Berdon Blogs

TAX TALK: Repair & Improvement Safe Harbors Help Accelerate Tax Deductions

Posted by Hal Zemel, CPA, J.D., LL.M. on Mar 6, 2017 12:50:00 PM

If last year your business made repairs to tangible property, such as buildings, machinery, equipment, or vehicles, you may be eligible to deduct the expenses on your 2016 income tax return. However, you must determine if the expenses qualify as “repairs,” and are not actually “improvements.”

The distinction between repairs and improvements is important. 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 and depreciated over a period of years.  But, you can take an immediate expense for the costs incurred for incidental repairs and maintenance.

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Topics: TAX TALK

TAX TALK: Simplified Method for Determining Potential Estate Tax Exposure

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 28, 2017 10:50:56 AM

While not exact, here is a simplified way to project your potential estate tax exposure.

  • Determine the value of your assets, net of any debts.
  • Subtract any assets that will pass to charity on your death.
  • If you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies.
  • The net number represents your taxable estate.
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TAX TALK: Are You Required to File a 2016 Gift Tax Return by April 18?

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 21, 2017 11:00:00 AM

If last year you made significant gifts to your children, grandchildren, or other heirs as part of your estate planning strategy, or you just wanted to provide loved ones with some helpful financial support, it’s important to know when you are required to file a gift tax return.

Some transfers require a gift tax return even if you do not owe any tax. Also, sometimes it is desirable to file a return even if it is not required.

Mandatory Filing Requirement

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Topics: TAX TALK

TAX TALK: Basics of Incentive Stock Options

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 13, 2017 12:50:00 AM

Incentive stock options (“ISOs”) allow you to buy your employer’s stock in the future at a fixed exercise price. The exercise price must at least equal the stock’s fair market value on the date granted. If the stock appreciates above the exercise price, the ISOs will allow you to buy the stock at a price below the fair market value (“FMV”) on the exercise date. However, complex tax rules apply to this type of compensation.

Tax Treatment of ISOs

ISOs must comply with many rules (not discussed here), but receive tax-favored treatment:

GRANT DATE: On the date your employer grants your ISOs - You owe no tax.

EXERCISE DATE (purchase stock at exercise price) On the date you exercise the ISOs:

  • Regular Tax
    1. You owe no regular income tax. There may be other tax consequences if you leave your employment and exercise the ISO.
    2. Your basis in the stock will equal the exercise price that you pay.

  • Alternative Minimum Tax (“AMT”)
    1. You will have an AMT adjustment equal to the FMV of the stock on the date of exercise in excess of the exercise price of the ISOs.
    2. Depending on your tax situation, the AMT adjustment may cause you to pay AMT.
    3. You will add the AMT adjustment to your basis in the stock in order to calculate your AMT gain or loss when you sell the stock.
    4. Generally, you will receive an AMT credit carry-forward to offset future regular tax liability to alleviate potential double taxation.
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Topics: TAX TALK

TAX TALK: The Domestic Production Activities Deduction Applies to More than Just Manufacturing

Posted by Hal Zemel, CPA, J.D., LL.M. on Feb 6, 2017 12:50:00 PM

The Section 199 deduction, also called the “domestic production activities deduction,” is intended to boost US jobs by encouraging domestic manufacturing.  In fact, it’s often referred to as the “manufacturers’ deduction.” But, this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 Deduction 101

A company calculates its Sec. 199 deduction by first determining its qualified production activities income (“QPAI”).  QPAI is the net income from qualified production activities. A company computes its QPAI by taking its domestic production gross receipts (“DPGR”) and subtracting the cost of goods sold and other expenses allocable to DPGR.

Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t. If less than 5% of receipts do not qualify as DPGR, the company may treat all of the receipts as DPGR.  Also, the company will need to allocate its expenses to those that directly and indirectly relate to the DPGR and those that do not relate to DPGR.

The Sec. 199 deduction is determined by multiplying the lesser of the qualified production activities income or taxable income by 9%. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production.

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Topics: TAX TALK

TAX TALK: Investment Interest Expense Deduction and Its Limitations

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 30, 2017 12:50:00 PM

If you borrow money and use the proceeds to buy assets held for investment, such as margin debt used to buy securities, generally the interest on the debt is deductible for both regular tax and alternative minimum tax purposes. However, there are limitations that apply that may reduce the benefits of this itemized deduction.

Deduction Limitations

First, interest is only deductible to the extent you invest in securities that produce taxable income. You cannot deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you cannot deduct the interest.

Second, your investment interest deduction is limited to your net investment income. Your net investment income, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, net investment income includes only investment income taxed at ordinary income tax rates and not investment income taxed at preferential capital gain tax rates such as long-term capital gains and qualified dividends.

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Topics: TAX TALK

TAX TALK: Can you Benefit from the State & Local Sales Tax Deduction?

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 23, 2017 7:00:00 AM

Currently, you are allowed an income tax deduction for the greater of your state and local income taxes and your state and local sales taxes.  A little over a year ago, the PATH Act made “permanent” the break allowing taxpayers to deduct state and local sales taxes as an itemized deduction in lieu of state and local income taxes. For many taxpayers their income taxes will substantially exceed their sales taxes, and therefore, not provide any benefit. However, if you reside in a state with no or low income taxes or you purchase major items, such as a car or boat, this break can be valuable.

2016 Tax Return

You do not have to document all of the sales tax you actually paid during the year. You can use the IRS sales tax calculator to determine your deduction based on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation). Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax and deduct the greater.

If you are in the Alternative Minimum Tax (“AMT”), it does not matter, since neither is deductible for AMT purposes.

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Topics: TAX TALK

TAX TALK: Help Prevent Tax Identity Theft by Filing Early

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 17, 2017 12:50:00 PM

If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.

But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.

Why Early Filing Helps

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But, if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

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Topics: TAX TALK

TAX TALK: 2017 Q1 Tax Calendar: Key Deadlines for Businesses and Other Employers

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 9, 2017 11:00:00 AM

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017.

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.
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Topics: TAX TALK

TAX TALK: Retirement Plan Contributions Remain Largely Unchanged

Posted by Hal Zemel, CPA, J.D., LL.M. on Jan 3, 2017 11:00:00 AM

Since the 2017 inflation rate remained low, most of the retirement plan contribution limits are unchanged. Only the limit for contributions to defined contribution plans has increased by $1,000.

Type of limit

2017 limit

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans

$18,000

Contributions to defined contribution plans

$54,000

Contributions to SIMPLEs

$12,500

Contributions to IRAs

$5,500

Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans

$6,000

Catch-up contributions to SIMPLEs

$3,000

Catch-up contributions to IRAs

$1,000

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Topics: TAX TALK

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