Home Equity Interest – Deductible or Not?

The new federal tax law created a lot of confusion over whether mortgage interest on home equity loans and lines of credit are still deductible, and the Internal Revenue Service is getting a lot of questions from taxpayers and tax professionals alike. The IRS finally came out with additional guidance, confirming that the majority of taxpayers will still be able to deduct mortgage interest paid on home equity loans and lines of credit, subject to a few restrictions.

The Tax Cuts and Jobs Act of 2017, enacted December 22, 2017, specifically suspended interest paid on home equity lines of credit and home equity loans until 2026… UNLESS the proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan. Under the new law, interest on a home equity loan used to build an addition or to improve the home is typically deductible, while interest on the same loan used to pay personal living expenses, such as student loans and credit card debt, is not. As under the new law, the loan must be secured by the taxpayer’s main home or second home, not to exceed the cost of the home and meet other requirements

 

There are also other limitations, such as a combined loan balance limit. Beginning in 2018, only interest paid on $750,000 of qualified residence loans (for taxpayers filing jointly) may be deductible. This limit is reduced to $375,000 for taxpayers filing a single return, and is in place for home acquisition indebtedness obtained after December 16, 2017.

The IRS even provided clarifying guidance and some examples:

Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.  In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deducible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home.  The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home.  The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).

Posted by JitLeeBillings in Credit, Home Equity, Mortgage, Tax Tips, taxdeductions, 0 comments

Withholding Calculator & Your 2018 Paycheck

Previously we talked about how the new tax reform will change your tax returns. In conjunction with the implementation of the new tax reform, the Internal Revenue Service also made changes to the withholding tax tables. This is meant to work in conjunction with the new tax rules to ensure that the correct amount of tax is withheld. This means that, if you do nothing, the amount of taxes withheld on your payroll has decreased, resulting in an additional $20 – $60 in your net take home pay.

But while most taxpayers will see a drop in their tax liability, some will not. Also, the decrease in your tax liability may or may not be equal to the decrease in the amount of tax withheld on payroll. To help taxpayers actively manage and anticipate their 2018 tax withholdings, the IRS has launched a new withholding calculator .

To use the calculator most efficiently and effectively, you should have the following information before starting:

  • Your most recent paystub; please be sure that this contains year to date figures
  • A copy of your 2017 tax returns

The calculator will not ask for any personally identifiable information or account information, and is only as accurate as the data entered. Only use the official IRS calculator, and avoid tax scams from cybercriminals impersonating the IRS.

If you determine that you should change your withholdings based on the results of running the calculator, you should obtain a new W4 . This should be given to your Human Resources department as soon as possible. Generally, the fewer withholding allowances on the W4, the higher your tax withholdings will be, and the less you will receive in your paycheck.

 

For those of you who receive non-salaried sources of income such as self-employment, pensions, annuities, social security, etc; or if you experience a life changing event, such as purchasing your own home, or welcomed a new addition, your tax projection for 2018 may be beyond the capabilities of the withholding calculator – please consult with your tax advisor to obtain an accurate projection based on your unique set of circumstances.

Posted by JitLeeBillings in deduction, tax, Tax Tips, 0 comments

Tax Extender Act of 2017 – Extension of Tax Credits

On February 7, 2018 the 115th Congress passed the Tax Extender Act of 2017. This Act addresses temporary or scheduled to expire tax breaks at the end of 2016 or 2017. All of these temporary or scheduled to expire tax breaks are referred to as “Tax Extenders” because Congress will review all or most of them to extend for the benefit of taxpayers. Congress enacts temporary tax provisions (usually a tax credit or deduction) to address a temporary need such as floods in Texas or Hurricanes in Florida. Some of these temporary benefits prove to be so beneficial to the economy they are made permanent. The enacted tax credits or deductions are scheduled to expire on a certain date, this is known as a “sunset”. Therefore, the Tax Extender Act of 2017 extended or made permanent tax deductions or credits that expire or “sunset” in 2016 or 2017.

Hooray for Tax Extender Bill!

