LeBlanc and Chandler CPA: January 2017

Sunday, January 29, 2017

1099-K ~ Understanding Your Special K's

The IRS is reporting that it will be comparing filed 1099-Ks against income reported on business tax returns (including those reported on 1040 Schedule C tax returns). Knowing how this impacts you can save you an unwanted IRS correspondence audit.

Background

A couple of years ago the IRS introduced the 1099-K. This new informational tax return is meant to capture sales activity of previously unreported credit card transactions from places like e-bay and Amazon. Credit card processors are now required to report these transactions to you and the government if you have 200 or more transactions and over $20,000 in billing activity.

What is happening now

The IRS is now going to be comparing these filed 1099-Ks with the income reported by those receiving the form. If their computer audit shows you have not reported income sufficient enough to cover the activity on the 1099-K you will receive a letter asking for an explanation.

What you need to know

1. 1099-Ks could include more than income. Since your 1099-K comes from a credit card merchant processor, whatever is on that credit card transaction is included on the tax form. This means it can often include sales tax receipts that have been passed on to your state. If you only record the income portion of the 1099-K, you may run the risk of under-reporting your 1099-K causing an under-reporting audit.

2. Sole proprietors using a Schedule C do not have a place to report 1099-K activity. If you are a sole proprietor, your business activity is reported on a Schedule C. There is not a separate line to report 1099-K activity. Given this, the problem with sales tax previously mentioned can become even more complicated.

3. Make sure you do not double count. Remember 1099-K is credit card transaction activity that may also be reported within other types of 1099 reporting. You must make sure that Gross Revenue on your tax return matches the revenue on your business books.

4. Leverage the IRS matching knowledge. Knowing that the IRS is going to run an automated under-reporting match using 1099-K information, here are some suggestions;

o Make sure your Gross Income (gross receipts) surpasses the amounts shown on all related 1099 transactions. Focus on your 1099-MISC and 1099-K activity.

o Reduce your gross 1099-K activity to account for non-revenue transactions on a separate line and note what the activity represents. Do not net out the non-revenue portion of 1099-K activity as this may cause a mismatch for the IRS comparison program.

o Double check your book income against your tax return and make sure you can tie them to each other. Pay special attention to ensure your 1099-K activity is not over-stating your revenue.

Should you receive a correspondence audit from the IRS concerning a 1099-K call for help.

Remember, this process will be new for them as well as for you.

Phil Chandler, CPA, MBA is a principal with Leblanc & Chandler, CPA and a speaker, author and consultant on topics regarding tax, bookkeeping, accounting and business management. His education in accounting and engineering as well as background in accounting, construction and real estate provide him unique insights in what it takes to run successful businesses, especially in those specific industries.

Retirees and Taxes

When it comes to taxes, growing older can have its advantages. But older individuals may also have additional tax-related requirements. Here's a quick overview of the tax and financial breaks available as you reach a certain age.

Higher standard deductions. You're eligible for a higher standard deduction once you reach age 65.

Tax credit for the elderly. You may qualify for this direct credit against taxes if you're age 65 or older during the tax year. There are limitations if your tax-free pension benefits, such as social security, exceed certain levels. Income limitations also apply.

Tax breaks for social security benefits. Generally, you'll pay no tax on social security benefits if the total of one-half of the benefits plus all other income is less than $25,000 (singles) or $32,000 (married filers). Above those levels, you'll pay tax on up to 50% of your benefits. High-income seniors could be taxed on up to 85% of their social security benefits.

Higher return filing threshold. Because of the higher standard deductions and potentially tax-free social security benefits, your taxable income may not reach the filing threshold and you may not need to file a federal income tax return. You may need to file for other reasons, though.

Higher contributions. Once you reach age 50, you may contribute more to your retirement accounts. Also, at age 55, you can contribute an extra amount to a health savings account.

