Tax Planning and Preparation Archives

Navigate the Tax Rules for Boats and RVs

May 16, 2019 By PWB CPAs

Will you be cruising the waters on your boat or camping out in your RV this year? Besides the pleasure you can enjoy through your personal property, you may also be eligible for tax breaks, if certain requirements are met.

Following is a brief rundown of four prime tax-saving opportunities.

1. Chartering activities. It’s common for some boat owners to charter out their vessels for sightseeing or fishing excursions when they’re not being used personally. In other words, this becomes a sideline business that allows you to recoup some of your expenses.

Notably, you can use expenses to offset the taxable income from chartering activities, including the cost of fuel, repairs, insurance, supplies, equipment, mooring and storage, and even fishing gear or binoculars. Plus, you’re entitled to a generous depreciation allowance for the vessel itself.

Of course, your deductions are based on the percentage of boat use that’s business-related. For example, if you charter out the boat 50% of the time, you can deduct 50% of the expenses.

Finally, be aware that you could run into troubled tax waters if the activity is treated as a hobby, rather than a business. Under the Tax Cuts and Jobs Act (TCJA), hobby expenses are generally disallowed for 2018-2025. Also, a business operation may trigger other tax consequences (for example, self-employment tax for a sole proprietor).

2. Mortgage interest. Typically, you can deduct mortgage interest on a qualified residence, like the main place where you live, but you’re also entitled to interest deductions on a second home, like a vacation home. Surprisingly, the “residence” can also be a boat or a RV.

To qualify for this tax break under the tax code, the boat or RV must have sleeping, cooking and toilet facilities. So, if your boat has a galley, sleeping quarters and a head, you should be in the clear. You can’t just barbecue on a boat’s deck or throw a sleeping bag down below. Most RVs have the requisite facilities for this deduction.

Keep in mind that the TCJA imposes new limits on mortgage interest deductions for itemizers. It lowers the threshold for new acquisition debt from $1 million to $750,000, but prior loans are grandfathered. It also generally eliminates the deduction for home equity debt.

3. Charitable donations. Maybe you want to upgrade your boat or RV or your passion for boating or camping is waning. In any event, you might decide to donate the boat or vehicle to charity. Assuming certain requirements are met and you itemize deductions, this could provide a tax windfall.

As a general rule, you can deduct the current fair market value (FMV) of the boat or RV on the date of the donation. For instance, if you bought the RV for $80,000 years ago and it’s now worth $50,000, you deduct $50,000 on your personal return.

But don’t leave matters to chance. Obtain an appraisal from an independent professional. An appraisal is required anyway for property donations above $5,000.

Other special rules may come into play. For instance, the charity must use the boat or RV to further its tax-exempt function. Deal with a qualified charitable organization that is experienced with these types of donations.

4. Sales tax. Depending on your situation, you may be able to deduct the sales tax you pay when you purchase a boat or RV, although the rules have been complicated by the TCJA.

Previously, you could deduct all of your state and local property taxes, plus either your state and local income tax or sales tax. But now the total annual deduction for state and local tax (SALT) payments is limited to $10,000 for 2018-2025.

If you opt to write off sales tax instead of income tax as part of your annual SALT deduction, be aware that you can use either the actual tax paid, based on records, or an amount from a convenient IRS table. Generally, the actual expense method will produce a bigger deduction. Caveat: If you choose the table amount, you can add on sales tax from certain “big-ticket items” — like boats and vehicles!

To Summarize

These are just four ways you may benefit tax-wise from boats or RVs. At other times, you might use the property as transportation for hire or even claim home office deductions if you qualify under the strict letter of the law. Moral of the story: Be aware of all the tax-saving possibilities for these prized possessions.

Could Medicare Premiums Lower Your Taxes?

January 28, 2019 By PWB CPAs

Health care is a top concern for many Americans, especially people who are age 65 and older. While these individuals qualify for basic Medicare insurance, they may need to pay additional premiums to get the level of coverage they desire.

Those premiums can add up to a substantial annual sum, especially if you’re married and both you and your spouse are paying them. But the silver lining is that paying those premiums may help your tax situation.

Medicare Basics

For starters, many people are unclear about Medicare health insurance programs and options. Here’s a brief overview.

Medicare Part A. This coverage is commonly known as hospital insurance. It covers inpatient hospital care, skilled nursing facility care and some home health care services.

Part A is free to people over age 65 who paid Medicare taxes for 40 or more quarters during their working years. They’re considered to have already paid their Part A premiums via Medicare taxes on wages and/or self-employment income.

People who didn’t pay Medicare taxes for enough months while working generally must pay for Part A coverage. The premium amount depends on how many quarters the individual paid taxes into the program.

If you paid Medicare taxes for 30 to 39 quarters during your working years, the 2019 Part A premium is $240 per month ($2,880 for the full year).
If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 per month ($5,244 for the full year).
The same Part A premiums apply to a spouse who paid Medicare taxes for less than 40 quarters while working.

