Six Must-Dos When You Donate to Charity

Donations are a great way to give to a deserving charity, and they also give back in the form of a tax deduction. Unfortunately, charitable donations are under scrutiny by the IRS, and many donations without adequate documentation are being rejected. Here are six things you need to do to ensure your charitable donation will be tax-deductible.

1. Make sure your charity is eligible. Only donations to qualified charitable organizations registered with the IRS are tax-deductible. You can confirm an organization qualifies by calling the IRS at (877) 829-5500 or visiting the IRS website.

2. Itemize. You must itemize your deductions using Schedule A in order to take a deduction for a contribution. If you’re going to itemize your return to take advantage of charitable deductions, it also makes sense to look for other itemized deductions. These may include state and local taxes, real estate taxes, home mortgage interest and eligible medical expenses over a certain threshold.

3. Get receipts. Get receipts for your deductible contributions. Receipts are not filed with your tax return but must be kept with your tax records. You must get the receipt at the time of the donation or the IRS may not allow the deduction.

4. Pay attention to the calendar. Contributions are deductible in the year they are made. To be deductible in 2017, contributions must be made by December 31, although there is an exception. Contributions made by credit card are deductible even if you don’t pay off the charge until the following year, as long as the contribution is reported on your credit card statement by December 31. Similarly, contribution checks written before December 31 are deductible in the year written, even if the check is not cashed until the following year.

5. Take extra steps for non-cash donations. You can make a contribution of clothing or items around the home you longer use. If you decide to make one of these non-cash contributions, it is up to you to determine the value of the contribution. However, many charities provide a donation value guide to help you determine the value of your contribution. Your donated items must be in good or better condition and you should receive a receipt from the charitable organization for your donations. If your non-cash contributions are greater than $500, you must file a Form 8283 to provide additional information to the IRS about your contribution. For non-cash donations greater than $5,000, you must also get an independent appraisal to certify the worth of the items.

6. Keep track of mileage. If you drive for charitable purposes, this mileage can be deductible as well. For example, miles driven to deliver meals to the elderly, to be a volunteer coach or to transport others to and from a charitable event can be deducted at 14 cents per mile. A log of the mileage must be maintained to substantiate your charitable driving.

Remember, charitable giving can be a valuable tax deduction – but only if you take the right steps.

Do You Have a Household Employee? Don’t Ignore the Nanny Tax.

As you review your filing requirements for 2018, make sure you don’t overlook the nanny tax related to household employees. If you have a housekeeper or any other household employee, you could be liable to pay state and federal payroll taxes.

How to know if you must pay the nanny tax.

First, you’ll need to determine whether you have a household employee. Generally, this is someone you hire to work in or around your house. It could be a babysitter, nurse, gardener, etc. It doesn’t matter whether they work part-time or full-time, or whether you pay them hourly, weekly, or by the job.

But not everyone who works around your house is an employee. For example, if a lawn service sends someone to cut your grass each week, that person is not your employee.

Your responsibilities.

If you have a household employee, you’ll generally be responsible for 2017 payroll taxes if you paid that individual more than $2,000 last year. However, federal unemployment tax kicks in if you pay more than $1,000 to all domestic employees in any quarter.

It’s not always easy to tell whether or not you have a household employee, or whether exceptions apply. If in doubt, consult your tax professional.

IRS Disaster Assistance and Emergency Relief

Our nation has been has been plagued by multiple hurricanes and wildfires. The link below is from the Internal Revenue Service website and may be helpful to those that have been directly affected.

https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses-1

 

 

Business Tax: Time to Consider Section 179?

Section 179 expensing can be a very powerful tax-planning tool for small and medium-sized businesses acquiring capital assets. While it doesn’t change the amount of depreciation you can take over the life of capital purchase, it can change the timing by allowing you to deduct your purchase in the first year you place it in service.

How does Section 179 work?

Generally, when you purchase a piece of equipment for your business – say a $10,000 computer system – you can’t deduct the entire cost in the year it was purchased. It must take the expense by depreciating the cost over several years.