Reverse mortgage. If you're at least 62 years old and own your own home, you can use a reverse mortgage to convert your home into nontaxable income. With a reverse mortgage, the lender makes loan advances to you which don't have to be repaid until your death. Repayment of the loan and accrued interest would also come due if you sell the house or move, but you won't have to repay more than your home is worth.

Home sales. You may plan to sell your home if you move or want to downsize in retirement. Couples who file a joint tax return can keep up to $500,000 of the profit on a home sale tax-free ($250,000 for singles).

Do A Financial Review at Tax Time

Tax filing time is an ideal time to review your financial affairs. You have to gather information to prepare your tax return at this time. Why not take one more step and do something positive for your financial well-being?

The following suggestions will get you started on your financial review:

Hold a discussion with your family. Spouses and children need to share and prioritize their financial aspirations.

· Write down your financial goals. How much money will you need to meet each goal? When will you need the money, and how will you get it?

· Construct a net worth statement (a list of your assets and debts), and compare it to last year's statement. Are you gaining or losing ground?

· With your goals (and the effects of inflation) in mind, review the performance of your investments.

Take steps to protect what you already have. Goals may become instantly unobtainable if you lose your present assets or your income potential.

· Do you have adequate disability insurance coverage to replace take-home pay if you become incapacitated?

· Do you have enough life insurance if you or your spouse should die?

· Do you have replacement value property insurance on your home?

· Do you have adequate insurance for calamities such as automobile accidents or lawsuits? Note: Make sure that you need all of the insurance that you have. Do not duplicate employer-provided coverage. Review your coverage annually; do not just automatically renew policies.

Review your will and your estate plan. Did your situation change during the year (marriage, divorce, births, deaths, move to another state, for example)? If so, make appropriate changes to your will and estate plan.

Review your credit use. Keep your credit card bills current. If you're finding that hard to do, it's probably time to cut up some of those credit cards and get your debt under control.

Organize your records. If you had trouble assembling data for your financial review, you need a better system. Set one up.

WHEN TO ASK FOR HELP or Run the Risk of High Tax Bill

“Before taking action talk to your tax adviser.”

How many times have you seen this legal disclaimer and have your eyes gloss over? Unfortunately, there are too many times when taxpayers do not follow this advice and then must pay the price with an unnecessarily high tax bill.

Here are some of the most common situations that can save you money by seeking advice before you act.

· Getting married

· Selling a home

· Donating stocks and investments

· Getting divorced

· Change in dependent status

· Approaching retirement

· Starting a business

· Managing participation in tax-advantaged retirement accounts like 401(k), 403(b), and various IRAs

· Death and birth of loved ones

· Donating high value items

· Selling stocks, bonds, mutual funds or business property (rentals)

· An audit

· Tax efficient transfer of your estate

· Selling or buying high value assets (art, collectibles, real estate, and small business assets)

· Determining Social Security benefit strategy

In advance of any of these events, or when in doubt, please ask for assistance. There are too many stories that include the words “if only he had talked to someone first.”

Wednesday, January 4, 2017

Tracking and Deducting Car Expenses

If you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.

Standard mileage rate.
Actual car expenses.

For discussion purposes, “car” includes a van, pickup, or panel truck.

STANDARD MILEAGE RATE

You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. For 2016, the standard mileage rate for the cost of operating your car for business use is 54 cents per mile.

If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees.

You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Choosing the standard mileage rate. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.

ACTUAL CAR EXPENSES

If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Actual car expenses include:

Depreciation
Garage rent
Gas
Insurance
Lease payments
Oil
Parking fees
Registration fees
Repairs
Tires
Tools

If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses but you must continue to keep records. Business and personal use. If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.

35 Is The Magic Number for Social Security Benefits

Social Security is a government program (well, Duh!!) so it should not be a surprise to anyone that it has lots of confusing rules and regulations. We are surrounded by experts galore stating different techniques to use regarding when and how to receive your maximum benefits. But, as a CPA, I have become very aware that many people are missing out on one of the most important steps to maximize your social security benefits. So, lets talk some basics.

