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Tax Tip: Maximize Your Equipment Depreciation Deduction

The American Taxpayer Relief Act that finally passed this month had two major changes that resulted in big tax savings for small businesses that invest in equipment.

IRS Code Section 179 write-offs: Your small business can take a first-year deduction of up to $500,000 of the cost of qualified property placed in service during 2013 and retroactively to January 1, 2012.  Qualifying property is most non-real estate related property.  Check with your tax advisor for a complete list.  The Section 179 deduction is phased out once you buy more than $2 million of equipment during the year.

Bonus depreciation:  In addition to other depreciation deductions, a business can claim a 50 percent bonus depreciation for qualified new (not used) property placed in service for 2012 and 2013.  The definition of “qualified property” includes property with a cost recovery period of 20 years or less, qualified leasehold improvements, certain computer software, and water utility property.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Client Question: Who Can I Claim as a Dependent?

There are three basic tests that you must pass in order to claim someone as a dependent on your tax return.

First, you cannot claim anyone as a dependent if they can be claimed as a dependent by another person.  If the dependent is married, they cannot file a joint return with their spouse.  Exception:  You may claim them if the only purpose for the joint return was to claim a refund and the dependent would not have a tax liability (either jointly or if filing married filing separately).

Second, the dependent must be a U.S. citizen, a national, or a resident alien.  Residents of Canada or Mexico also qualify.  Exception:  A child does not have to meet the citizenship test if he has been legally adopted by a U.S. citizen or national, or if the child lived with the adoptive parent as a member of the household all year.  This exception also applies if the child was lawfully placed with the taxpayer for adoption.

Third, the dependent must be a Qualifying Child or a Qualifying Relative.

A Qualifying Child must:

1. Be the taxpayer’s child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them
2. Be (a) younger than the taxpayer and either under age 19 or a full-time student under age 24, or (b) any age if totally and permanently disabled
3. Live with the taxpayer more than half of the year
4. Not provide more than half of their own support
5. Not file a joint return (unless filed only to claim a refund)
6. Not a qualifying child of another taxpayer with higher priority under the tie-breaker rules.  Call your tax advisor for advice if you think someone else may also be able to claim them.

A Qualifying Relative must:

1. Not be the taxpayer’s or anyone else’s qualifying child
2. Either (a) live with the taxpayer all year as a member of the household, or (b) be related to the taxpayer
3. Have gross income of less than $3,800
4. Receive more than half of their total support for the year from the taxpayer claiming them.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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Client Question: Can I Legally Borrow From an IRA?

The short answer is no.  The IRS treats a regular loan from an IRA as a “prohibited transaction”.  This means that if you “borrow” funds, the amount you receive will be taxable income at ordinary income rates and subject to a 10 percent penalty if you are under 59 ½ (unless one of the tax law exceptions applies).

The tax law allows you to use IRA funds if you put the same amount back in your IRA within 60 days.  It doesn’t have to be the same money or even the same IRA.  Warning:  Missing the deadline for repayment makes the amount taken out taxable income at ordinary income rates and subject to a 10 percent penalty if you are under 59 ½ (again, unless one of the exceptions applies). 

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

IRS Adjusts Mileage Rates

The IRS announced the new standard mileage rates that can be used to deduct auto expenses related to business, medical, moving, and charitable purposes (IRS Notice 2012-72).  Beginning January 1, 2013, the following rates will apply:

• 56.5 cents per mile for business travel (a 1 cent per mile increase from 2012);
• 24.0 cents per mile for medical related mileage and moving travel (a 1 cent per mile increase from 2012);
• 14 cents per mile driven in service of charitable organizations (no change from 2012).

Taxpayers have the option of using the higher of actual expenses or the amount using actual business mileage multiplied by the standard mileage rate.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Thank You, Accounting-Degree.org!!

 

 

We want to thank Accounting-Degree.org for choosing us as one of the top 25 blogs of 2012!

We try our hardest to provide useful and consistent information to our audience. Our goal is to give small business owners the knowledge to create the business they desire.

We will continue our hard work in 2013! And thank you again for being a loyal follower!

Article: 12 Month Total Online Presence Blueprint

Simply put--If you are in business, you should read anything John Jantsch writes. 
12 Month Total Online Presence Blueprint

http://www.ducttapemarketing.com/blog/2013/01/14/total-online-presence-blueprint/

Sent via Flipboard

Fiscal Cliff Avoided—Sort Of

Congress and President Obama reached a last-minute deal to head off the "fiscal cliff".  Well, most of it anyway.  Since the vote was so hurried, with lawmakers who were not involved in the negotiation given less than ten minutes to "read" the 154-page bill, a summary of the major items in the bill and what isn't in the bill is in order.

