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Posts Tagged Tax Deduction

Start-up Costs – How To Deduct Them

Jul 18

Posted by admin in Taxes

A new business owner incurs start-up costs before beginning the business. Under Section 195(c)(1), start-up costs are costs the taxpayer incurs to investigate the creation or acquisition of a business or in creating a business. The costs must be costs that would be deductible as an ordinary and necessary business expense if the taxpayer was actively conducting the business.

In general, a taxpayer may not deduct start-up costs until the taxpayer sells the business. That is the default rule of Section 195(a). However, for start-up costs paid or incurred after October 22, 2004, a taxpayer may elect to deduct start-up costs to the extent allowed by Section 195(b)(1)(A). Under Section 195(d)(1), a taxpayer has until the due date of the tax return, including extensions, to make the election.

A taxpayer makes the election by claiming the deduction on the appropriate form. For example, a taxpayer who is a sole proprietor would claim the deduction on Schedule C of Form 1040. The taxpayer should attach a statement to the form showing the start-up costs for which the taxpayer is making the election.

If a taxpayer failed to make the election when the taxpayer filed a timely tax return, the taxpayer has six months to file an amended return and make the election under Regulations Section 301.9100-2(b). The IRS has no authority for allowing any other late elections.

If the taxpayer elects to deduct start-up costs, the taxpayer may deduct up to $5,000 of startup costs in the year the taxpayer begins the active conduct of the business. However, if the start-up costs exceed $50,000, the $5,000 limit on the deduction for start-up costs is reduced by the amount by which start-up costs exceed $50,000.

For example, assume that the start-up costs are $52,000. The taxpayer may claim an immediate deduction of $3,000 [$5,000 - ($52,000 - $50,000)]. If the start-up costs are $55,000 or more, the taxpayer may not deduct any of the start-up costs in the year the taxpayer begins the active conduct of the business except as an amortization deduction as explained below.

The taxpayer may deduct the remaining start-up costs ratably over 180 months beginning in the month in which the taxpayer begins the active conduct of the business under Section 195(b)(2). For example assume that a taxpayer\’s start-up costs were $23,000. The taxpayer may deduct $5,000 immediately. In addition, the taxpayer deducts the remaining $18,000 of start-up costs at the rate of $100 a month [($23,000 - $5,000) / 180].

The ratable deduction of start-up costs over 180 months is called an amortization deduction. A taxpayer claims an amortization deduction on Form 4562 and then carries the total deductions on Form 4562 to the appropriate form.

If the taxpayer sells the business before deducting all of the start-up costs, the taxpayer may deduct the remaining start-up costs as a loss as allowed by Sections 165 and 195(b)(2).

A taxpayer should take advantage of these rules to ensure the highest possible tax deductions. Because the time for making the election is quite limited, a taxpayer should be sure to make the election in a timely manner.

Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He earned a Ph.D. in accounting with an emphasis in taxation from the University of North Texas. He is also admitted to practice before the United States Tax Court. He has published numerous articles on tax topics in professional journals. He is the co-author of the book Tax Strategies for the Self-Employed and the revision editor of CCH Financial and Estate Planning Guide, 15th edition. For more tax savings strategies, please see his blog: http://taxsavingsstrategies.blogspot.com

Writen By : Alan D Campbell

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How To Deduct Points On A Real Estate Loan

Jul 17

Posted by admin in Taxes

A point on a mortgage loan is one percentage point of the loan. For example, two points on a $200,000 mortgage loan would be $4,000 ($200,000 x 2%). Points represent prepaid interest.

A taxpayer who uses the cash method of accounting may deduct points paid on a loan to buy or improve a principal residence as long as the points are a normal business practice in the area, are reasonable in amount, and the loan is secured by the residence (Sections 163(h)(3)(B) and 461(g)(2)). Interest, including points, on a loan to acquire or improve the taxpayer\’s residence is limited to the interest on the first $1,000,000 of the mortgage loan.