When you are lucky enough to reach your 60's (it surely beats the alternative) and ready to start receiving social security, a simple calculation will be made to determine the starting amount of your monthly benefits. One of those pesky government analysts will look at your work history and will pick 35 of the years when you earned the highest wages. From those 35 years they will first do a fancy calculation to bring those wages up to todays values, In other words, they actually adjust those amounts to allow for inflation since earning $20,000 back in 1980 (milk was $1.19/gallon) does not buy you the same amount of groceries that $20,000 earned today does.
The sum total of all the adjusted earnings you received over the 35 years of your prime time will then be divided by the number of months included in 35 years (my calculator says 35 years x 12 months = 420 months, approximately) and that ladies and gentlemen will give you your "Average Indexed Monthly Earnings".(also called AIME). There are some other minor calculations done by the government but overall, the creation of this AIME is what determines how much you will receive each and every month until your demise, which we hope is well past 100.

So, what happens if you decide to take a break from earning a typical wage for a period of time. Lets say you just want to go to the beach and rent umbrellas to tourists for cash. And, because you went off the grid, according to the government payroll tax department, you end up recording wages for only 34 years instead of 35. That means your average monthly wage calculation (remember AIME) will use a "0" for one of your 35 work history years. Now, I hope I am not the only person with memories of skipping class while in school and of course I always managed to skip class when the teacher decides to have a "pop test". Receiving a big fat "0" on the test pretty much destroys your grade point average and then you spend the rest of the semester working on extra credit projects. Please tell me I am not the only person who had this experience... on multiple occasions.

My point here is that it is very important to pay attention to how many decent "wage earning" years you have before you decide to back off and slow down. The critical number here is 35. So hang in there and make sure you report at least 35 years of income to your favorite uncle (that be the government). And my advice to those kids in school is don't skip class... unless you are the teachers pet... or you are meeting a potential boyfriend/girlfriend... or you were a lot smarter than me (which is not hard). Whatever, just stay in class!

Congress Double-Dips On Social Security Tax!

Sometimes I have to be the bearer of bad news to my clients when they ask if they have to pay any taxes on their social security benefits. Didn't I already pay taxes on that money? Well, yes, but for now lets just establish the ground rules.... Don't shoot the messenger.

Lets first start with the basics. Throughout your working life when you received a paycheck (hopefully a big fat one) you would also see the federal withholding tax being charged against the entire amount. I realize there are some deductions, such as retirement contributions, which may reduce the amount being taxed but for the most part you are paying tax on your gross earnings. Then our friends (AKA, IRS) also take some money out for social security and Medicare so the government can take care of us when we are old and senile (sometimes my wife thinks I'm already there). This means the social security fee that goes to the government has already been taxed. Let's call this tax number 1.

Now, here you are in much later years, with lots of grey hairs in your head, grandkids running amok and a wobble in your step. It is now time to start receiving your social security. You receive that whopping social security check every month and you also continue with some part time ventures to help pay for toys for the grandkids. But at the end of the year, when your CPA calculates your taxes he also gives you the news that some of your social security was taxed again. Tax number 2. Remember.... Don't shoot the....

Continuing the discussion, let me explain that the taxes placed on social security are certainly not straightforward because that would simply be too easy for Congress. So, here are some of the rules to determine how much of your benefits are taxable:

Start with all taxable income you derived from working, plus any taxable retirement money you received (e.g. pensions, IRA, etc) plus any interest earned less any adjustments allowed on page 1 of the 1040 tax form. And then you add 1/2 of any social security benefits you received for the year. This is called your "Modified Adjusted Gross Income". I know, its a downright fancy term which you can use at the next party. Excuse me, but what is your "modified adjusted gross income". Lets call this the MAGI.
If this MAGI is below $25,000 (for singles) or $32,000 (for us married folk) then none of your benefits are taxed.
If this MAGI is between $25,000 - $34,000 (for singles) or $32,000 - $44,000 (for the blissfully married) then 50% of this portion of benefits are taxed.
If you have MAGI greater than $34,000 (table for one please) or $44,000 (the hitched people) then 85% of this portion of benefits are taxed.