• The payroll tax increase from 4.2 percent to 6.2 percent is the largest tax increase in the bill, affecting almost all workers and business owners.  This tax increase is projected to raise revenues by more than $1.6 trillion over the next ten years, primarily from middle-class families.
• The bill kept in place all of the "evil" Bush-era tax policies for all families with taxable income below $450,000 and single filers with taxable income below $400,000.
• It kept some of the tax credits from the 2009 expanded tax credits.
• It permanently patched the alternative minimum tax (AMT) to keep it from raising taxes on middle-class families.
• Finally, Congress made many of these changes permanent rather than holding them hostage with another temporary fix, which has been the norm in Washington for the last 12 years.
• Top marginal rates increased from 35 percent to 39.6 percent.  This is a massive 13.14 percent tax increase on the top income earners, many of which are business owners.
• The bill raised effective marginal tax rates by reinstating the Personal Exemption Phaseout (PEP) and the phase-down of itemized deductions (called the "Pease" provision).  Both provisions begin at $250,000 for singles and $300,000 for families.  These provisions have the effect of raising tax liabilities without specifically raising the tax rates.  When combined with the rate increase on top income earners, these provisions compound the damage to work incentives and funds availability for job creators.
• Higher tax rates on capital gains and dividends increase the tax bias against investment.  The fiscal cliff deal allowed these tax rates to increase from 15 percent to 20 percent for families with taxable income over $450,000 and singles with taxable income over $400,000.  Don't forget that ObamaCare adds another 3.8 percent surtax on capital gains and dividends for families with income over $250,000 and singles with income over $200,000.  This sets a dangerous precedent, because it is the first time a payroll tax applies to non-earned income.  Increasing the rate from 15 percent to 23.8 percent is a huge 59 percent increase in the tax rate.  This large of an increase will lower investment across the economy.  Less investment will reduce capital formation for new and current businesses, with the result that they will create fewer jobs and pay their current workers less.
• The fiscal cliff deal raises the tax rate from 35 percent to 40 percent while leaving the exemption at $5 million ($10 million for married couples) and allowing it to be indexed for inflation.
• Congress let the expensing of equipment expire.  This is a big increase in taxes on businesses that require regular equipment purchases, and will also have a negative effect on job creation.
• The law delayed any decision on expense cutting for two months.

The tax laws in this bill, when added to those items ObamaCare added, result in the biggest change to the tax code since 2001.  We will discuss these changes in more detail in future blogs.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation. 

Individual Tax Breaks in the 2012 Taxpayer Relief Act

The 2012 Taxpayer Relief Act prevents many of the tax hikes that were scheduled to go into effect this year and kept many favorable breaks that were scheduled to expire.

The major individual tax breaks include:

• Making permanent the Bush-era income tax breaks for families under $450,000 and single filers under $400,000.  This eliminated the scheduled tax increase for all but the highest income earners.
• The Alternative Minimum Tax exemption increases for 2012 by $2,050 for married couples and $1,300 for singles.  The exemption is permanent and will automatically increase each year based on the rate of inflation.
• Above-the-line deduction for educator expenses reinstated for 2012 and extended for 2013.
• The exclusion from income for discharged home mortgage debt is extended for 2013.  Without this extension, taxpayers may have had to include gain on the discharge debt as income when their personal home was repossessed or short sold.
• The deduction of mortgage insurance premiums is reinstated for 2012 and extended for 2013.
• Above-the-line deduction for college expenses is reinstated for 2012 and extended for 2013.
• Nontaxable IRA transfers to eligible charities are reinstated for 2012 and extended for 2013.
• The American Opportunity College Tax Credit that was slated to expire after 2012 was extended for five years.
• Deduction of state income taxes and sales tax are reinstated for 2012 and extended for 2013.
• Energy tax credits reinstated for 2012 and extended for 2013.

In future blogs we will explore tax-planning opportunities that you can take advantage of now that Congress has finally let us know what the rules are for 2013.

Until then, let-s make this our most profitable year ever.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation. 

Business Tax Breaks in the 2012 Taxpayer Relief Act

The recently passed 2012 Taxpayer Relief Act prevents many of the business tax increases that were scheduled to go into effect this year.  The following is a list of the major items extended:

• Retroactively extended for 2012 and 2013 the credit for research and development.
• 50 percent bonus first-year depreciation of new equipment with a useful life under 20 years expired at the end of 2012.  The new law extends this until the end of 2013.
• The 50 percent bonus depreciation on leasehold improvements and qualified restaurant property is also extended through 2013.
• Asset expensing under Section 179 is increased for 2012 from $139,000 to $500,000.  In 2013 the Section 179 deduction is increased from $25,000 to $500,000.
• The Work Opportunity Tax Credit (WOTC) is extended for 2012 and 2013.  The credit reduces taxes up to $6,000 for employers who hire veterans and the long-term unemployed.

Congress also managed to squeeze in special corporate breaks for certain favored industries.  These include special expensing breaks for TV and movies, investment companies, railroads, rum production in Puerto Rico and the Virgin Islands, and New York bonds.  It's good to know that large political contributions still work for some industries.

Tomorrow I will cover the tax breaks for individuals.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but having me bookmarked on your computer doesn’t make you a client:  Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

IRS To Start Processing Returns on January 30, 2013. Most Business Returns Delayed at Least Until Late February

The IRS announced that it plans to open the 2013 filing season on January 30, 2013.  This is about two weeks later than the normal start date.  The delay is a result of the enactment of the American Taxpayer Relief Act of 2012 that was passed on January 2, 2013.

In IR 2013-2, the IRS said the vast majority of tax filers (more than 120 million households) should be able to start filing either paper returns or electronically.

The IRS estimates that tax returns claiming residential entry credits, depreciation, or general business credits will be able to file in late February.  This means that most business owners will not be able to file until March or later.

I, like most tax preparers, will be working on returns as soon as our tax software is updated, but holding the returns until the IRS finally accepts them.  So don't hesitate—get your information in as early as possible in order to beat the rush.