Category: Business Tax Preparation

Estimated Taxes

Avoid Costly Surprises for Those with Nonwage Income

If you have nonwage income that is not subject to withholding, you’ll probably owe some tax.  If so, you are required to pay this tax to cover your tax liability through quarterly estimated tax payments or face underpayment penalties and interest.

Here are some tips on how to avoid estimated tax underpayment penalties at the end of this year and minimize the burden of quarterly taxes for 2014…

Nonwage income includes…

  • Interest and dividend income
  • Capital gains
  • Business income
  • Rental income
  • Gambling winnings
  • Taxable distributions from an IRA or pension plan
  • Social security benefits
  • Other income from non-wage sources

When you expect to owe $1,000 or more when you file your tax return, you should pay estimated taxes.

To avoid underpayment penalties, estimated tax payments must be large enough so that when combined with wage withholding they total at least…

  • 90% of the tax shown on your current individual income tax return, or
  • 100% of the tax that was shown on the prior year (110% if the prior year’s adjusted gross income exceeded $150,000 on a single or joint return, $75,000 if married filing separately).

The estimated taxes are generally paid in four quarterly estimated tax payments of equal size with due dates of April 15, June 15, September 15 and January 15 of the following year.

The penalty for underpayment is the IRS interest rate, which changes quarterly and is 3% for the second quarter of 2014.  Payments are made by filing the IRS Form 1040-ES voucher, Estimated Tax for Individuals, or electronically through the IRS’s Electronic Federal Tax Payment System (EFTPS).

DEDUCTING MEDICAL AND DENTAL EXPENSES

With the high cost of medical care more people are now able to deduct on their tax return unreimbursed medical expenses.  If you plan to claim a deduction for your medical and dental expenses you must be able to itemize your deductions on Schedule A and your medical and dental expenses must exceed 10 percent of your adjusted gross income (the threshold is 7.5% if you or your spouse is age 65 or older and this exception will apply through 2016.)

Even if your medical and dental expenses were incurred in a previous year and paid in the current year, you can still deduct them in the current year as long as you have accurate records of those expenses.  Include medical and dental expenses you paid for yourself, your spouse and your dependents.  There may be some exceptions that apply, such as, expenses reimbursed by insurance or other sources don’t qualify as a deduction.

Deductible medical and dental expenses must be mainly for diagnosing, treating, easing or preventing disease.  Medical expenses include…

  • Doctors and dentists
  • Prescription medicines
  • Qualified long-term care services
  • Medical insurance premiums
  • Eyeglasses, equipment and supplies
  • Limited amounts for qualified long-term care insurance
  • Transportation costs to and from medical care, the deduction is 24 cents per mile for 2014.

No double dipping.  If you have paid your medical and dental expenses with monies from your Health Savings Account or Flexible Spending Arrangements, you can’t deduct the amounts paid from those plans.

CREATE ESTATE TAX SAVINGS

Create estate tax savings by giving a minority interest in your business to family members.  For estate tax purposes the value of a minority interest in a closely held business is often discounted 30% to 40% due to the lack of marketability and lack of management control.

TAX LOOPHOLE

Tax loophole.  Shift income to low-tax-bracket family members by structuring your business as a pass-through entity – for example, an S corporation, partnership, or limited liability company.  The income each family member would report on their tax return is proportionate to their percentage of ownership.

WHAT YOU SHOULD KNOW ABOUT DEDUCTIBLE MOVING EXPENSES

 

To deduct the costs of a job-related move, your new place of work must be at least 50 miles more than the distance between your former residence and your old place of work.  In addition, you must work a minimum of 39 weeks in the 12 months following your arrival at your new location.  The 39 weeks don’t have to be consecutive, and you don’t have to work for only one employer.

You can deduct the expenses that are reasonable for moving your personal property (furniture, appliances, cars, and personal effects) and that of other members of your household as well as travel expenses for you and your family to get to your new location (including lodging).

You have the option of deducting your car travel by using either your actual expenses for gas, oil, parking fees, and tolls you pay to move or the standard mileage rate of 23.5 cents a mile.  You must keep an accurate record of each expense if you elect to deduct the actual expenses.

An important feature of deductible moving expenses is that they are not subject to the 2% of Adjusted Gross Income limitation on miscellaneous itemized deductions.

YOU MUST KEEP RECORDS TO SUPPORT ITEMS REPORTED

You must keep records to support items reported on your tax return.  You should keep basic records that relate to your federal tax return for at least three years.  Basic records are documents that prove your income and expenses.  This includes income information such as Forms W-2 and 1099.  It also includes information that supports tax credits or deductions you claimed.