It should be no surprise to anyone that there are lots of exceptions and special circumstances which is why the IRS publishes a 30 page document (called Pub 915) which is guaranteed to put you to sleep. In any case, if you only receive social security benefits then you are good to go but for many people who require an extra income during retirement (fishing does not count) then this is a heads up to expect to pay some taxes.

Phil Chandler, CPA, MBA is a principal with Leblanc & Chandler, CPA and a speaker, author and consultant on topics regarding tax, bookkeeping, accounting and business management. His education in accounting and engineering and background in accounting, construction and real estate provide him unique insights in what it takes to run successful businesses, especially in those specific industries.

Saving Money By Buying More Stuff

Have you ever been in that conversation with your spouse which starts out with them saying....No, I didn't really need to buy this _______ (fill in the blank with coat, couch, purse, jewelry.....whatever) but it was 40% off this week only so I just could not pass up the savings opportunity. I saved us lots of money by taking advantage of this fantastic sale.

Now, hopefully you are smarter than me, and before you open your mouth you decide whether this is a verbal battle that is worth fighting. I usually talk first and then regret later.

My point is of course, that buying something you do not need, regardless at what price (!!!), is still spending money needlessly. So, now that I got that off my chest lets talk about one small way the IRS actually helps us get back some of that money we spend on ..... everything.

When you file your tax return, one of the big choices is whether to (1) use the Standard Deduction or (2) Itemize your deductions. Now, the Standard Deduction, in 2015, allows you to reduce your reported income (which saves you taxes) by $6,200 (as individual) or $12,400 (as blissfully married) without having to provide any paperwork or really do anything (nice and simple is always great). But, if you have lots of deductions then you are allowed to "itemize" which means you can write off lots more of your expenses than the standard deduction allows. One of those "itemized" deductions is the ability to write off the sales tax you pay on all of those purchases you made throughout the year (yes Dear, even the ones On Sale). That's actually pretty nice.

The IRS rule actually says you can choose to write off either your state/local income tax or state/local sales tax. Since I live in Tennessee which has no income tax on your wages the choice normally taken in Tennessee is to use the sales tax approach.

So, many peoples first reaction is How do I know how many purchases I actually made in 2015? I don't keep all those receipts for groceries, gas, coffee (those Starbucks add up), gifts for your spouse (I heard I need to make more of these), furnishings, repairs to house, and on and on (it never ends...). Well good news. Our favorite uncle (that's the IRS) says we can choose to add up all of our receipts or instead to use their handy dandy chart which looks at your household income and exemptions (fancy word for your kids) and where you live and then they tell you what the average amount of sales tax you should have spent for the year. I like the chart idea as most people do.

But wait. Because just like those Ronco knives commercials, There is More!!! Your favorite Uncle says if you were fortunate enough to make an unusual purchase this year... like a boat, four wheeler, car, airplane then you can also add the sales tax for this special item onto your average sales tax amount. So now, you can actually go to your spouse and say... Dear, I think we need to buy a boat so we can save money on our taxes. I am sure that will be a wonderful discussion. Good luck with that.

So, when you are talking with your Tax Professional make sure you ask about your Sales Tax Deductions, especially if you were able to convince your spouse to buy that boat. Spend and save.... Spend and save.

Phil Chandler, CPA, MBA is a speaker, author and consultant on topics regarding tax, bookkeeping, accounting and business management. His education in accounting and engineering and background in accounting, construction and real estate provide him unique insights in what it takes to run successful businesses, especially in those specific industries.