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1099 New Filing Deadline

Make note that the filing deadline for 1099's has been changed to January 31, 2017. 

The IRS has become muchmore aggressive in assessing penalties and the penalties for failing to file 1099's can be very significant.  Therefore we strongly encourage you to make sure you meet this filing deadline. 

Generally, you are required to issue a 1099 for payments made in the course of your trade or business.  This also includes nonprofit organizations.  Form 1099-MISC should be filed for each person or entity to whom you have paid during the year at least $600 in services (including parts and materials), rents, prizes and awards, medical and health care payments, and other income payments.  Payments to a corporation may be excluded.  Additionally, payments for merchandise may be excluded.  Other Form(s) 1099 are required for payments if interest, dividends, royalties, etc.  The filing threshold for these 1099's is $10 in most cases.

As mentioned above, the penalties for failure to file a Form 1099 have increased significantly.  Income tax returns now contain the following questions:

  •    Did you make any payments that would require you to file Form(s) 1099?
  •    If yes,  did you or will you file all required Forms 1099?

Failure to answer these questions truthfully may subject you to additional penalties of perjury.  Therefore it will be important that you answer these questions truthfully.  In the event of an IRS audit, one of the first items verified will be compliance with the filing of Forms 1099.

 

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Breaking Down Section 1031 "Like-Kind Exchanges"

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Breaking Down Section 1031 "Like-Kind Exchanges"

My father-in law and I were watching Million Dollar Listing the other day, and the brokers had a seller and a buyer that were trying to get their respective deals to close quickly due to "tax issues." Whenever accounting issues come up in daily conversation, tax nerds, like ourselves, get excited....so I thought this would make a good topic for the blog this week. 

What is a 1031 "Like-Kind Exchange" 

Generally speaking, a like-kind exchange is a swap of one business or investment asset for another, and you will have either limited or no tax due at the time of the exchange. Basically, the IRS allows you to change the form of your investment without cashing out or recognizing a capital gain, allowing for your investment to grow tax deferred. There's currently no limit on how many times you or how frequently you roll over the gain from one piece of investment real estate to another. 

There is one catch! You can trigger a gain known as depreciation recapture when depreciable property is exchanged in a 1031. This type of gain is taxed as ordinary income...not good!  If you swap one building for another, you can avoid this recapture, but if you exchange improved land with a building for unimproved land without a building, the depreciation you previously claimed on the building is "recaptured" as ordinary income...hence the term, "like-kind exchange." in order for the swap to qualify as a section 1031 exchange. 

What you need to know when contemplating a 1031 "Like-Kind Exchange" 

  • Provision is only for investment and business property; 
  • "Like-kind" is a VERY broad term, but you should consult an tax-professional before pulling the trigger on an exchange;
  • You can do a "delayed exchange," also known as a Starker exchange; 
  • Two Key Timing Rules:    
  1. You must designate, in writing, a replacement property within 45 days of the sale of your property; and, 
  2. You must close on the new property within 180 days of the sale of the old. 
  • The IRS allows you to designate three replacement properties as long as you eventually close on one of them; and, 
  • If you receive cash...it's taxed. 

Section 1031 exchanges can be great for investors, but you have to be wary of the potential tax pitfalls. If you have any questions, feel free to reach out to our tax advisors.  

 

 

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Here's hoping that college memories last as long as your student loan payments...

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Here's hoping that college memories last as long as your student loan payments...

The US News and World Report recently came out with a survey detailing what it is that Millennials want, why we are important, and just why older generations don't understand millennials.  It's a quick skim, but pretty interesting!  http://www.usnews.com/pubfiles/USNews_Market_Insights_Millennials2014.pdf

Let's set the scene. When I graduated from Baylor, none of these things in this survey were on my radar. The only thing I was really worried about was whether or not I was going to miss the Gilt daily flash sale, or where we were going for happy hour Thursday night. 

I was putting a tiny % of my paycheck into my company's  401(k), making my minimum student loan payments and covering all my other monthly bills, so clearly I thought the rest should be allocated to my shopping budget. Since I had set up all my student loans (which were close to $60K) to auto-pay, I really did not look at them until I had been paying them for 3 years. I got a notice from Wells Fargo thanking me for making my payments on time, and telling me they were reducing my interest rate by .05%...whoop whoop. That was a turning point for me...