COMBINE MISCELLANEOUS ITEMIZED DEDUCTIONS IN THE SAME YEAR

Combine miscellaneous itemized deductions in the same year.  Only miscellaneous itemized deductions that exceed 2% of your adjusted gross income (AGI) are deductible.  Consequently, most people find that their miscellaneous itemized deductions are not deductible.  Loophole:  By paying two years of expenses in the same year, you can often get over this 2% of AGI limit.

AMERICAN OPPORTUNITY TAX CREDIT IS AVAILABLE

American Opportunity Tax Credit is available for the first four years of undergraduate college education.  The credit is worth up to $2,500 and is equal to 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next qualifying expenses.  Qualified expenses are tuition and related expenses. Added bonus:  Up to 40% of the credit is refundable, meaning that your refund can be greater than the amount of taxes you paid. The credit does phaseout for higher income taxpayers.

TAX LOOPHOLES FOR BUYING A BUSINESS

The manner in which you buy a business can have significant tax ramifications.  Of the two ways to buy a business – by purchasing the stock or by purchasing its assets – an asset purchase can create better opportunities for bigger write-offs.  Here’s why.

Disadvantages of a stock purchase.

When you buy a company’s stock, the cost basis you must use for depreciation is the value of the assets as shown on the company’s books at the time you purchase the stock.  Any amount you pay over the book value of the assets cannot be depreciated.

Advantages of an asset purchase.

When you buy a company’s assets, you can allocate the purchase price among various assets of the business based on their fair market value at the time of the purchase.  The amounts you allocate can then be used as the basis for the company’s depreciation deductions and to establish a loss or gain when you dispose of the assets at a later date.

For example, assume that you pay $100,000 for a business that has fixed assets with a fair market value of $100,000 and a book value of $50,000.  If you buy the company’s stock, you can only depreciate $50,000 of fixed assets.  But if you buy the assets of the business, you can take depreciation deductions on the full fair market value of the $100,000 in fixed assets.

Allocate asset values for maximum tax savings

Since some assets are depreciable and some are not, the way you allocate the purchase price to the various assets of the business is the key to maximizing deductions.  When you’ve determined those allocations, make sure that the assets are listed in the sales contract and that a specific amount is assigned to each.  You’ll need this information to support your deductions.

Handling Critical Assets

Goodwill is the amount you pay for a business in excess of the value of all the other assets of the business.  The amount you allocate to goodwill is amortized over a 15-year period beginning in the month of acquisition.  Be careful to assign a reasonable value to goodwill and to include it in the sales contract.  If goodwill is left out of the contract, the IRS can assign a value to it and lower the value you allocate to another depreciable asset.

Seller’s agreements not to compete often assign a specific value to this item and typically

cover a fixed time period.  The IRS allows agreements not to compete to be amortized over a 15-year period regardless of the fixed time period stated in the contract.  Be careful not to overvalue an agreement not to compete of less than 15 years since it must be amortized over a 15-year period.

Consulting fees are often paid to sellers who remain active in the business over a period of time.  If you allocate a portion of the purchase price to a consulting fee the amount is fully deductible. 

Employment contracts are sometimes given to key employees before a business is sold.  You acquire these contracts when you buy the business, so you can allocate a portion of the purchase price to them.  The cost can be amortized over the life of the contracts and is deductible.

 Lease purchase premiums are amounts paid by the buyer to acquire an existing lease at an attractively low rent.  You can write off lease premium costs over the remaining term of the lease.

Subscription lists and customer lists may be amortized if its value can be ascertained and the list has a limited useful life, the duration of which can be determined with reasonable accuracy.

Business-buying traps to avoid

Don’t forget that while buildings are depreciable, land is not.  If you buy buildings and land, be sure that the sales contract separately states the price of the buildings and the price of the land so you can determine depreciation deduction for the buildings.

To maximize depreciation deductions, some buyers often seek a relatively high purchase price allocation for fixed assets such as machinery and equipment.  However, fixed assets may be subject to state sales tax and a high valuation can result in a higher sales tax.  Some simple advance calculations will help you avoid this trap.

PUT YOUR SAFE DEPOSIT BOX IN YOUR CORPORATION’S NAME

Put your safe deposit box in your corporation’s name

 In most states, a safe deposit box in an individual’s name will be sealed when the individual dies so that the authorities can take an inventory of its contents.  If you are a shareholder in a closely held corporation, you can avoid this problem by renting a safe deposit box in the name of your corporation.  Safe deposit boxes in corporate names are not sealed when a shareholder dies.

By giving the right of access to the box to a fellow corporate officer whom you trust, you can assure your heirs of immediate access to the box.

Check the law in your state first, because some states will not seal a safe deposit box if it is rented jointly in the names of you and your spouse.