Tax Provisions Extended

2013 Kevin SickelsOn Friday, December 19th, 2014 President Obama signed the Tax Increase Prevention Act (“TIPA”), H.R. 5771, into law.  TIPA is commonly referred to as the “tax extenders” bill as it extends certain expiring provisions of the Internal Revenue Code. The affected provisions are extended retroactively for 2014 and then once again expire after December 31, 2014.

The extended provisions could result in a tax break for businesses and individuals who have already made certain expenditures during 2014.

For individuals, income tax provisions extended by TIPA include the following:

  • The deduction for state and local general sales taxes in lieu of state and local income taxes. This is very beneficial for those living in states with no state income tax such as South Dakota.
  • The deduction of up to $4,000 for qualified tuition and related educational expenses, which is phased out at an AGI of $65,000 for single filers and $130,000 for joint filers.
  • The tax deduction of mortgage insurance premiums.
  • The tax exclusion of up to $2 million of imputed income from the discharge of indebtedness on a principal residence.
  • The tax exemption of distributions from individual retirement accounts for charitable purposes for individuals aged 70 1/2 or older.
  • The above-the-line tax deduction of up to $250 of classroom expenses of elementary and secondary school teachers.

For businesses, the provisions extended by TIPA include the following:

  • 50% bonus depreciation in the first year for capital purchases.  This applies to new assets but not to used assets.
  • The option to expense, rather than capitalize, up to $500,000 for purchases of Section 179 property.  This is increased from $25,000.
  • The research and development tax credit.
  • The work opportunity tax credit.
  • The 100% exclusion from gross income of gain from the sale of small business stock.

As these provisions are only preserved retroactively through December 31, 2014, the status of these provisions for 2015 remains unclear. Individuals and businesses should continue to monitor possible future federal legislation for a further extension when tax planning for 2015.

February 4, 2015

New Way to Pay – IRS Direct Pay

The Internal Revenue Service (IRS) has instituted a new web-based system called IRS Direct Pay which enables individual taxpayers to pay tax bills or make estimated tax payments directly from a checking or savings account, without any fees or preregistration.

The website is easy to use and taxpayers will receive immediate confirmation that a payment has been submitted. Bank account information is not retained in IRS systems after a payment is made.

The system is available 24 hours a day, seven days a week. “IRS Direct Pay reflects our latest effort to add more online tools to provide additional service options to help taxpayers,” IRS Commissioner John Koskinen said in a written statement. “IRS Direct Pay simplifies the payment process, and taxpayers can make a payment from the convenience of a home computer.”

By using the “Pay Your Tax Bill” icon at the top of the IRS home page (www.irs.gov), taxpayers can access IRS Direct Pay, which walks the taxpayer through the following five steps:

  1. Providing your tax information.
  2. Verifying your identity. – The IRS will use one of your prior year processed tax returns to verify your identity.
  3. Entering your payment information.
  4. Reviewing your online confirmation.
  5. Electronically signing and recording your online confirmation.

The system can be used to make tax payments related to tax returns for the last 20 years, request for extension of time to file payments for the current calendar year and estimated tax payments for the current calendar year.

As of May 31, 2014 more than 150,000 taxpayers had used the IRS Direct Pay system to make over $340 million in tax payments.

The system offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Please contact our office with any questions on the IRS Direct Pay system.

October 28, 2014

Why You Should Consult with a CPA Before Starting a New Business

2013 Kevin SickelsOne aspect of running a small business that few people give a lot of thought to is the way they deal with professionals such as bankers, lawyers, CPAs/accountants and so on. Most entrepreneurs just dive right into their businesses without giving a second thought to what value these professionals can provide.

The main thing for an entrepreneur to remember is a personal relationship is needed with each of these professionals. They have the ability sometimes direct, sometimes indirect to drastically influence the success of your business. Your goal should be to develop a long-term, personal relationship with each of them. If you do that, when you hit a bump in the road, they’ll be there to help you get over it.

As you become more experienced, you’ll find that your accountant and attorney will overlap a bit in their services and expertise. Here are a few examples of services your CPA/accountant should be able to provide:

 

  • Helping you decide what type of entity (such as S-Corporation or Limited Liability Company) and ownership structure to have when you first get started; your accountant should work closely with your attorney on this.
  • Assistance in setting up your accounting system so that interim and year-end financial reporting will be easier.
  • Help you understand your financial statements and use such financial statements to assist in making decisions concerning the direction of your business.
  • Ensure that you pay the correct types of taxes in the correct amounts.
  • Ensure that you send out W2 and 1099 forms to the proper people at the proper times, and also make sure that if you send out 1099s, the IRS will agree with you that those individuals are independent contractors and not employees. This is a common mistake that can cost you a lot of money and stress.
  • Advise you on income tax deductions and how to separate your personal and business expenses.
  • Advise and guide you through an IRS audit if you ever have one.
  • Advise you on specific transactions, such as whether it’s better to lease or buy equipment or real estate.

Ketel Thorstenson, LLP has professionals with varying experience and expertise.  By combining these resources into one firm, we have the ability to advise you on starting a new business or growing your business in any type.  We have the research tools at our disposal to stay on top of the ever-changing tax and accounting regulations.

It is important to ask your CPA/s/accountant’s advice before you take action. It’s almost always easier (and cheaper) to structure things properly upfront, as opposed to trying to fix something later.

