Arthur Lander, CPA, PC
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Here is a collection of free and helpful accounting articles I have written for our clients:
2012 Year-End Tax Planning (in .PDF format)
Thirteen Ideas to Improve Your Business
Deductions For Your Automobile
Deductions For Your Home Office
2012 Year-End Tax Planning Letter - November 19, 2012
You can download a PDF of this article here.
Dear Clients and Friends,
At this time so many tax issues are still to be decided by Congress and the President.
For example, dividends may go back from being taxed at 15% to ordinary tax rates. For those C corporations with cash on the balance sheet December is a time to consider paying a dividend. Dividends are not tax deductible to a C corp. But, it may still be a good idea to take a dividend because of the step tax rates of a C corporation and the 1st 50,000 of C corporation income is taxed at 15% and then the capital gains tax at the individual level is 15% for a total of 30%.
Also, for high income taxpayers (250K for married taxpayers) in 2013 there will be an additional 3.8% tax on net investment income.
Another item set to expire is the payroll holiday of 2% for employees.
So a host of items are on the table as of this date.
However, this letter mentions some of the several potential tax-saving opportunities still available for you to consider. I would be happy to meet with you to discuss specific strategies.
IRA, Retirement Savings Rules for 2012
More tax-saving opportunities continue for retirement planning in 2012.
Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2012 is $5,000. Individuals who are active participants in a plan may also make deductible contributions to an IRA, but limited in amount depending on their AGI. For 2012, the AGI phase-out range for deductibility of IRA contributions is between $92,001 and $111,999 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.
For 2012, a $1,000 "catch-up" contribution deduction is allowed for taxpayers age 50 or older by the close of the taxable year who meet the other qualifications for IRA deductions. Thus, the total deductible limit for these individuals may be as high as $6,000.
In addition, an individual will not be considered an "active participant" in an employer plan simply because the individual's spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $173,000 to $183,000. Above this range, no deduction is allowed.
Roth IRAs: This type of IRA permits nondeductible contributions of up to $6,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59 ˝ . Distributions may be made earlier on account of the individual's disability or death. The maximum contribution is phased out for persons with AGI above certain amounts: $173,000 to $183,000 for joint filers, and $110,000 to $125,000 for single filers (including heads of households). For 2012, a $1,000 "catch-up" contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals.
Roth IRA Conversion Rule: Funds in a traditional IRA may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.
For 2012, there is no AGI limit for taxpayers wishing to convert their traditional IRA.
401(k) Contribution: The 401(k) elective deferral limit is $17,000 for 2012. If your 401(k) plan has been amended to allow for catch-up contributions for 2012 and you will be 50 years old by December 31, 2012, you may contribute an additional $5,500 to your 401(k) account, for a total maximum contribution of $22,500 ($17,000 in regular contributions plus $5,500 in catch-up contributions).
For the self-employed: If you are self-employed, your business is allowed to contribute up to a 25% match of your salary. The maximum of all contributions for a self-employed person to a 401(k) plan is $50,000 after both employee and business contributions. For example, if your salary is $122,000 for 2012 and you personally make a $17,000 contribution, you can reach the max contribution of $50,000 if your business contributes $30,000.
SIMPLE Plan Contribution: The SIMPLE plan deferral limit is $11,500 for 2012. If your SIMPLE plan has been amended to allow for catch-up contributions for 2012 and you will be 50 years old by December 31, 2012, you may contribute an additional $2,500.
Catch-Up Contributions for Other Plans: If you will be 50 years old by December 31, 2012, you may also contribute an additional $5,500 to your 403(b).
**** Before the year end 401K plans and defined benefit plans must be set up. ****
Deferring Income to 2013
One of the unknowns is what the changes will be in the tax laws for 2013. The typical advice is to defer income. If the tax rates only go up for taxpayers making more than 250,000 then those taxpayers may not want to defer income to 2013.
If you expect your AGI to be higher in 2012 than in 2013, or if you anticipate being in the same or a higher tax bracket in 2012, you may benefit by deferring income into 2013. Some ways to defer income include:
Delay Billing: If you are self-employed, delay year-end billing to clients so that payments will not be received until 2013.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not included in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, remember to keep the following in mind:
Deduction In Year Paid: An expense is only deductible in the year in which it is actually paid.
Payment By Check: Date checks before the end of the year and mail them before January 1, 2013.
Promise To Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2012, you can take the deduction even though you won't pay your credit card bill until 2013.
Itemized deductions and personal exemption No Phase Out: You get the full benefit of your exemption and itemized deductions without any reduction if your income is over certain amounts.
Certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses.
Standard Deduction Planning: Deduction planning is also affected by the standard deduction. For 2012 returns, the standard deduction is $11,900 for married taxpayers filing jointly, $5,950 for single taxpayers, and $8,700 for heads of households.
If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year.