The limit on deductibility of interest on a loan to acquire a residence applies to the taxpayer\’s principal residence and one other residence (Section 163(h)(4)(A). However, a taxpayer may deduct points paid in the year paid only in connection with a mortgage loan on the taxpayer\’s primary residence (Section 461(g)(2)). If a taxpayer pays points on a mortgage loan to purchase a second home, the taxpayer must amortize the points over the life of the loan.

A taxpayer claims the deduction on Schedule A of Form 1040. A buyer may deduct the points even if the seller pays them (Rev. Proc. 94-27, 1994-1 CB 613). A taxpayer who uses the accrual basis of accounting must amortize the points over the life of the loan.

If a taxpayer pays points on a home equity loan, the taxpayer may not deduct the points immediately unless the taxpayer uses the proceeds of the home equity loan to improve the property. If the taxpayer does not use the proceeds of a home equity loan to improve the property, the taxpayer must amortize the points over the life of the loan (Sections 163(h)(3)(C) and 461(g)(1)).

The deduction of interest, including points, on a home equity loan is limited to the interest on a home equity loan up to $100,000 unless the taxpayer uses the home equity loan for business purposes. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid (Temp. Regs. Sec. 1.163-10T(j)(3)).

The same rule that applies to a home equity loan also generally applies to a refinancing of a taxpayer\’s mortgage loan. The taxpayer may not deduct the points immediately. The taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid.

However, for taxpayers who live under the jurisdiction of the U. S. Court of Appeals for the Eighth Circuit, if the taxpayer pays points on a mortgage loan and uses the proceeds to pay off a short-term bridge loan, the taxpayer may deduct the points in the year paid (Huntsman v. Commissioner, 90-2 USTC Para. 50,340, CA-8, 1990, rev\’g 91 TC 917). The U. S. Court of Appeals for the Eighth Circuit has jurisdiction over taxpayers in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

If a taxpayer pays points on a mortgage loan to acquire undeveloped land, a commercial building, or rental real estate, the taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, including a sale of the property, the taxpayer may deduct the unamortized points in the year paid.

Taxpayers should remember to deduct points paid in connection with a mortgage loan to purchase or improve their principal residence, whether the purchaser or seller pays the points. For points paid in connection with a refinancing of a mortgage, to obtain a home equity loan, or to obtain a mortgage loan on rental or commercial property, taxpayers should remember to deduct the points over the life of the loan and deduct the unamortized points in the year the taxpayer pays the loan.

Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He earned a Ph.D. in accounting with an emphasis in taxation from the University of North Texas. He is also admitted to practice before the United States Tax Court. He has published numerous articles on tax topics in professional journals. He is the co-author of the book Tax Strategies for the Self-Employed and the revision editor of CCH Financial and Estate Planning Guide, 15th edition. For more tax savings strategies, please see his blog: http://taxsavingsstrategies.blogspot.com

Writen By : Alan D Campbell

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Home Equity Loan Tax Deductions – Deducting Home Equity Interest

Jul 17

Posted by admin in Taxes

Home equity interest is tax deductible under certain circumstances.
Interest is an itemized deduction if you paid the interest, where legally
responsible for the loan, and secured the loan with your home. If you
don\’t meet these conditions, you can still deduct the interest, just
under another category.

Basic Requirements To Deduct Mortgage Interest

The IRS has three basic requirements that you must meet in order to
deduct mortgage interest. First, you have to be legally responsible for
the loan. You can\’t deduct interest you pay for someone else\’s loan.

The home equity loan also has to be a secured debt for a qualified
home. It either has to be your main home or second property. It cannot be
rented out or used for business purposes. If you do use a room as a
business office, that part of the house can be written off as a business
expense.

The final requirement is that you file a 1040 with itemized deductions.

Fully Deductible Interest Has Caps

In most cases, you will be able to fully deduct the interest you paid
on a qualifying loan. The loan has to be for the fair market value of
the property or less. Loans originating prior to October 13, 1987 are
automatically grandfathered in.

Loans after 1987 have caps on qualifying loan amounts. If the home
equity loan was taken out to purchase, construct, or improve a home, then
it qualifies for the entire deduction up to $1 million when filing
jointly. Home equity loans used for other purposes qualify for deductions up
to $100,000.