Section 179 allows you to deduct the cost of the $10,000 computer in the year it was purchased and placed in service. You can deduct the expense of up to $510,000 of qualified property. The $510,000 deduction begins phasing out dollar for dollar if $2.03 million or more of qualified property is purchased during the year (meaning it phases out completely after you’ve purchased $2.54 million in business capital assets).

What is Qualified Property?

Qualified property includes things like tangible personal property, computer software and qualified real property (e.g., interior building costs for nonresidential buildings).

Section 179 doesn’t apply to property acquired for use in a rental property if it’s not your trade or business but simply an investment. Some vehicles qualify for Section 179 expensing, within limits. (The limits were brought about when some business owners bought expensive Hummers and expensed the cost in a single year.)

If you are considering your options for depreciating your business assets under Section 179, here are important details to remember:

  • Section 179 allows deducting the expense of up to $510,000 of qualified business purchases.
  • A Section 179 deduction cannot create a loss for the business.
  • A Section 179 deduction must be for business use. If an asset is not entirely used for business, the allowance is reduced.
  • If you sell a Section 179 asset prior to the full depreciation period, you will have to record any sales proceeds as taxable income.
  • Many states limit the use of this federal shifting of depreciation.

Taking Section 179 for capital purchases can be useful, but it’s not for everyone. Using Section 179 for an immediate tax break means it will no longer be available for future years. Consider this as you manage your business’s tax obligations. Remember to consult your tax professional if you have any questions about taking Section 179.

How To Fix Your Overfunded Account

Is socking away large sums in a tax-deferred retirement account ever a bad it? It is when you exceed the annual IRS limits. Intentional or not, the penalties can be painful. Here’s how overfunding occurs and what steps to take to fix the problem.

When do overfunding situations occur? Overfunding retirement accounts happens more than you may realize. It can be the result of a job change that causes you to participate in the two different employer retirement plans. Sometimes people forget they made IRA contributions early in the year and do it again later. Others forget that the IRA limit is the total of all accounts, not per account. The rules are complicated. Traditional IRAs can’t be contributed to after age 70-1/2, while Roth IRA contributions are subject to income limits. Plus,  all contributions are predicated on having earned income.

IRAs – The annual Roth and Traditional IRA contribution limit is $5,500 ($6,500 if age 50 or older). If you surpass this amount, you pay a 6 percent penalty on the overpayment every year until it’s corrected, plus a potential 10 percent penalty on the investment income attributed to the overfunded amount.

The fix: If the overfunding is discovered before the filing deadline (plus extensions), you can withdraw the excess and any income earned on the contribution to avoid the 6 percent penalty. You will potentially owe 10 percent on the earnings of the excess contributions if you’re under age 59-1/2. You can apply the withdrawn contribution to the next year. If your issue is due to age (70-1/2 or older for a Traditional IRA), or income limit (for a Roth IRA), consider re-characterizing your contribution from one IRA type to another.

401(k)s – The rules for correcting an overfunded 401(k) are a little more rigid. You have until April 15 to return the funds, period. The nature of the penalty is also different. The excess amount is taxable in the year of the overfunding, plus taxable again when withdrawn. So, you pay tax twice on the same amount. In certain cases, overfunding a 401(k) could cause it to lose its qualified status.

The fix: If you suspect an overpayment situation, contact your employer as soon as possible. Adjust your contribution amount before the end of the year and try to get the problem resolved that way.

No matter the cause, if you are in doubt about how to handle excess contributions, be sure to consult your tax professional.

Fair Market Value (FMV): What It Is and How to Defend It

So what is fair market value (FMV)? According to the IRS, it’s the price that property would sell for on the open market. This is the price that would be agreed upon between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts.

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation.

Understand when FMV is used

Fair market value is used whenever an item is bought, sold or donated and has tax consequences. The most common examples are:

  • Buying or selling your home, other real estate, personal property or business property
  • Establishing values of other business assets like inventory
  • Valuing charitable donations or personal goods and property like automobiles
  • Valuing bartering of services, business ownership transfers or assets in an estate of a deceased taxpayer

Know how to defend your FMV determination

If the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but also penalties. Here are a few tips to help defend your FMV in case of an audit.

Properly document donations. Fair market value of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt confirming your donations.