Medical Expenses: Medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 7.5% of AGI. Consider bunching medical expenses into years when your AGI is lower.
If you are self-employed, consider hiring your spouse and deducting all of the family medical expenses using a Medical Reimbursement Program.
Charitable Contributions: Consider making your charitable contributions at the end of the year. You can use a credit card to charge donations in 2012 even though you will not pay the bill until 2013.
A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.
Health Savings Accounts and Flexible Spending Accounts
For those of you who are participating in a health insurance program with a high deductible you can still make a contribution to your Health Savings Account of $3,100 for individuals and $6,250 for families.
Please remember to use or you will lose the money in the Flexible Spending Account.
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor.
Equipment Purchases: If you are in business and purchase equipment, you may make a "Section 179 Election," which allows you to expense (i.e., currently deduct) otherwise depreciable business property. There is also available a 100% bonus depreciation for property that may not qualify for the Section 179 election.
NOL Carryback Period: If your business suffers net operating losses in 2012, you may apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2010.
Education and Child Tax Benefits
Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year's return. The credit is phased out by $50 for each $1,000 AGI over $110,000(married filing jointly) and $75,000(single).
American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit: The maximum AOTC credit is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer's spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the student's post-secondary education.
The Lifetime Learning credit maximum in 2012 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he/she is taking post-secondary classes to acquire or improve job skills. As with the AOTC credit, eligible students include the taxpayer, the taxpayer's spouse, or a dependent.
For 2012, both the AOTC credit and the Lifetime Learning credit are phased out once your income reaches a certain limit.
Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any "qualified education loan." The maximum deduction is $2,500. The deduction for 2012 is phased out at a modified AGI level between $125,000 and $155,000 for joint filers, and between $60,000 and $75 ,000 for individual taxpayers.
Tax credits for home improvements
Federal tax credits for 2012 include, solar water heaters, smal wind energy property. geothermal heat pumps. These pumps use the ground instead of outside air to provide air conditioning and heating. The credit for more traditional energy saving like storm doors has expired.
The following rules apply for most capital assets in 2012:
● Capital gains on property held one year or less are taxed at an individual's ordinary income tax rate.
● Capital gains on property held for more than one year are taxed at a maximum rate of 15% (0% if an individual is in the 10% or 15% marginal tax bracket).
Timing of Sales: You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income.
Dividends: Qualifying dividends received in 2012 are subject to rates similar to the capital gains rates. Therefore, qualifying dividends are taxed at a maximum rate of 15%. Qualifying dividends includes dividends received from domestic and certain foreign corporations.
If you have any questions, please do not hesitate to call. I would be happy to meet with you at your convenience to discuss the strategies outlined above. There is still time to implement these strategies to minimize your 2012 tax liability.
Very truly yours,
THIRTEEN IDEAS TO IMPROVE YOUR BUSINESS
by Arthur Lander
- Payment on delivery.Having a large accounts receivable balance can be reassuring, but the reality is that some of those accounts will be uncollectible. Trying to sue for collection is time consuming and costs money with no assurance of being paid. As the dean of my law school would say, "You can paper your walls with uncollected judgments."
- Concentrate on what you do best.Yes, it looks like a great opportunity, but what do you know about that industry? You own a nursing home and decide to open up a medical testing laboratory. It seems like a close enough fit, but it is an entirely different business. Even if you have great managers, how do you know they are doing the right thing?
- Make allocations for taxes.You're having a great year, but don't forget the estimated payments during the year. Come tax time you may have made the mistake of using the tax money for business expansion.
- Avoid partnerships as a form of doing business, or, for that matter, corporations where the stock is held 50/50. Everything is great now, but what happens when there are disagreements? And there will be. Consider a third person on the Board of Directors or a buy-out agreement.
- Have adequate staffing.Try and keep your employees; high turnover is a killer because of the cost of training. And for a small company, the owner has to do the training, which takes you away from what you do best.
- Major projects.Be very careful of major projects. Say you decide you have a great tax preparation package, and, yes, everyone agrees it is. The only problems is that your marketing effort cannot compete with the existing businesses, and so no one knows about your tax package. Leave room in the budget for marketing or don't undertake the idea.
- Sales first.Sales are what drive the ship.
- Meet your deadlines.Your customers want to have confidence in your product or service. Missing a deadline is a sure confidence killer.
- Look for tax savings.Everyone wants to keep their accounting costs low and nobody wants to go to the doctor, either. But projections and tax planning on transactions can save accounting fees many times over.
- Document as much as you can.In the litigious society that we live, having adequate documentation can be a great protector. Write the contract down, and limit the potential for misunderstanding. If you want to change the contract write on it what the terms are. There is nothing sacred about pre-printed forms.
- Invest your profits wisely--after all you worked hard for them.
- Set up a line of credit.Check with your local banks to see if they will give you a line of credit that costs nothing unless you use it. Say you are expecting a check on Thursday and it does not come, and you have payroll the next day. A line of credit for one payroll period can ease the stresses of life.