Ketel Thorstenson, LLP wants to build a relationship with you, help you succeed.  We live our philosophy of Friends for Life.

June 17, 2014

Four tips for filing your 2013 income tax returns

With tax day less than a month away, here are some helpful tips on how to do your taxes correctly. Ketel Thorstenson LLP, is a Rapid City accounting firm that keeps track year round of the ever-changing tax code. Owners of small businesses and people who receive regular income from their investments should pay particular attention to the first two items.

1: New Tax Rules for Buying or Improving Property

The IRS issued final regulations in September 2013 that clarify when business owners can deduct the cost of acquiring, producing or repairing tangible property. For example, the costs of resurfacing a floor to keep the property in good condition would likely be deducted immediately, whereas the removal of a floor and installation of a new floor may need to be capitalized. Almost all businesses will be affected by the new regulations. The good news is that taxpayers may deduct any single item whose cost does not exceed $500 per invoice or item.

2: Net Investment Income Surtax

The 3.8 percent Net Investment Income Surtax is something new for 2013 individual and trust tax returns. If your total income is above certain thresholds, you will owe additional taxes on your passive income. This includes interest, dividends, capital gains, royalties and passive investments. This adds an additional level of complexity to your tax return.

3: Gifting

One of the most common questions on taxes is about gifting. A gift of money is not deductible on your tax return, nor can the recipient report the gift as income. For 2014 the annual gift exclusion is $14,000 per person. A gift of a direct payment to providers for medical and education expenses do not count toward the annual gift tax limit.

4: Head of Household

Everyone must choose a filing status when preparing their tax return. A common mistake is to file as single rather than Head of Household. Head of Household status provides expanded tax brackets and a higher standard deduction than the single filing status. Normally, people assume that only single parents can file as Head of Household. Even if the child does not live with you — but you pay for over half their living costs — then you can file as Head of Household. The child must be claimed as a dependent, and there are other filing status rules. Make sure you claim the correct filing status in order to receive the best tax benefit possible.

March 27, 2014

Final IRS Repair and Supply Regulations

2013 Kevin SickelsIf you are a business owner, whether big or small, the Internal Revenue Service has issued final regulations that will impact your business in 2014 and beyond.  These new regulations provide guidelines and safe harbors in relation to capitalization of certain expenditures.  They are split into two areas: (1) Materials and Supplies and (2) Repairs.

Materials and Supplies

The final regulations allow all businesses to deduct units of property when purchased if they are consumed in less than 12 months or have an acquisition cost of less than $200.  This would apply to common supplies such as napkins for a restaurant or towels for a hotel.  It would also apply to some items that are not normally considered supplies, such as televisions, computer monitors, file cabinets, office furniture, etc.  One exception to this rule applies to items that are being tracked and counted like inventory.  These types of items must be deducted when used or consumed rather than when purchased.

Any purchased item that fits the above definitions can be expensed rather than capitalized and depreciated.  This is especially important with the $25,000 limit on Section 179 expensing for capital assets currently effective for 2014 and future years.

The final regulations also add a de minimis safe harbor election for businesses that would like to deduct units of property with a purchase price greater than $200.  The deduction limits depend on whether or not the business has an Applicable Financial Statement (AFS).  A business has an AFS if their financial statements are audited, issues them to the SEC, or issues them to another federal, state, or local governmental body.

If a business does not have an AFS, the business can put in place an accounting procedure (we recommend written) by the beginning of the tax year that allows for expensing of items with a useful life of less than 12 months or costing less than an amount up to $500.  This accounting procedure needs to be followed for book purposes and tax purposes to meet the safe harbor.

If a company has an AFS, the business can put in place an accounting procedure that must be in writing by the beginning of the tax year that allows for expensing of items with a useful life of less than 12 months or costing less than $5,000.  This accounting procedure needs to be followed for book purposes and tax purposes to meet the safe harbor.

The above expensing limits apply per item/unit of property if substantiated on an invoice.  Here is an example:  ABC Company purchases 100 computers for $400 each.  The business does not have an AFS and has an accounting policy of $500.  The business pays the $40,000 invoice and expenses the computers as supplies.

As you can imagine, this will change the way one looks at purchases of items that might have been capitalized in the past and now can be expensed as supplies.

Repairs

In our spring 2013 newsletter, we went into great detail about the proposed regulations that were issued on this topic.  The final regulations are very similar and here is a brief overview.

The regulations do not give a safe harbor dollar amount.  They do give three tests to decide if an item should be capitalized or expensed.  The rules are very detailed and in-depth and cannot be covered in detail in this newsletter.  However, here is a quick summary of some of the definitions for your reference.  If a transaction falls into one of these three categories it must be capitalized for tax purposes.

Betterment:

Betterment corrects a material defect that existed prior to acquisition, increases the size or capacity of the item or materially increases the strength, efficiency, quality or output of a unit of property.  Example – Remodeling of a retail store.

Adaptation:

Adaptation is the modification of a Unit of Property to a new or different use that is inconsistent with the original use.  Example – Conversion of a manufacturing building into a retail showroom.

Restoration:

Restoration is returning a unit of property to its ordinarily efficient condition if the property has deteriorated to a state of disrepair.  Example – Running an engine until it is not operational and then having to over haul it.

Again, these are just a few of the definitions related to repair transaction that would result in a business being required to capitalize the expenditure.  Each transaction needs to be evaluated and any sizable transactions should be discussed with your tax professional.

February 28, 2014