Medicare Part B. This coverage is commonly called Medicare medical insurance. It mainly covers doctors and outpatient services. Medicare-eligible individuals must pay monthly premiums for this benefit. The premium amount depends on the individual’s modified adjusted gross income (MAGI) for two years earlier.

For example, your 2019 premiums depend on your 2017 MAGI. This term refers to the adjusted gross income (AGI) amount plus any tax-exempt interest income.

To get Part B coverage, you have to pay a base premium, which is $135.60 per month ($1,627 for the full year) for 2019. Plus, higher income individuals must pay a surcharge.

For 2019, the Part B surcharge applies to:

Singles with 2017 MAGI in excess of $85,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $170,000.

Surcharges accrue on a graduated schedule. That is, the more MAGI you earned in 2017, the higher your Part B costs will be for 2019. Including the surcharge (if you owe it), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year) or $460.50 ($5,526 for the full year).

The maximum premium for 2019 applies to:

Singles with 2017 MAGI in excess of $500,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D. This option is for private prescription drug coverage. Base premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

For 2019, the Part D surcharges depend on your 2017 MAGI, and they increase based on the same scale as Part B surcharges. The good news is that the 2019 surcharges are slightly lower than for 2018, except for those in the highest income category. The 2019 monthly Part D surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90 or $77.40.

Medigap. Medicare Parts A and B don’t cover all health care expenses. Coverage gaps include co-payments, co-insurance and deductibles. So, some people opt to buy a so-called “Medigap” policy. This is private supplemental insurance that’s intended to cover some or all gaps.

In most states, insurance companies can sell only standardized Medigap policies that offer the same basic benefits. Some policies offer additional benefits for an additional cost. Premiums vary depending on the plan you select.

Important note: Before you travel outside the United States, find out whether Medicare will cover you while you’re away. Generally, the coverage is limited or nonexistent. If you don’t have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.

Medicare Advantage. Federal Medicare benefits may be provided through Part A and Part B coverage or through a so-called “Medicare Advantage plan” offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the insurance company to cover your Medicare Part A and Part B benefits. The Medicare Advantage insurance company then pays your claims. A Medicare Advantage plan may also include prescription drug coverage (Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

Medicare Advantage Plans can include:

HMOs that only cover medical service providers that are in the plan’s network,
PPOs that encourage you to use in-network providers, and
Private fee-for-service plans that generally allow you to go to any medical service provider that accepts the plan’s payment terms.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part B premiums to the government. You may need to pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans don’t charge an additional premium. The additional premium, if any, depends on the plan you select.

Important note: Medigap policies don’t work with Medicare Advantage plans. So, people who join a Medicare Advantage plan should discontinue their Medigap coverage.

Tax Deductions for Medicare Premiums

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return.

For 2018, you could deduct medical expenses only if you itemized deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI. For 2019, the itemized deduction threshold for medical expenses increases to 10% of AGI, unless Congress extends the 7.5% hurdle.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals will claim itemized deductions.

However, having significant medical expenses (including Medicare health insurance premiums) may allow you to itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

For More Information

Contact your tax advisor if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.

Plan Now to Avoid Surprises Later

November 30, 2018 By PWB

Do you know how the Tax Cuts and Jobs Act will affect your 2018 taxes? What the new year could bring for your business? How you’ll prepare year-end financial statements? Whatever you do, don’t be caught off guard when 2019 rolls around. Take a moment to plan ahead with PWB today.

Get Started!

Our accountants and consultants can help you with the following:

Tax Planning

It’s important to understand how the new tax law will affect your 2018 tax liability and to maximize your potential benefit. We can conduct a tax projection to estimate your 2018 liability or refund, and offer tax-planning strategies for you to implement before year-end. Tax planning is especially important if you’ve:

Sold or purchased a business or real estate
Received or exercised stock options
You are self-employed, or receive income from a flow-through business
Would like to plan for upcoming tax liabilities for cash flow purposes
Have significant investment gains or losses during the year

While a tax projection is the best way to plan for your specific situation, you can view our free Tax Planning Guide for tips to reduce your taxes.

**An important note about potential fee increases related to tax reform legislation changes**

Signed into law late last year, the Tax Cuts and Jobs Act brought sweeping changes to the U.S. tax code. The new legislation has many benefits, including reduced tax rates, newly created business deductions, and an enhanced standard deduction, to list a few.

According to the Internal Revenue Service, taxpayers filing Forms 1040 C, E, and F, are now likely to spend more time—as little as a half-hour to upwards of 20 hours—on their 2018 taxes. In our past experience, tax planning before the actual tax preparation produces a more favorable overall tax result. Whether you choose to plan now or when filing your 2018 tax return, it’s important to note the additional time will result in an increased cost.