The following are some of the Tax Extenders that have been extended:

  • Exclusion from gross income the discharge of qualified principal residence through 2017
  • Mortgage insurance treated as qualified residence interest through 2017 with limits
  • Deduction for qualified tuition and related expenses through 2017 with limits
  • Classification of race horses as 3-year property placed in service during 2017
  • 7-year depreciation for motorsports entertainment complexes placed in service during 2017
  • Extension of special expensing rules for certain film, television and theatrical productions through 2017 with limits
  • Extension of empowerment zone tax incentives through 2017
  • Extension of credit for nonbusiness energy property through 2017
  • Extension and modification of credit for residential energy property with limits
  • Extension of credit for new qualified fuel cell motor vehicles through 2017
  • Extension of credit for alternative fuel vehicle refueling property through 2017
  • Extension of credit for 2-wheeled plug-in electric vehicle through 2017
  • Extension of credit for energy-efficient new homes through 2017
  • Extension and phaseout of energy credit through 2022 with limits
  • Extension of energy efficient commercial buildings deduction through 2017
  • Individuals held harmless on improper levy on retirement plan
  • Modifications of user fee requirements for installment agreements
  • After 2017 attorney fees relating to awards to whistleblowers are deductible above the line
  • Modification of rules governing hardship distributions from retirement account
  • Tax home of certain citizens of the USA living abroad

 

These are some of the Tax Extenders that are applicable to many taxpayers. It is exciting to see that Congress is committed to preserving electric and biofuel motor vehicle credits. In this day with many taxpayers owning vehicles it is important to reduce all of our carbon foot prints in any way we can, to get a tax credit for doing so is a bonus!

Posted by JitLeeBillings in Credit, deduction, Tax Tips, taxdeductions, 1 comment

Limited Liability Companies & Entity Classification

Many clients are referred to our office with questions about the Limited Liability Company (LLC). Their questions range from: “What is it?” to “How does this affect me?”. Perhaps the most puzzling is the question of entity election: Should I be a Sole Proprietorship, Partnership or Corporation? Since the name of the entity includes the letters LLC, which stands for Limited Liability Company, doesn’t that mean I’m a Company or a Corporation? Why should I have to elect an entity classification?

How LLCs are taxed

So what am I?

The Massachusetts Limited Liability Company law became effective January 1, 1996 with the creation of the Limited Liability Act. An Limited Liability Company is a form of business organization that is unincorporated and having one or more members formed pursuant to Massachusetts General Law chapter 156C.

That’s just the legal definition. The Internal Revenue Service does not recognize the legal definition; therefore it is possible to tax an LLC as a Schedule C, Corporation, S Corporation, or Partnership. These options can be daunting.

I will start with explaining the automatic tax treatment by the IRS and then Tax Elections that are available. An LLC can have one or several members. The IRS automatically taxes the LLC as a Sole Proprietor if one member; as a Partnership if two (or more) members. Therefore, you must be extremely careful when applying for a tax identification number as this information allows the IRS to assign a tax filing category in their computer systems. In both situations the profit of the LLC is taxed with your individual tax return. This means that the profit of the LLC is subject to federal income tax, self-employment tax (subject to Internal Revenue Code (IRC) limitations), along with Massachusetts income tax.

There are Tax Elections available for an LLC member or members to make with the IRS to have the Organization taxed as a Corporation or S – Corporation. To be treated as a Corporation you must file an Entity Classification Election Form with the IRS. To be treated as an S Corporation you must file an Entity Classification Election Form along with Election by a Small Business Corporation (pursuant to IRC 1362). I recommend mailing the executed Forms to the IRS certified and return receipt to prove timely mailing and IRS will stamp receipt of the Form. The IRS will then issue an approval letter, confirming whether the elections have been granted. You must retain a copy of this letter for as long as the LLC is active.

This process appears confusing on its face. However, if you think of the process in terms of how you want to be taxed and what Form you desire the LLC to file, that will provide you with the road map of Forms you must file with the IRS to accomplish your goal. Remember, choosing the correct tax treatment of your LLC will cost you thousands of dollars or save you thousands of dollars.

Once you have completed the election(s) that you believe are appropriate for your particular tax situation, you are now ready to engage in a profitable business year and file the Tax Return that will yield you the least tax liability! Now that is tax music to my ears.

 

 

Posted by JitLeeBillings in LLC, tax, Tax Tips, 0 comments

Tax Cuts and Jobs Act decimates business entertainment expense in 2018

Last week we talked about business entertainment and the relevant substantiation requirements; this week we will focus on what is changing as a result of the Tax Cuts and Jobs Act starting January 1, 2018. Under the new Tax Cuts and Jobs Act, most entertainment expenses paid or incurred after January 1, 2018 is no longer deductible. Business entertainment expenses such as expenses incurred for business meetings  and expenses for an entertainment venue are no longer 50% deductible. There are a few exceptions, which mostly addresses employee related entertainment expenses.