Special Cases For Interest Deductions

The IRS has also made provisions for military personal and ministers.
If you receive a non-taxed housing allowance, you can still deduct your
mortgage interest.

You can also deduct early payment fees for selling or refinancing your
home. In some cases, late payment fees can also be itemized.

Tax Laws Change

Before taking any actual tax deduction, double check with IRS
regulations to be sure you are in compliance. Each year tax laws change, so
check either with the IRS publications or an accountant. They will be able
to give you the most up to date information and possibly point out
additional deductions.

View our recommended lenders for a home equity loan online.

Also, check out our recommended lenders for home refinance companies online, or view our recommended bad credit lenders online.

Writen By : L. Sampson

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S Corporations Can Reduce Self-Employment Tax

Jul 12

Posted by admin in Taxes

As a sole proprietor, 100% of your profits are subject to self-employment taxes. The self-employment tax is 15.3% of all profits up to $94,200 (for 2006). Profits beyond the first $94,200 are subject to a 2.9% self-employment tax. If the profits from your business are $200,000, you will pay self employment taxes of $17,037.

Owners of limited liability companies (LLCs) who are active in the company operations are generally subject to the same self-employment tax.

Your business can reduce its self-employment tax obligation by creating an S-corporation. S-corporation profits are not subject to employment taxes. The owners wages, however, will be subject to employment taxes like any other employee.

Many S-corporation owners don?t pay wages to themselves for this reason. They take profit distributions only, thereby avoiding all employment taxes. These taxpayers, however, are at risk of paying penalties if they are audited by the IRS. The IRS requires that S-corporation owners who operate their business pay themselves a ?reasonable wage.?

Now you realize that you can maximize your tax savings by creating an S-corporation and paying yourself the smallest wage that qualifies as ?reasonable.? So what is reasonable? The IRS does not give specific figures. Also, there is very little case law to provide guidance by example. There are factors that are considered in determining reasonable wage.

Courts would look at the work done by the owner compared to other persons performing similar duties. Courts will also look at the capital contribution by owners. If profits are attributable to capital investments rather than the owner?s efforts, a greater allocation toward profit distribution is warranted. Also, if profits are attributable to the leverage offered by employees, rather than the owner?s own professional services, again, a greater allocation toward profit distribution is warranted.

Assuming $50,000 per year is a reasonable salary, you could save $9,387 in taxes by creating the S-corporation and paying yourself this wage from the $200,000 profit.

Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Kent Everett area on various tax issues. His firm, Huddleston tax accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service. Seattle Bellevue tax accountant John Huddleston is a frequent publisher of tax saving ideas.

Writen By : John Huddleston

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Does A Non-Profit 501(c)(3) Realize Unrelated Business Taxable Income (UBTI) For Advertising?

Jul 12

Posted by admin in Taxes

Non-profit organizations which are exempt from income tax under ?501(a) are subject to tax on unrelated business income. ??501(b), 511. Unrelated business income is gross income derived by any organization from any unrelated trade or business, regularly carried on by it, less the deductions allowed. ?512. An ?unrelated trade or business? is a trade or business which is not substantially related (aside from the need of such organization for income or funds) to the purpose of the organization. ?513. However, ?unrelated trade or business? does not include a trade or business where substantially all the work is performed for the organization without compensation. ?513(a)(1). See Rev. Rul. 75-201, 1975-1 CB 164.

The sale of advertising in a publication published by an exempt organization is an unrelated trade or business when the advertising activity is regularly carried on. Reg. 1.512(a)-1(f)(1). See also Rev. Rul. 73-424, 1973-2 CB 190.

Courts have held advertising revenue not to constitute unrelated business income in some circumstances. For example, in National Collegiate Athletic Assn. V. Comm., (1990, CA10) 66 AFTR 2d 90-5602, 914 F.2d 1417, 90-2USTC 50513, revg (1989) 92 TC 456, advertising revenue received by the NCAA from the sale of programs of its annually sponsored championship tournament was not unrelated business income where the tournament lasted less than three weeks and occurred only once a year.

