A company car is a wonderful and necessary part of many businesses, and from time to time, the car will need to be replaced with something newer. When replacing a business vehicle, it does make a difference for tax purposes whether you decide to sell it or trade it. If you sell a vehicle that was used for business, the resulting gain or loss is reported on your tax return. As a result, it is generally better to sell a vehicle if the disposition of the vehicle will result in a loss. If, on the other hand, the disposition will result in a gain, it would be better to trade it. Since trade-ins are treated as a tax-deferred exchange and any gain or loss is absorbed into the replacement vehicle’s depreciable basis, it is generally better to trade in a vehicle that would result in a gain.
As an example, suppose you sell your business vehicle for $12,000. Your original purchase price was $32,000 and $17,000 is taken in depreciation. As illustrated below, the sale results in a loss, so it generally would be better for you to sell the vehicle and deduct the loss rather than trade in the vehicle.
Sales price $12,000
Depreciation Taken <$17,000>
Depreciated Basis <$15,000>
Loss <$ 3,000>
On the other hand, had you sold the business vehicle for $16,000, the sale would have resulted in a $1,000 taxable gain, and trading it in would have been a better option.
If the vehicle is used partially for business and personal purposes, the loss or gain must be prorated for the business use. Loss on the personal portion is not deductible.
Since trade-in values are generally less than the sales value of the vehicle, the trade-in decision must also consider whether the tax benefits will exceed the additional money received from selling the old business vehicle. Of course, there is always the hassle of selling a car to be considered as well. This sell/trade-in concept also applies when selling or disposing of other business assets.
If you have any questions related to the disposition of vehicles or any other business asset and how the sale will impact you business wise, please contact us at Dagley & Co.
Public domain image
The Affordable Care Act (ACA) – commonly known as Obamacare – insurance mandate, along with its health insurance premium subsidies available from insurance marketplaces, premium tax credit (PTC), and penalty for not being insured, is going to affect just about every taxpayer in one way or another.
It is important for everyone to understand that new, substantial, and sometimes complicated reporting requirements have been added to the 2014 tax return to facilitate the ACA insurance mandate. This means taxpayers need to be prepared for a variety of new forms they will be receiving starting in January 2015 from their insurance companies, employers and the marketplace that they will need in order to prepare their tax returns.
These forms, which are also filed with the government, will:
- Provide proof of ACA acceptable monthly insurance coverage for all family members that you will use on your 2014 tax return to avoid being assessed a penalty for not being insured.
- Provide the government, and you, with the amount of monthly advance premium tax credit (APTC) – sometimes referred to as a premium subsidy – you may have benefited from if you purchased health insurance from a government-run insurance marketplace (also known as an exchange). These amounts are needed to determine if you are entitled to an additional PTC or if you must repay some portion of the APTC. The insurance marketplaces will provide this information on a Form 1095-A. Private insurance companies will provide proof of coverage on Form 1095-B.
Things can get pretty complicated if your tax family or household income changed during the year and you did not report the change to the marketplace. When a taxpayer was married or divorced during the year or an individual who is not in your tax family was included in insurance purchased through the marketplace, the insurance premiums and APTC must be allocated among those insured by the month.
To make matters worse, the IRS is letting both employers and insurance companies use alternative means of providing the required information for 2014, which means you will need to watch out for substitute reporting not included on the official IRS forms.
All of this additional reporting and allocating, if necessary, greatly adds to the complexity of 2014 tax returns, especially for taxpayers who qualify for the PTC and those who’ve received APTC through the marketplace. If you have friends or family members who may need assistance with this new tax return complexity, please suggest they contact Dagley & Company for assistance.
Image via the White House
Taxpayers often question how long records must be kept, and they wonder what the amount of time the IRS has to audit a return after it is filed. Of course, there is no one correct answer as it all depends on the circumstances. In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.
In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has a number of exceptions:
- The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
- The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax; or (c) deliberately tries to evade tax in any other manner.
- The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.
If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old. We also recommend you add an additional year or so if you live in a state with a longer statute.
Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property transactions, social security benefits, etc. You should keep certain records for longer than 3 years. These records include:
- Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
- Stock and mutual fund statements where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after final sale.
- Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.
If you have questions about what records to retain and what you can dispose of now, please get in touch with Dagley & Co. We work with clients all over the globe and can help you keep up-to-date financial records on your business.
Image via public domain
We’re heading into a season of giving, and knowing all the facts just might prompt you to give more to your favorite cause. If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:
- Away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals at 100%. Note that these expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities.
- The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor. However, the cost of your own entertainment or meal is not deductible.
- If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
- Deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.
There are some misconceptions as to what constitutes a charitable deduction and the following are frequently encountered issues:
- No deduction is allowed for the depreciation of a capital asset as a charitable deduction. This includes vehicles, computers, etc.
Example: Larua volunteers as a member of the sheriff’s mounted search and rescue team. As part of volunteering, Laura is required to provide a horse. Laura is not allowed to deduct the cost of purchasing or to depreciate her horse. She can, however, deduct uniforms, travel, and other out-of-pocket expenses associated with the volunteer work.