Starting January 1, 2018, per the new Tax Cuts and Jobs Act, the only fully deductible entertainment expenses are:

  • Items that are treated as compensation to an employee-recipient
  • Recreational, social or similar activities and related facilities primarily for the benefit of employees who are not highly-compensated employees
  • Expenses for entertainment sold to customers
  • Items that are includible in the gross income of a non-employee recipient

The new Tax Cuts and Jobs Act substantially affects Internal Revenue Code Section 274 entertainment expenses, eliminating one of the more contentious areas of business expense deductions. Business owners should take additional care going forward to minimize, if not eliminate, their exposure of this particular issue.

Employer-provided meals received a stay of execution; amounts paid or incurred for meals provided to employees and their spouses and dependents for the employer’s convenience and on the employer’s business premises, as well as amounts considered de minimis fringe benefits remain a deductible expense until January 1, 2026.

On the bright side, expenses for food and beverage associated with operating a trade or business (meals consumed by employees on work travel) remain deductible.

As always, please be sure to maintain sufficient documentation to substantiate each business deduction.

 

Thomas D. Terranova, Jr., CPA, PFS, CITP is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Jit Lee Billings, CPA is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Terranova & Associates, LLC is located in Danvers and contact be contact at 978-774-7700 for consultations.

Posted by JitLeeBillings in deduction, smallbusiness, Tax Tips, taxdeductions, 0 comments

Entertainment expense deduction & substantiation

Business entertainment

Many business owners and associates meet with clients at a restaurant or other entertainment venues with the purpose of conducting business. These entertainment expenses are generally allowed as deductions (limited to 50%), and are governed by the following Internal Revenue Code Sections (Prior to the New Tax Cuts and Jobs Act):

  • IRC 162(a): requiring that an item needed to be both ordinary and necessary in order to be deducted as a business expense
  • IRC 274: requiring that this entertainment item is properly substantiated
  • IRC 132(e): provides a De Minimis Fringe Exception for entertainment expenses incurred for the convenience of the employer to be consumed on the premises

In order to provide substantiation that entertainment expense is both ordinary and necessary, one must follow the rules outlines in IRC 274. Each entertainment item over $75 must have the following substantiation information in writing:

  • Amount and proof of payment
  • Time and place
  • Business purpose and benefit
  • Attendee(s) and their business relationship to the business

IRC 274 further provides an exception to the proof of payment requirement should entertainment expense be less than $75. However, all other elements of substantiation must still be maintained.

With regards to entertainment expenses incurred while travelling, IRC 274-5(j) allows the use of a “per diem method” for substantiation purposes. This is commonly known as the “Conus rates”, and the list of expenses for each major location within and without the United States is published and maintained by the U.S. General Services Administration. Proof of travel is required to use this substantiation method.

IRC 132(e) allows a 100% deduction for “any property or service, the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employers’ employees) so small as to make accounting for it unreasonably or administratively impracticable.

While full written substantiation is the best defense in the case of an audit, one should weigh both the costs of benefits of doing so.

In the event your substantiation documentation is unavailable through no fault of your own (acceptable examples of these circumstances include fire, flood or natural disaster), you have the right to “substantiate claimed deductions by reasonable construction of the expenditures or use” – this is otherwise known as the Cohan rule.

The use of the De Minimis Fringe Benefit rule (IRC 274(n)(2)(B)) was successful in a June 26, 2017 Tax Court Case brought by the owners of the Boston Bruins against the IRS. (GO BRUINS!!) This case revolved around deducting the entire cost of pregame meals for players and personnel at away games. While I won’t bore you the with details, suffice to say that the IRS closely examines the entertainment deduction and it behooves you to adhere to the substantiation requirements.

Enjoy your Entertainment Deduction!

 

 

Thomas D. Terranova, Jr., CPA, PFS, CITP is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Jit Lee Billings, CPA is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Terranova & Associates, LLC is located in Danvers and contact be contact at 978-774-7700 for consultations.

Posted by JitLeeBillings in deduction, Tax Tips, taxdeductions, 0 comments

WHO FILED MY TAX RETURN? Identity Theft and its consequences

As you prepare to file your tax return in the upcoming months one problem that has grown is identity theft. Thieves steal your identity in order to file fraudulent tax returns. Taxpayers find out this has occurred when they file their tax return, are then informed a tax return has already been filed using their social security number. How is your financial data obtained and what do you do?