I logged into all the different student loan providers and realized how long they were projecting for me to pay off my loans as well as the amount they were showing I would end up paying for the amount I borrowed.  It was terrifying, and I hated every minute of it. I made an excel spreadsheet with the amount owed, and the interest rate I was being charged, and I put the ones with the highest interest rate at the top.

I heard this saying a long time ago, "how do you eat an elephant...one bite at a time." That was my plan of attack. I was going to stick to my budgets and use all extra income to start to chip away at the elephant of student loans that I had. Within the first year, I paid off the two highest interest rate loans and I was well on my way to paying off the rest. I put any raises and bonuses I received towards paying off my student loans.

In my debt-free journey I got to a point that the interest rate I was paying on the debt was so low, that I could actually make more interest through investments, so I decided to go that route. Your goal may be different, and your goal is to be completely debt-free. Whatever works for you, but the faster you can pay off those student loans the easier you can make financial decisions for the future. No one wants to be paying off their own student loans when they feel like they need to start saving for their own children's college. 

If you're looking for new ways to learn to save money I suggest checking out http://20somethingfinance.com/

 

 

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Exploring the Tax Differences of Rental Income

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Exploring the Tax Differences of Rental Income

I was talking to a group of friends the other day, and someone mentioned that they were considering purchasing a rental property as an investment for the “tax advantages.” Although I don’t have many friends in the stage of life where they are looking for this type of investment, I thought it might be a good topic to discuss.

If you receive rental income for the use of a dwelling, such as a house or an apartment, you deduct certain expenses that correlate to this dwelling on your tax return. These expenses may include:

  • mortgage interest;
  • real estate taxes;
  • casualty losses;
  • maintenance and repairs;
  • utilities;
  • insurance; and, depreciation.

These expenses are netted against the rental income you received in order to reduce the amount of rental income that is subject to tax. If the purpose of your rental is to make a profit, and do not use the dwelling unit as a personal residence, then your deductible rental expenses can actually be more than the rental income – which creates a loss. I know what you’re thinking….”this sounds pretty great! A loss that will reduce the amount of taxes I pay!!!”  However, you should read on, because depending on how your rental activity is classified, your tax picture can look very different! 

Passive vs. Active - What's the Difference?  

Income and losses on your tax return are divided into two categories:

Non-passive – Defined as businesses in which the taxpayer materially participates; and,

Passive – Rentals and businesses without material participation. 

This classification is KEY!

The IRS’s Passive activity rules prevent investors from deducting passive activity losses from their non-passive sources of income. In other words, passive activity losses may only be netted against passive activity income. So if you have a passive rental loss, and no other passive active income, your losses generally are limited by the "at-risk" rules and/or the passive activity loss rules.

But Wait, There are exceptions to this Rule!

rental real estate allowance under IRC § 469(i)(8)

A taxpayer may deduct up to $25,000 in rental real estate losses as long as the taxpayer actively participates and has less than $100,000 in income.  The $25,000 rental real estate allowance under IRC § 469(i)(8) allows individuals to offset losses from rental real estate without necessarily having passive income, but once your income goes over $100,000, the $25,000 offset is limited. 

Short-term rentals with material participation

As most people know, the tax code is extremely complicated, with very specific definitions.The activity is not deemed a rental property (and therefore, not passive income) if:

  • The average period of customer use is 7 days or less; OR,
  • The average period of customer use is 30 days or less and significant personal services are provided (such as maid service, cleaning services, etc.)

If either of the above apply to your rental property, the activity is not considered passive rental activity.  It is treated as a business. If you have material participation in the business, your losses are not limited

There is a qualifying disposition under IRC § 469(g).

If you do not have passive income in a year that you have passive activity losses, your loss is carried forward so that you can apply your passive activity losses in future years that you may have passive activity income. When you sell that rental property, any gain on the sale of that property is classified as passive income, so those carried forward losses can finally be used! 