Get an appraisal. If you sell a major asset such as a small business, collections, art, or a capital asset, make sure you get the independent appraisal of the property first. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.

Keep pricing proof for similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar items to the one you sold, it can readily support your FMV claim.

Take photos and keep detailed records. The condition of an item is often a key consideration in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount. Keeping copies of invoices for major purchases is also a good idea.

With proper planning, establishing FMV of an item can be done in a reasonably defendable way if ever challenged. If you are unsure about FMV of an item, consult with your tax professional.

End of College Tuition Deduction

It can be difficult to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extended this $4,000 deduction for 2017, leaving many parents worried that college will now be even more expensive.

However, Congress left in place two popular education credits that may offer a more valuable tax break:

  • The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).
  • Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $131,000 per year (or singles making $65,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.

So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction is generally the only means you have to reduce your tax bill.

In addition to the two alternative education credits, there are many other tax benefits that help reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives. Contact your tax professional for an overview of the strategies available to you.

Consider a Mid-Year Business Self-Audit

The word “audit” makes most of us uncomfortable. But by using auditing principles within your own business, you may quickly discover ways you can enhance your firm’s full-year performance. Here are some factors to consider.

Prepare with a pre-audit. Perhaps the most obvious use of a self-audit comes to play as you prepare for a pending or potential tax audit. For example, if you receive notice of a sales tax audit, conduct your own self-audit before the auditor arrives. Your self-audit might find areas in the state sales tax code where the state actually owes you money.

Internal controls. Consider auditing areas in your company that may be tempting for potential thieves. This may be your inventory, cash register, or accounts receivable. Understand your vulnerabilities and create two different ways to independently verify their accuracy. Internal control self-audits can discover theft, but most often they will identify ways you can reduce the chance of theft ever occurring.

An eye towards ID theft. Consider auditing your data to ensure it is property protected. This has become more important as most small businesses are now using cloud-based services to take orders, pay bills, and receive payments.

Focus on key financial areas. In your self-audit, focus on the areas of your company that make the most financial sense. For most of us it’s auditing those financial processes that impact cash flow. A good place to start is an independent review of your bank accounts and their related reconciliations.

Look at performance progress. Another benefit of a mid-year self-audit can simply be creating year-to-date performance reporting, forecasting your full year, and then comparing it to your plan. If you find problems, you still have plenty of time before the end of the year to take corrective action.

If you need assistance with any of these steps, be sure to consult your tax professional.

Zombie Payer – Keep Your Automatic Payments in Control

When it comes to paying bills, many people cannot imagine returning to paying and sending bills via the U.S. Postal Service. But, the “turn it on and forget it” nature of automatic payments can create zombie payers who no longer challenge or review the details of bills. Here are some ideas to keep this from happening to you.

Create a list. Make a list of the companies you authorized to use automatic payments to pay your bills. Include in the list the card or account each company uses for the automatic payments, as well as payment amounts and frequency. If you use credit and debit cards to pay companies, record the expiration date, in case you need to update any company that has your card on file. When there is a change in a card or bank account, you will be able to consult the list to find the companies you need to notify.

Watch for fees. Make sure the bill payment system you’re using is low cost or no cost. Some companies will charge you a fee for automatic payments. If your biller wants to charge you, pay them with a traditional check.

Beware of price creep. Paying for a product or service automatically can create a situation where you do not notice when your price changes. Monitor your on-going payment amounts so you are able to question any price increase or discontinue service (if applicable).

Review underlying bills. Along with automated bill payments is the vendor’s desire to stop sending hard copies of your bill. However because you’re not receiving a bill, you may be unaware of changes. You may want to opt to continue receiving email or paper billing statements (if possible) so you can verify that your payment has not changed and there are not additional fees or errors.

Take care to review your accounts and statements to avoid zombie paying, and in turn protect yourself and keep your finances in your control.

Five Reasons Business Owners Incorporate

Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a “sole proprietor,” in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons business owners consider incorporating as their business grows.

  1. To protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.
  2. To provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.
  3. To issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.
  4. To gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.
  5. To enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise, and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies.

If you are still reviewing the pros and cons of incorporating your business, be sure to consult your tax professional for advice.