Blogs - PWB

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.

Expertise for the Everyday and the Exceptional:
Meet Jeff Johnston and Susan Nash

April 2, 2019 By PWB CPAs

Sometimes life just doesn’t go the way we thought—or hoped—it would. If you’ve ever been in this situation, you know how stressful it can be, especially if you’re not sure where to turn for support.

With this in mind, we made a decision last year to broaden PWB’s expertise and services to better support our clients in the midst of life’s storms. We are pleased to announce we’ve recently achieved this goal by welcoming Jeff Johnston and Susan Nash to our team.

Get to Know Jeff Johnston

Throughout his 30-plus-year career, Jeff has directed hundreds of forensic accounting, litigation support, insurance recovery, and business valuation engagements for public and private companies. His experience includes conducting complex damage studies involving everything from lost sales to valuing a business, as well as testifying as an expert witness in court and arbitration. In every engagement, Jeff’s goal is to help his clients make informed decisions in a fair and timely manner.

As a PWB partner, Jeff leads our new Advisory practice. He is available to advise both companies and counsel on a broad slate of tax and legal matters ranging from complicated business disputes to damages studies.

Learn more about Jeff.

Get to Know Susan Nash

Sue specializes in helping individuals navigate the unexpected. With deep knowledge of taxation, particularly as it relates to estates, trusts, and gifts, she’s known for breaking complex issues into manageable steps.

In her role at PWB, Sue supports clients in the decision-making process while also helping to minimize tax liabilities. She is available to support estate attorneys and planning teams in complex estate tax matters, too.

Learn more about Sue.

Expertise for Wherever Life Takes You

If you’re facing a complicated personal or business-related challenge, please know Jeff, Sue, and the entire PWB team are here for you. We understand how critical the right expertise is to a successful outcome, and we are committed to making sure you have the support you need in any situation.

Give us a call anytime.
763.550.1100

Spouses Are Guilty Until Proven Innocent

March 18, 2019 By PWB CPAs

When you got married, you knew it was for “better or worse.” But you might not know about laws that hold you responsible if your spouse cheats on a tax return.

Married couples filing jointly should be aware that:

You are both responsible for tax, interest and penalties — even after a divorce or the death of a spouse.
The IRS may hold you responsible for all the tax due even if there is a divorce decree stating that your ex-spouse is accountable for previous joint returns.
You can be liable for tax even if none of the income on a tax return is attributed to you.

To illustrate how the law works, let’s say you have a wage-earning job and your spouse is self-employed. You file joint tax returns.

Next year, you get divorced and a year later, the IRS audits your tax return. Your ex-spouse is nowhere to be found and auditors determine that he or she didn’t report all the income from the business.

What Could Happen?

You are generally liable for paying the tax due, plus interest and any penalties. Your wages can be seized by the IRS even if you paid every penny owed on your share of the family income.

Fortunately, there may be a way to get off the hook. In some situations, the tax law provides “innocent spouse” relief if you can prove:

There is a substantial understatement of tax attributable to the grossly erroneous items of your spouse or ex-spouse.
The hidden income belonged to your ex-spouse and you didn’t benefit from it.
You didn’t know or have reason to know about the understatement.
It would be inequitable to hold you liable.

In January of 2012, the IRS released proposed streamlined procedures that make it easier to obtain equitable relief. In addition, the new guidelines includes an exception to the requirement that items must be attributable to the ex-spouse when that spouse’s fraud is the cause of the understatement or deficiency.

Be aware that the IRS is required to notify an ex-spouse that relief has been requested so that he or she can elect to participate. There are no exceptions, even for victims of domestic violence.

“Innocent” versus “Injured” Spouse

If your current or former spouse has gotten you into tax trouble, you may be able to get help from the IRS.

It all depends on whether the tax agency considers you “injured” or “innocent.” You probably think you qualify as both but they are two different legal terms:

An injured spouse files a joint return and loses all or part of a refund because of a spouse’s debts.

An innocent spouse claims no liability for items on a joint tax return that belong to a spouse or ex-spouse.

Let’s say you and your current spouse file a joint tax return and are expecting a large refund. But you receive a notice from the IRS stating that your refund is being seized to pay a debt owed only by your spouse. For example, back taxes from before you married, past due child support, a delinquent student loan or other federal debt.

You may be able to recover your portion of a joint tax refund that the IRS seized. To qualify, you must have earned your own income and made your own federal tax payments. Ask your tax adviser for more information if you think you qualify.

Advice: Don’t count on innocent spouse relief if you know your spouse is cheating on tax returns. The IRS often denies relief.

Consider filing separate tax returns — especially if you’re in the process of a divorce. It may save you a bundle in the future. For more information about your situation, consult with your tax advisor.

What Do the New Revenue Recognition Rules Mean for Franchisors?

February 21, 2019 By PWB CPAs

By Bryan A. Ekern, CPA

As usual, there’s much to think about at the start of a new year. If you’re a franchisor, revenue recognition should be top of mind as you plan for 2019. That’s because on January 1, 2019, the Financial Accounting Standards Board’s new revenue recognition rules went into effect for private companies (the rules went into effect for public companies on January 1, 2018). Technically known as “FASB ASC Topic 606, Revenue from Contracts with Customers,” these new rules could significantly alter how you recognize initial franchise fees.

What changes can franchisors expect?

The previous FASB rules required franchisors to recognize initial franchise fees upon substantial performance of their obligations to the franchisee, which generally resulted in recognition upon the opening of the unit. The new rules, however, may require franchisors to recognize these fees over the term of the franchise agreement, or when certain performance obligations are met. For instance, instead of recognizing a $50,000 increase in revenue at a new store’s opening, the franchisor must now recognize the amount over a period of what could potentially be several years.

What about performance obligations?

A performance obligation is a contracted agreement to provide a distinct good or service to a customer. In the event of a franchise unit opening, performance obligations might include site selection, equipment, manuals, training, and, of course, the use of the franchisor’s intellectual property (e.g., its trade name).

Theoretically, a franchisor could recognize a portion of the initial franchise fee upon the completion of each activity—in accordance with the franchise agreement, of course. But this is where it gets tricky. Other than equipment, performance obligations related to opening a unit will not likely be considered distinct. This is because they provide little or no benefit without intellectual property.

What should you do now?

First, be sure you understand the aforementioned FASB rules. Then, it’s a good idea to review your contracts to identify any performance obligations related to the initial opening of a unit. Next, determine which performance obligations are distinct and when each distinct performance obligation is typically completed. Generally, performance obligations are either completed at a point in time or over the course of time, the latter of which will likely be the case if the performance obligation involves the use of intellectual property.

Act now to start 2019 off on the right foot.

As you can see, the new revenue recognition rules could dramatically change the way you recognize your initial franchisee fees. Taking time to get acquainted with the rules and the details of your contracts as soon as possible could help you avoid unnecessary process changes and headaches. If you have questions about how you might be impacted, please give us a call, and we’ll help you sort it out.

Contact your PWB advisor today.

763-550-1100

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.