IRS Chief Counsel ?strongly disagrees? with the Tenth circuit. The IRS argues the state court should have taken into account the time spent soliciting the advertisements and preparing the advertising for publication. IRS announced it will continue to litigate the issue in appropriate cases. Action on Decision 1991-015, 7/3/91.

IRS distinguished NCAA where a state university received income from advertising placed in its football souvenir programs. Here, a significant time span was involved over which the activities were conducted. The football season lasted three months and the work in setting up the programs and soliciting adverting took even longer. IRS letter ruling 9137002.

Assuming that the journal is published periodically throughout the year, an exempt organization should not rely on National Collegiate Athletic Assn. The periodic publishing and on going solicitation efforts will likely constitute a unrelated business regularly carried on. See ?512.

The court also held advertising revenue does not constitute unrelated business income in US v. American College of Physicians, (1986 S.Ct). In American College of Physicians, the court found that the advertising business contributes importantly to the university?s education program through the training of students.

Also, advertising revenue does not constitute unrelated business income if the advertising contributes to the organization?s purpose. For example, publication of legal notices in a bar association journal contributes to the association?s exempt purposes by promoting the common interest of the legal profession through providing a single source of information regarding legal events in the county and therefore, wouldn?t result in unrelated business income. Rev. Rul. 82-139, 1982-2 CB 108. However, advertising revenue received by a bar association for ads place in its attorney directory are taxable income since the advertising is commercial in nature and represents an effort on the part of advertisers to maximize sales to a certain segment of the public. IRS Letter Ruling 9148054.

Similarly, magazine advertising revenues received by an exempt trucking association did not contribute to the association?s exempt purposes where the advertising represented marketing efforts by the advertisers to sell their product. In this case, no systematic effort was made by the organization to advertise products related to the editorial content and no effort was made by the organization to limit advertisements to new products. Florida Trucking Assn Inc. (1986) 87 TC 1039.

It is clear that, with a few exceptions, advertising revenues received by a 501(c)(3) exempt organization will often generate unrelated business taxable income (UBTI).

Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Kent Everett area on various tax issues. His firm, Huddleston tax accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service. Seattle Bellevue tax accountant John Huddleston is a frequent publisher of tax saving ideas.

Writen By : John Huddleston

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Be Cautious With Home-office Deductions

Jul 12

Posted by admin in Taxes

Home office deductions make many people nervous. Thought to be a red flag to the IRS for an audit, many taxpayers simply don\’t bother with the deduction. But they could be wasting quite a bit of money.

The trickiest part of home office deductions is knowing whether or not you are eligible to write off a portion of your home as a business expense. If you are able to write off a portion of your rent or mortgage costs, plus any utilities and housing expenses, you are able to reduce your taxable income.

You have to know what makes your home office space deductible. There are three basic rules that you must meet to determine eligibility.

The first rule is known as the \”exclusive use\” rule. Your office space must be devoted solely and wholly to your business and nothing else. That means that you can\’t use the space for other activities. If you use your office to run your business and run your household, you can\’t deduct it as office space.

The second rule is the \”regular use\” rule. Your home office must be used on a regular basis for business. For example, if you are self employed and rent an office outside of the home, you probably won\’t be able to deduct your home space. But if you can show that you regularly have meetings with clients in your home office, you may be able to deduct it.

The third rule is the \”principal place of business rule.\” Your home office must be where you do your administrative tasks, bring your clients or a separate structure. You don\’t have to do the majority of your business there; you must only adhere to one of the above. So if you rent an office in town, but do your book keeping in your home office, you may be able to deduct the costs for that portion of the home.

The best way to protect yourself from a potential IRS red flag is to have your taxes prepared by a tax professional who is up to date on the changing laws.

Martin Lukac, represents http://www.RateEmpire.com, a finance web-company specializing in real estate/mortgage market. We specialize in daily updates, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies! Visit http://www.RateEmpire.com today.

Writen By : Martin Lukac

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