However, a taxpayer may deduct the cost of maintaining a personally owned asset to the extent its use relates to providing services for a charity. Thus, for example, a taxpayer was allowed to deduct the fuel, maintenance and repair costs (but not depreciation or the fair rental value) of piloting his plane in connection with volunteer activities for the Civil Air Patrol. Similarly, a taxpayer, such as Lauren in our example, who participated in a mounted posse that was a civilian reserve unit of the county sheriff’s office, could deduct the cost of maintaining a horse (shoeing and stabling).
- A taxpayer who buys an asset and uses it while performing volunteer services for a charity can’t deduct its cost if he retains ownership of it. That’s true even if the asset is used exclusively for charitable purposes.
No charitable deduction is allowed for a contribution of $250 or more unless you substantiate the contribution with a written acknowledgment from the charitable organization. To verify your contribution:
- Get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
- You should submit a statement of expenses if you are paying out of pocket for substantial amounts and, preferably, a copy of the receipts to the charity, then arrange for the charity to acknowledge the amount of the contribution in writing.
- Maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.
For additional details related to expenses incurred as a charity volunteer, please contact Dagley & Co.
Image via Public Domain
w-9s and 1099s are forms business owners use to report payments of at least $600 for the year. The contractor fills out the W-9, and the business owner issues a 1099 at the end of the year. If you use independent contractors to perform services for your business or rental that is a trade or business, and you pay them $600 or more for the year, you must issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses. Note that this requirement generally does not apply for payments made to a corporation. However, the exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.
It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.
Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.
IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete a Form W-9 before engaging in business with him or her.
If you have questions or need copies of the Form W-9, please call Dagley & Co. We are always here to assist you with your 1099 filing requirements.
Image via public domain
Did you recently build a new website for your company? With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. However, it’s not the case. Questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes.
Here are a few ways to look at claiming your business website:
Advertising Content – Advertising costs are currently generally deductible. Thus, the costs of website content that is advertising are generally deductible in the year paid or accrued, depending on the business’ accounting method.
Purchased Websites – If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the 3-year period, beginning with the month in which the website is placed in service. For 2013, non-customized computer software placed in service during the year can be expensed as Sec 179 property up to the $500,000 limit of this special expense deduction.
In-House Developed Websites – If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid or accrued, depending on the taxpayer’s overall accounting method. Or, as an alternative, the costs may be amortized under the 3-year rule.
Non-Software Expenses – Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.
Cost Before Business Starts – Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.
In short, deducting the expenses of a website can be complicated. Please get in touch with Dagley & Co. if you have questions.
Image via Public Domain
Below you’ll find some of the necessary tax deadlines for U.S. business owners this month, October 2014. If you are worried that you may have missed these deadlines, contact us, Dagley & Co., for help. (Find our phone number at the bottom of this webpage.)
October 15 – Electing Large Partnerships
File a 2013 calendar year return (Form 1065-B). This due date applies only if you were given an additional 6-month extension. March 17 was the due date for furnishing Schedules K-1 or substitute Schedule K-1 to the partners.
October 15 – Social Security, Medicare and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in September.
October 15 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in September.
October 31 – Social Security, Medicare and Withheld Income Tax
File Form 941 for the third quarter of 2014. Deposit or pay any undeposited tax under the accuracy of deposit rules. 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 November 10 to file the return.
October 31 – Certain Small Employers
Deposit any undeposited tax if your tax liability is $2,500 or more for 2014 but less than $2,500 for the third quarter.
October 31 – Federal Unemployment Tax
Deposit the tax owed through September if more than $500.
Image via public domain
Have you ever wondered if the IRS double checks your work with the banks? Wonder no more. Since 2012, banks, credit card companies, and other third-party organizations that settle transactions have been required to file informational returns with the IRS that reported a business’s credit and debit card transactions and other electronic types of reportable income. The form used to file that information with the IRS is the 1099-K. If your business has credit or debit card transactions, then you, along with the IRS, have received this form in the past.
The information provided on the Form 1099-K allows the IRS to determine the business’s gross income from credit and debit card sales and makes it easier to segregate credit/debit card sales from cash sales.
With Form 1099-K, the IRS is in the position to see if the credit card dollar figure reported on the tax return matches the bank’s information return; the form will also allow them to see if a business’s other sales from cash and check payments makes sense in the context of the firm’s overall business.
As expected, the IRS has developed a program to match reported income on the income tax returns filed by businesses to the income reported on the 1099-Ks. The IRS’ analysis includes comparing the percentage of income a specific business reported as coming from credit/debit cards and cash sales, for example, to what the typical percentage is for other businesses in the same industry. If you receive a letter from the IRS related to the 1099-K, then the IRS’s computer thinks you underreported your business income and the agency is requesting an explanation for the discrepancy.
Do not procrastinate or ignore the letter. Procrastinating will only make matters worse.
If you receive one of these letters, it may be appropriate for you to seek professional assistance with preparing a response. Get in touch with us at Dagley & Co. (our information at the bottom of this blog post page) if you need help settling.
Image via Public Domain