Business Planning

What do you wish to accomplish in 2019? A conversation with PWB can help you prioritize your goals and take action. Work with our business consultants to explore how to:

Obtain timely and accurate financial statements through one of our Outsourced Bookkeeping options
Conduct a financial performance review to increase profit, benchmark yourself against industry standards and value your business
Create a 2019 budget for disciplined spending
Streamline internal accounting processes for better controls and efficiency
Evaluate your payroll platform and benefits structure
Determine how the new revenue recognition and lease accounting standards could affect your business

Year-End Financial Statements

Consistent, annual financial statements can help to prepare your company for a future sale. They can also provide some level of comfort to owners who aren’t actively involved in the day-to-day operations. Certain industries, regulators, contracts, and grants may even require them. Involving PWB with your year-end financial statements can provide several benefits to your company, such as:

Lenders providing better terms
Insurance companies charging lower premiums
Vendors granting more credit
Gaining more credibility with your customers

Take Control of Your 2019

With the new tax law in full swing, planning ahead is even more important for 2019. We’re here to help you avoid any unwanted surprises—call your PWB accountant today to get started.

Contact PWB

Call 763-550-1100 or contact us online >

7 Year-End Tax Planning Moves for Small Businesses

November 13, 2018 By PWB CPAs

Business owners still have time to significantly reduce their tax bills for 2018. Here are seven year-end small business tax planning moves to consider, taking into account changes included in the Tax Cuts and Jobs Act (TCJA).

1. Claim 100% Bonus Depreciation for Asset Additions

Thanks to the TCJA, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2018. That means your business might be able to write off the entire cost of some (or all) of your 2018 asset additions on this year’s return.
Bonus depreciation isn’t subject to any spending limits or income-based phaseout thresholds. But the program will be gradually phased out, starting in 2023, unless Congress extends it.

Consider buying some extra equipment, furniture, computers or other fixed assets before year end. Your tax advisor can explain what types of assets qualify for this break.

2. Claim 100% Bonus Depreciation for a “Heavy” Vehicle

Heavy SUVs, pickups and vans that are used over 50% for business are treated for tax purposes as transportation equipment. So, they qualify for 100% bonus depreciation

Specifically, bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door (where the door hinges meet the frame).

If your business needs a vehicle that meets these requirements and you place it in service before the end of this tax year, it could deliver a big write-off on your 2018 tax return.

3. Cash in on More Generous Section 179 Deduction Rules

For qualifying property placed in service in tax years beginning in 2018, the TCJA increased the maximum Sec. 179 expensing amount to $1 million. (Under prior law, the limit was $510,000 for tax years beginning in 2017.)

The TCJA provides other beneficial changes to the Sec. 179 expensing rules, including:

Property used for lodging. The TCJA repealed the prior-law provision that excluded from Sec. 179 expensing personal property used to furnish lodging. So now eligible property qualifies for a tax break. This change goes into effect for property placed in service in tax years beginning in 2018 and beyond. Examples of such property include:

– Furniture,
– Kitchen appliances,
– Lawnmowers, and
– Other equipment used in the living quarters of a lodging facility or in connection with a lodging facility, such as a hotel, motel, apartment house, rental condo or rental single-family home.

Qualifying real property. Sec. 179 expensing can be claimed for qualifying real property expenditures, up to the maximum annual allowance. The Sec. 179 allowance is $1 million for tax years beginning in 2018. There’s no separate limit for qualifying real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

For tax years beginning in 2018 and beyond, the TCJA expanded the definition of real property eligible for Sec. 179 expensing to include qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. These items must be placed in service in tax years beginning after 2017, and after the nonresidential building has been placed in service.

Important note: Various limitations apply to Sec. 179 expensing deductions, especially if you conduct your business as a so-called “pass-through entity” (including a partnership, S corporation or a limited liability company (LLC) that’s treated as a partnership for tax purposes).

4. Time Business Income and Deductions from Pass-Through Entities

Income and deductions from pass-through entities are allocated to the owners based on their ownership percentage in the business. Your pro rata share of a pass-through entity’s net income is taxed at your personal rates.

Under the TCJA, individual federal income tax rate brackets will basically be the same for 2018 and 2019, with modest adjustments for inflation. (See “2018 and 2019 Individual Tax Brackets” below.) So, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2018 until 2019.

However, if you expect to be in a higher tax bracket in 2019, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2019. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

5. Maximize the New Deduction for Income from a Pass-Through Entity

The TCJA created a new deduction based on qualified business income (QBI) from pass-through entities. For tax years beginning in 2018 through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.

The QBI deduction is available only to noncorporate taxpayers, meaning individuals, trusts and estates. It also can be claimed for up to 20% of income from qualified real estate investment trust (REIT) dividends and 20% of qualified income from publicly traded partnerships (PTPs).