Hidden identity of a hacker with mask

The IRS reports your data is stolen 91% of the time with “Spear Phishing Emails”. This is when an individual receives an email from someone who appears to be a trusted source, when in reality it is a criminal. You open the attachment to the email which allows the thief to obtain your passwords or downloads malware that tracks your keystrokes or obtain control of your computer. Once the thief secures your financial data they utilize it to obtain fraudulent bank accounts, credit cards, and file tax returns.

 

If your financial data is stolen and a fraudulent tax return was filed using your social security number you should: 1 File a complaint with the FTC at identitytheft.gov. 2 Place a fraud alert with the three major credit bureaus Equifax 888-766-0008, Experian 888-397-3742, and TransUnion 800-680-7289.  3 File Identity Theft Affidavit Form 14039 with the IRS. 4 You will need to paper file your tax return (federal and state). 5 Request a 6-digit Identity Protection Pin from the IRS at irs.gov/getanippin.  6 Notify the MA- DOR 617-887-6367 or via MassTaxConnect. 6 Notify the MA Attorney General. 8 File a Police report. 8 Obtain a credit report from each Credit Bureau to close all fraudulent accounts.

 

After you report Identity Theft to the IRS you can expect: you will paper file your tax return with Identity Theft Affidavit Form 14039, as you will not be able to file electronically. IRS will issue you an acknowledgement letter. Your tax return will be processed by Identity Theft Victim Assistance department by staff that has specialized training. Your case should be finalized between 120 to 180 days. This is a long and arduous process, so please be patient.

 

How to avoid a data breach: Always be vigilant with emailing anyone your financial data including your social security number. When receiving an email request be sure to open the detailed email address to determine whether the email is accurate. If you have any doubt regarding an emailed request, call the person who is requesting the data. Your computer should utilize software and hardware that will keep it secure such as: security software, firewall, malware/virus software, use robust passwords and back up your computer regularly.

Identity Theft is a burdensome situation that will try your patience every step of the way. What you will need to keep in mind is that once you report to a government agency your identity is stolen, each government agency employee will require you to prove your identity with every telephone call. To relieve some of the stress, you should consider writing to government agencies when needed.

 

Please be vigilant with your financial data and only submit it to a known source.

 

Thomas D. Terranova, Jr., CPA, PFS, CITP is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Jit Lee Billings, CPA is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Terranova & Associates, LLC is located in Danvers and contact be contact at 978-774-7700 for consultations.

Posted by JitLeeBillings in Tax Tips, 0 comments

How An LLC Is Taxed

How an LLC is taxed

Many clients are referred to our office with questions about Limited Liability Company’s taxation. What is an LLC? The Massachusetts LLC law became effective January 1, 1996 with the creation of the Limited Liability Act. An LLC is a form of business organization that is an unincorporated organization having one or more members formed pursuant to Massachusetts General Law chapter 156C. The various tax treatments available to LLC is Schedule C, Corporation, S Corporation, and Partnership. These options can be daunting.

Now that we have all of the legal jargon out of the way, let’s talk tax!

How is an LLC taxed and how will that affect you? I will start with explaining the automatic tax treatment by the IRS and then Tax Elections that are available. An LLC can have one or several members, based upon the number of member(s) the IRS automatically taxes the LLC as a Sole Proprietor if one member; and a Partnership if two members. Therefore, you must be extremely careful when applying for a tax identification number as that is the Form that you inform the IRS as to the number of members in the LLC and in turn the IRS issues a notice with the LLC tax identification number and specific tax return that needs to be filed. In both situations the profit of the Organization is taxed with your individual tax return subject to federal income tax and self-employment tax (subject to IRC limitations), along with Massachusetts income tax.

There are Tax Elections available for a LLC member or members to make with the IRS to have the Organization taxed as a Corporation or S Corporation. You might be thinking at this point how I make it through the maze of IRS Forms to complete this task. To be treated as a Corporation you must file an Entity Classification Election Form with the IRS. To be treated as an S Corporation you must file an Entity Classification Election Form along with Election by a Small Business Corporation (pursuant to Code section 1362). I recommend mailing the executed Forms to the IRS certified and return receipt to prove timely mailing and IRS receipt of the Form. You are correct, it is a long and precise process that you must go through, so please move through it with extreme care.

This process appears confusing on its face. However, if think of the process in terms of how you want to be taxed and what Form you desire the LLC to file, that will provide you with the road map of Forms you must file with the IRS to accomplish your goal. Remember, choosing the correct tax treatment of your LLC will cost you thousands of dollars or save you thousands of dollars.

 

Thomas D. Terranova, Jr., CPA, PFS, CITP

Terranova & Associates, LLC.

