease it back to them.
Here are the steps needed to get this done:
Step 1: Get an independent appraisal as to the fair market value of the home. Tell the appraiser not to be cheap but to be fair.
Step 2: The children would then buy the house at a fair value. Your parents, however, can be your bank and finance part of the purchase price as long as they charge reasonable interest, which as of the writing of this blog was a minimum rate of 4.25%. This is based on the IRS published applicable federal, long term rate.
Step 3: Your parents would then lease the house back from the children at fair rental value, although court decisions have allowed a 20% discount from fair rental value based on the fact that you have a great, long-term tenant who will take care of the property. See L.A. Bindseil, TC Memo 1983-411.
Cash result: Each month your parents will send the owning family members a rent check. Each month the family member will pay off the parent’s note. The result is that the cash flow will be approximately same.
Mark’s elaboration: There are some cases that note that if the cash flow exactly equals the rest, you could have a problem. Thus, try to have some difference either way.
Advantages to the parents:
• First: it unlocks their equity and puts that equity in their bank.
• Second: They can invest the equity into safer investments, which can results in more diversification.
• Third: it will cost them very little when the deal is finished.
• Fourth: The house will be owned by the kids, which will help avoid estate planning and probate costs.
• Fifth: the parents are getting full value of their home without having to pay a real estate commission.
Advantage to the children:
• First: this ensures that the home will remain in the family.
• Second: the children will be the owners of investment property. Thus, the family can depreciate the property including write offs for operative expenses, insurance, depreciation, repairs and supplies, utilities and maintenance.
Bonus benefit: Occasionally the family may visit the parents once a year and care take the property to make sure that it is in good condition.
AVOID EMBEZZLEMENT OF PAYROLL TAXES AT ALL COSTS
There were two cases in which payroll taxes were embezzled from a company. The first involved a “trusted employee” who embezzled the payroll taxes and other withheld taxes. The second case involved a payroll company who didn’t pay the taxes to the IRS. The problems this causes are twofold: First, you lose the money that was embezzled. Second, IRS takes the position that you, the owner are response for the payroll taxes regardless of the embezzlement. Thus, you have to pay this amount of money twice! The victim gets penalized.
How to avoid this problem: Obviously, it is a serious problem. First, you need good cash controls. You should NEVER use the same person to handle the cash or payroll deposits who also does the accounting. There should be a separation of functions unless you are using a trusted family member. Second, you should periodically review your Electronic Federal Tax Payment System account (EFTPS). You likely have one. If not, go to the US treasury web site to set one up. Reviewing the EFTPS wills how what was deposited with the government. Thus, when you instruct the payroll service such as ADP, Paychecks etc to make the payroll deposits on your behalf, which is a practice that I recommend, make sure you check you r EFTPS account to ensure that these payroll taxes were indeed paid.
In addition, always use an independent accountant to prepare quarterly and yearly financial statements and review that the amount paid each employee is proper. This is particularly important if you have employees that can pay any amount themselves by simply calling the bank for a payroll deposit. This is one area that should be carefully monitored.
Finally, review your liability insurance. Insurance usually covers some embezzlement. It might not be enough covers.
AVOIDING THE NEW, UPCOMING MEDICARE TAX ON INVESTMENT INCOME
The new Health Care law has a few bad pills you should know about. One of these is that for single filers who make over $200,000 of modified adjusted gross income (MAGI) and married folks who file jointly and make over $250,000 of MAGI, starting in 2013, you will be hit with a 3.8% Medicare tax on the lesser of your investment income or the difference between your total income and the numbers shown above. Your net investment income includes dividends, interest, royalties, rental income, and gains from disposition of property.
Example: Michele, a single taxpayer who earns $240,000 per year, has investment income of $50,000 in 2013. She will pay an extra 3.8% on $40,000 of this investment income, which is the lesser of the $50,000 of investment income or the difference between $240,000 of MAGI and $200,000 threshold amount noted above.
Being forewarned is to be forearmed. There are several ways to avoid this problem.
Think about selling your home before 2013: If you are going to move soon anyway, selling your home before 2013 might be an ideal time to sell it. Although you can exclude up to $250,000 if you are single or $500,000 if you are married filing a joint return, any appreciation above these numbers will be subject to the 3.8% Medicare surcharge. You should note that the 3.8% surcharge doesn’t apply to the portion of the gain that is subject to the exclusion.
Example: Sandy and Lori have a principal residence that has appreciated $750,000. If they were to sell their home before 2013, they will save 3.8% on the difference between the $500,000 exclusion and the net sale price of $750,000, which is $250,000. This results in a savings of $9500.
Mark’s sales tip: Second homes and investment properties do not qualify for the exclusion. Thus, selling them before 2013 might be an even smarter move. If you are a realtor, point this out can significantly increase you listing.
Consider owning Municipal bonds: Interest paid on municipal bonds are exempt from income tax and from the Medicare surcharge. However, you might have to pay tax on any appreciate of the bond.
Build up your retirement account: Distributions from your retirement accounts such as IRAs, SEPS, and 401Ks are expect from the Medicare tax. Thus, the more you can dump into these, the more cash you can you can shelter from the new Medicare tax. Moreover, this is a great way to save for retirement in a tax deferred way.
Even better, Set up a Roth IRA or Roth 401K: As I noted above, distributions from retirement plans are not subject to the new Medicare tax. However, they are included in your income if you took a deduction for the contribution. This would raise your adjusted gross income, which might put you in a high tax bracket and result in some phase outs of deductions and credits. However, qualified distributions from ROTH, 401K, which allow for up to $16,500 per year plus 25% of your wages, are tax free forever. Moreover, a Roth IRA allows you to put away up to $5000 per year, unless you are at least age 50 or over which will increase your contribution by an extra $1000. However, for the regular Roth IRA to be tax free, you have to keep it for at least five years and wait until you are at least 59.5 or older.
USE OF THE STATISTICAL METHOD FOR DOCUMENTING YOUR VEHICLES
You can keep your automobile mileage on a statistical basis for three consecutive months. You can do this daily for both business and personal mileage or just your personal mileage and your three month difference in odometer reading. This way the difference would be for business.
What many people forget is that you MUST show that the three months selected are represents of the rest of the year. Thus, you can’t your busiest three months. It is crucial that you keep your daily appointments for the whole year in some form of tracker or calendar.
Mark’s elaboration: IRS will actually count up your appointments to see if the number of appointments per month roughly matches the number of appointments on months that you didn’t select. This is a major criterion. If you don’t keep track of your appointments, IRS will disallow the statistical approach.
QUESTION AND ANSWER
“I hired my daughter to perform some day care for my children while I work at my real estate business. Can I deduct the wages paid my daughter for child care?”
Answer: Payments for day care are NOT deductible. However, you can get a child care tax credit of $1,000 if the child care is for dependent kids under age 17.