Because of various limitations on the QBI deduction, tax planning can help increase your allowable QBI deduction. For example, before year end, you might be able to increase W-2 wages or purchase additional business assets to help boost your QBI deduction.

Also, be aware that moves designed to reduce this year’s taxable income (such as postponing revenue or accelerating expenses) can inadvertently reduce your QBI deduction. Work with your tax pro to anticipate any adverse side effects of other tax planning strategies and optimize your results on this year’s return.

6. Establish a Tax-Favored Retirement Plan

If your business doesn’t already have a retirement plan, it might be time to take the plunge. Current retirement plan rules allow for significant deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $55,000 for 2018. If you’re employed by your own corporation, you can contribute up to 25% of your salary to your account, with a maximum contribution of $55,000.

Other small business retirement plan options include defined benefit pension plans, SIMPLE-IRAs, and 401(k) plans. You can even set up a solo 401(k) plan for just one person. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Important note: If your business has employees, your plan may have to cover them, too

The deadline for setting up a SEP-IRA for a sole proprietorship business and making the initial deductible contribution for the 2018 tax year is October 15, 2019, if you extend your 2018 return to that date. Other plans generally must be established by December 31, 2018, if you want to make a deductible contribution for the 2018 tax year. But the deadline for the contribution itself is the extended due date for your 2018 return.

There’s one exception: To make a SIMPLE-IRA contribution for 2018, you must have set up the plan by October 1, 2018. So, you might have to wait until next year if you prefer the SIMPLE-IRA option.

7. Sell Qualified Small Business Stock

A 100% federal gain exclusion break is potentially available when you sell qualified small business corporation (QSBC) stock that was acquired after September 27, 2010. That equates to a 0% federal income tax rate if the shares are sold for a gain.

However, you must hold the shares for more than five years to benefit from this break. Be aware that it’s not available to QSBC stock that’s owned by a C corporation. Plus, many companies won’t meet the definition of a QSBC in the first place. Your tax professional can help explain the details.

Need Help?

On the one hand, year-end tax planning for small businesses is easier for 2018 than for some previous years. That’s because we know the federal income tax rates that will apply next year.

On the other hand, this year’s tax planning is complicated by all the tax law changes that take effect for tax years starting in 2018. Work with your tax pro to identify the best year-end strategies for your specific business situation.

Could a Donor-Advised Fund Keep Your Annual Tradition of Charitable Giving Alive?

October 24, 2018 By PWB CPAs

By Judy Wold, CPA

One of the changes brought about by the Tax Cuts and Jobs Act (TCJA) is a significant increase in the standard deduction starting in 2018. Because of this, the tax benefits typically associated with itemized deductions, including those from charitable contributions, have largely been diminished. Nevertheless, don’t be discouraged: A donor-advised fund (DAF) could help you continue your tradition of giving and keep your tax savings intact.

What is a donor-advised fund?

A DAF allows you to easily contribute to your charities of choice and realize a tax benefit. Anyone can open one with a minimum contribution—typically $5,000 or more. Like any fund, a DAF can be professionally managed and invested. You, as the donor, dictate when (i.e., in what year) and to where (i.e., which charitable organization) your money will be distributed.

Following are three benefits of using a DAF to make charitable donations:

Your contribution is tax-deductible in the year you make it.

DAFs provide the most tax benefit when you “pre-load” your charitable donations. For example, if you and your spouse typically donate $5,000 a year to a charity, you may want to consider contributing a lump sum (let’s say $25,000 for simplicity’s sake) to your DAF in 2018. When coupled with other deductions, such as those for mortgage interest or state and local taxes, your itemized deductions would exceed the new standard deduction ($24,000 for married couples filing jointly), giving you a significant tax savings for the year. Then, you could schedule an annual distribution of $5,000 to your charity of choice for the next five years. To realize the greatest tax savings, you could make your contributions to the DAF during higher taxable income years.

Your money will grow tax-free.

Your invested charitable contributions will grow tax-free in a DAF. However, most DAFs come with fees, so it’s important to do your research to determine a fund’s annual fee and minimum initial deposit. In most cases, once the DAF is established, the minimum for future contributions is much less prohibitive.

You can contribute appreciated assets.

You can contribute various types of assets to your DAF, including appreciated assets. Your deduction will be for the fair market value of the appreciated asset on the date you contribute it to the DAF. This eliminates the taxable capital gain on the sale of that asset.

Act now to realize a tax savings for your 2018 charitable giving.

Under the new tax law, we expect DAFs to be a popular vehicle for making charitable donations. If you think one may be right for you, give us a call as soon as possible. We can help you better understand your potential tax benefits while determining how a DAF would impact your 2018 tax planning. Once you’re ready to move forward, your broker can help you establish a DAF and make contributions before year-end.

Contact your PWB advisor today.

763-550-1100