978-774-7700

Posted by JitLeeBillings in Tax Tips, 0 comments

Affordable Care Act (ACA) Update | Obama Tax Care

On March 6th House Republicans have proposed tax provision changes to the Affordable Care Act (Obama Health Care Tax) to eliminate or delay the 3.8% Net Investment Income Tax, .9% Additional Medicare Tax, Excise Tax on High Dollar Health Plans, 2.3% Medical Devise Excise Tax, Health Insurance Provider Fee, 10% Excise tax on Tanning Services, Employer and INDIVIDUAL mandates.

What does this mean to individuals? The current Obama Health Care TAX that individuals must pay if they do not have minimum essential health insurance will be eliminated! Individuals will no longer have their tax return filings delayed because they do not have the appropriate Form 1095, although specific employer filings have not been addressed at this time.

This update is a major change to the Affordable Care Act and is a step in the direction to correct Obama Health Care Tax that is effecting many individuals.

We will keep everyone posted with any future Affordable Care Act updates as they occur, so hold on to your knickers, as change is afoot in Congress, Senate, and the White House!!

 

Tom Terranova, CPA

Jit Lee Billings, CPA

Terranova & Associates, LLC

 

Posted by JitLeeBillings in Tax Tips, 0 comments

Unreimbursed Expenses – What are they?

As Employees perform their job as best as they can whilst Employers do all they can to maintain profitability, this results in a crossroad where employees incur unreimbursed expenses. You may ask what unreimbursed business expense will the IRS allow and how is it deducted? These are common questions asked by many. So let us work through this topic so you have a better understanding of this topic.

Unreimbursed expense is ordinary and necessary business related expense that is common and accepted in your line of business that is helpful and appropriate in accordance with IRC 162.

Unreimbursed expenses can include travel expenses include transportation (plane, bus, train … etc.), taxi, limousine, baggage and shipping, car rental, lodging, meals, dry cleaning, telephone, tips, porter, mileage, tolls, parking, trade publications, books, professional development, equipment, supplies, postage, tax preparation fees, tools, and other expenses ordinary and necessary for business travel.

Adequate records for the various expenses range from documents such as invoices, checks, and credit card receipts to contemporaneous account book, diary, log, or summary of expenses. A document is considered adequate if it includes the date, amount, place, and essential characteristics of the expense.

There are standard travel, lodging, and meals allowance known as federal “per diem” rate. In this case no supporting documents are needed other than your travel itinerary.

There are times when receipts are not available; a contemporaneous log for expenses under $75 should be adequate.

The IRS calls employer’s reimbursement plan an Accountable Plan. In this situation, reimbursements are not included in the employees W-2. For the Plan to be effective, it must be in writing; your expenses must be for business, provide your Employer with adequate accounting of the expenses within a reasonable amount of time (approximately 30 to 60 days), and refund your Employer within a reasonable amount of time any excess reimbursement you received.

Common professions that have unreimbursed expenses are police, emergency medical services (firefighters and EMT’s), teachers, and construction workers. Each profession has its own idiosyncrasy of expenses, what is common to all is employer contracts and handbooks that detail the employer and employees responsibilities. Let us look briefly at each profession keeping in mind the contracts and handbooks are in effect and must be reviewed before taking unreimbursed expense.

Police Officers dealing with tighter budgets have a myriad of unreimbursed expenses such as: union dues, uniforms, cleaning, continuing education, supplies, ammunition, publications, and safety gear, along with any other ordinary and necessary expense to perform the job. In many contracts/instances, Police do not receive an undisturbed lunch break, as supported by the Christey vs. US; meals are deductible if meal breaks must be in s public restaurant and within the Officer’s patrol route.

Emergency Medical Services (firefighter and EMT) may be union or non-union employees. In either case, they usually have many unreimbursed expenses including: union dues, uniforms, cleaning, insurance, professional development, safety equipment (stethoscope), publications, telecommunication, and any other ordinary and necessary expense to perform the job.

Educators/School Teachers are dealing with budgetary issues creating challenging times; luckily, they may claim unreimbursed expenses including: union dues, professional development, course materials, books, publications, supplies, computer equipment, awards, software and services, paper and all other ordinary and necessary expenses to perform the job.

Construction workers can be union or non-union employees. In either case, they usually have many unreimbursed expenses including: uniforms, cleaning, safety outerwear, tools, safety gear, continuing education, and all other ordinary and necessary expenses to perform the job.

The common issue with unreimbursed expenses for any career is documenting the expense and its necessity for your job.

Posted by JitLeeBillings in Tax Tips, 0 comments