- Update your paperwork.Take a look at your corporate documents, your dental plans, pension plans, etc. It doesn't take that long to update these documents, and it gives your a chance to review the area.
I hope these suggestions help you and good luck in your business. Give me a call if you have any questions (703) 486-0700.
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DEDUCTIONS FOR YOUR AUTOMOBILEThe first area I want to go over is to remind you to keep your milage log. You have probably heard this from me a couple of times.
By Arthur Lander
If you have a company car, and there isn't substantiation of the miles, then the use of the car will be considered personal, just like a salary check, and you risk an unexpected tax bill.
If you bill the company for the use of your personal car, you run the risk of the deduction being disallowed.
To substantiate a travel or transportation item by adequate records, the taxpayer must maintain a diary or account book in which each expense item is recorded at or near the time of the expenditure.
A record is created "at or near the time" of the expense if the taxpayer has full present knowledge of each element of the expense.
Example DiarySam keeps a log on a weekly basis in which he accounts for his use of an employer automobile during the week. Sam's weekly logs are made at or near the time of each use and should satisfy the diary aspect of the substantiation requirement for transportation expenses.
The taxpayer must be able to establish all of the following with respect to each trip away from home:
- the number of miles,
- the dates for each trip,
- the travel destination, described by city name or other designation;
- the business purpose for the travel or nature of the business benefit gained or expected as result of the trip, unless the business purpose is obvious from the circumstances, (e.g., a salesman's regular sales calls).
Other Sufficient EvidenceA taxpayer who fails to comply with the substantiation requirements described above can deduct an expense if he provides other sufficient evidence for each element of the expense. In order to do so, the taxpayer must establish each element:
- by his own statement, whether written or oral, containing specific information in detail as to each element; and
- by other corroborative evidence sufficient to establish such element.
The standard of proof required is so burdensome that a taxpayer is likely to attempt this method of substantiation only for very large items.
The answer is to keep your milage log. You can download them for free here. A mileage log should be kept for each vehicle.
Give me a call if at (703) 486-0700 if you have any questions.
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DEDUCTIONS FOR YOUR HOME OFFICE
By Arthur Lander
The second area I would like to review is commuting from the "office in the home."
This is a issue that is getting more important as more people are working out of their homes. One of the key issues is whether the home in the office is the principal office. So, the issue of whether the office in the home is the principal office not only bears on the deductibility of office expenses but also on the travel between the office in the home and work locations.
A taxpayer whose principal place of business is located in his residence may deduct the cost of all of his local transportation costs relating to his business.
This rule applies even if the business is not the taxpayer's sole source of income, as long as the taxpayer's residence is the principal location for the taxpayer's secondary business.
Example: Home is Principal Business Location
Betty, a dog trainer, sometimes trains dogs at their owners' residences, but also trains dogs at her own residence. Betty manages the business from a home office which is her principal office. Betty may deduct all of the local transportation costs connected with the business since she has no commuting costs.
Example: Home is Principal Business Location
Bob is a doctor employed full-time at a hospital. Bob also owns six rental properties which he manages himself from a home office. The local transportation costs Bob incurs in visiting his rental properties from his home office are deductible expenses of his rental property business.
A taxpayer whose primary business is located outside his home cannot deduct his transportation costs between his principal business site and the home business site because the taxpayer is presumed to simply want to go home.
Bob's principal place of business is at the hospital. Bob cannot deduct the costs of transportation between the hospital and his home because these are commuting costs, notwithstanding his rental business at home.
Ignoring the rental activity, what if Bob's office in the home is not his principal place of business, but just a regular place of business. Let's say Bob has an office in the home for his medical practice, but he works at various hospitals in his area.
Here we have a conflict. The Tax Court in Walker allowed a tree cutter to deduct the cost of daily travel to various tree cutting temporary work sites. Mr. Walker had a work shop in his home, which was considered a regular place of business by the Court.
The IRS does not agree with this decision, and the IRS has issued a Revenue Ruling on the subject. To get back to our example of Bob the Doctor, Bob would have to have a regular work location away from his residence, and then he could only deduct the travel between his residence and temporary work locations.
Rev. Rul. 90-23 defines a temporary work location as any location at which the taxpayer performs services on an irregular or short-term (i.e., generally a matter of days or weeks) basis.
So, the IRS is saying that Bob the Doctor has to have a regular work location other than his home. So, if the treecutters case came up again, the treecutter would lose because his only regular place of business was his home. He would have to have a regular place of business other than the home.
I wanted to point this issue out to you, because for those of you with an office in the home, we either need to qualify them as a principal office or make sure we are adhering to this new Revenue Ruling. This may require some adjustments in what you are doing. You may need additional advice depending on your situation. If you have any questions, please call (703) 486-0700.
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