The taxpayer meets the requirements of IRC § 469(c)(7) for real estate professionals.

This is a very specific definition, but if you, or your spouse, meet these requirements, your losses are also not limited. 

The IRS definitely has many definitions and rules around these requirements, so speak with one of our tax professionals to see if you may fall into one of the exceptions noted above!  

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Summer Tax Moves for the Savvy Small Business Owner or Entrepreneur

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Summer Tax Moves for the Savvy Small Business Owner or Entrepreneur

Since it is nowhere near April 15th, you, like us, are probably trying your very best to not think about next year's tax season; however, we wanted to give you a few tips to consider during summer that can possibly help with your 2015 tax bill. 

  • Adding Vacation time to a business trip:  Let’s suppose you booked airfare to meet with a client. Generally speaking, you can deduct the cost of your business related expenses, which typically includes airfare, lodging, and 50% of your meals – as long as the primary purpose of your trip is business. Costs attributable to the vacation days (i.e., lodging, meals, and transportation) are not deductible.  If a weekend comes between a Friday and a Monday work day, you can treat Saturday and Sunday as work days!
  • Summer socials for business clients:  You can deduct 50% of the costs attributable to business clients (spouses/dates included), if the entertainment precedes or follows a business meeting.
  • Kids Day Camps:  If your children are under the age of 13, you can claim the “child care credit” for sending them to day camp (overnight camps don’t count here), so you and your spouse can work during the summer months.
  • Office-wide picnic:  Typically meals and entertainment is limited to a 50% deduction, however, a business can deduct 100% of the expenses for a summer picnic if the event isn’t restricted to the higher-ups (basically, don’t lose anyone’s invitation…)
  • Review your portfolio:  This is the time of year you should take a look at your overall financial picture, and determine which investments have been winners in 2015 (Strong US Dollar), and which ones have been losers (hope you don’t have any investments in Greece right about now…)
  • Tidying up your vacation home:  Although qualified expenses can offset rental income, you can’t claim an overall rental loss if personal use exceeds the greater of 14 days or 10% of the rental time. However, time spent cleaning up or maintaining your vacation does not count as personal use, even if the rest of the family comes along!

As usual, record-keeping is the key, so make sure you maintain all receipts records for any deductions you want to claim. Have any questions or want more details, let us know!!

 

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The Best Tax Advice When Your Greatest Asset is Time

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The Best Tax Advice When Your Greatest Asset is Time

This post is targeted to you the millennial generation!

You have either just entered the workforce, or have been in it for a few years. Hopefully you’re not already planning to retire…if that’s the case maybe it’s time to look into other career alternatives. All joking aside, one of the best things you can do for your future is to max out your retirement plan contributions.  As many people know, the amount that you contribute now makes a BIG difference over time thanks to the time value of money (i.e., interest)! You might not be making the six-figure salary you dreamed of…yet, but regardless of how much money you are making it is in your best interest to contribute as much as you can towards retirement because you have so much time ahead of you!

Traditional Retirement accounts

Contributions to a 401(k), 403(b), and traditional IRA accounts are tax deductible because you pay taxes when you actually withdraw the funds in retirement.  In other words, you will be paying less in taxes today and allows a larger portion of your income to grow during that time.  The maximum you can contribute is $18,000 for 2015. Whatever your tax rate is today, you are essentially saving that % of money! 

Roth IRAs

I do have some young clients that are concerned about what could happen with taxes in the future, so they hedge their risk with a Roth IRA account. Roth IRA accounts are not tax deductible, but your money grows tax free meaning you end up with more tax-free money in the long run.  

Getting to the Max

Most people I know are starting families, buying homes, etc., so contributing the maximum is not realistic. If you’re in that situation, I would recommend gradually increase your contributions in increments over time. For example, you can automatically set up your 401(k) contributions to increase by 1% of your salary each year. This may not seem like much, but over time, as your salary hopefully increases your contributions will to without putting additional strain on your monthly budgets.

The only way that you can get to the maximum retirement contribution is by making it a priority for you/your family. Saving for retirement isn’t as fun as using those funds for something in the short-term, but I can promise you that will definitely thank yourself later! 

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