Tax Talk – Page 6 – Wilson Rogers & Company

S-Corp Home Office Deduction

Taking the home office deduction is fairly simple when you’re a self-employed individual and file Schedule C. In those instances, you simply indicate on Form 8829 the percentage of your home that is used for work, the costs to maintain your space, and that amount will go on your Schedule C as a deduction.

If you are a member of a partnership or multimemeber LLC, then you use a similar calculation to the one listed above (see the worksheet on page 27). However, you deduct the expenses as unreimbursed partnership expenses on Schedule E.

But what if you’re a member of a S-Corp? Well, if you still want that home office deduction, just be prepared to do a few workarounds to get it.

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer. The law was enacted in response to a Supreme Court decision [Feldman v. Commissioner]. The rental arrangement involved was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee “could” deduct office-in-the-home expenses as miscellaneous itemized deductions. But these deductions are of little or no value because of the 2% income floor imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income.

Based on the above, the old workaround that was often used was:

create a rental property on Schedule E of the individuals return, and include a portion of all expenses (rent, mortgage interest, property tax, insurance, utilities, etc). You would then report an amount of income that’s equal to;
rent expense that you report on your S-Corp tax return. Those two amounts will offset (the rent deduction on your S-corp return and the rent income on your individual return); and you will be left with the home office deduction.

Well, the IRS got tired of sifting through fake rental properties and instead recommends that the employee submit an expense report as part of what’s called an “accountable plan.”

So based on this guidance, here is the new way of deducting home office expenses if you are a member of a S-Corp:

Draft an accountable plan agreement for your company. It will outline what expenses are eligible for reimbursement, how they will be paid, etc. A sample plan can be found here, or you can create your own.
Calculate the percentage of your home that is used exclusively for business purposes. Divide the square footage used for business by the total square footage of the home and multiply by 100.
Calculate the total amount of eligible reimbursable expenses (see Form 8829 above). Multiply each amount by the percentage of business use calculated in the step above and enter the results on the expense form that you use for your accountable plan.
Prepare expense reports as the employee and turn them in to your company on a regular basis. Attach receipts or other documentation to the form to substantiate them.
Cut the check from the business account and deposit it into your personal account. Attach a copy of the check to the form as documentation that these were paid.
Enter the amount of the payment into your S corporation’s records as a reimbursement for employee expenses. Post each expense claimed to the appropriate expense account so that these expenses may be deducted from the corporation’s income on its tax return.

And there you have it. You have now created a tax-deductible business expense for the S-corp, and you don’t have to report the reimbursement as income.

Could you be paying more in taxes than you should?

As a business owner, there are some tax benefits to being structured as a S-Corp. The biggest one (that almost everyone knows) is the potential to reduce/minimize their employment taxes. But did you know that through some deliberate and diligent tax planning, you could be able to legally reduce your tax burden further?

If your business does $100K (or more) in revenue, you would be a perfect candidate for our S-Corp Tax Reduction Analysis. This analysis (a package valued at $1097, but $345 to you for a limited time), includes the following:

One hour investigative session to understand your business operations and potential tax levers
Review of the past 3 years of filed Form 1120S tax returns to unearth potentially missed deductions or tax savings
Formulation of potential tax strategies that if implemented could reduce the underlying tax liability
Comprehensive report indicating findings, tax strategies and steps to implement
Complementary copy of Jared’s book How to Slash Your Taxes Legally and Ethically

Furthermore, this analysis is guaranteed by our 100% ironclad money back guarantee. If we can’t find any tax savings that equal or exceed the cost of the analysis, we’ll refund your money, no questions asked!

To claim your analysis, simply email us via the address in the footer on this page or give our office a call at 773-239-8850. We only have capacity to perform so many of these analysis per month so get yours NOW. We look forward to working with you!

By Administrator|2019-08-28T08:16:03-06:00January 5, 2014|Categories: Tax Talk|Tags: accountable plan agreement, Form 8829, home office deduction, home office expense worksheet, how to deduct home office expense for partnership, how to deduct home office expenses on income taxes, How to save taxes with an S-Corporation, s corp tax saving strategies, S-Corp home office deduction, sample accountable plan agreement, Section 280A, unreimbursed partnership expenses, where to deduct home office expense, where to deduct home office expense for s corp|Comments Off

5 Quick Year End Tax Tips

So 2013 is ending in about 3 days and here you are wondering what you can do to cut your tax bill. Well, while most of your options are just about gone, here are 5 quick things to consider:

Do A Test Run of Your Tax Return
If possible, why not do a quick test run of your return? The year is almost done so you should have most of the information you need to come up with a projection. Sure, some of the numbers will need to be estimated, but the end result should yield a pretty good picture. With that picture in hand, you will know what moves you can or need to make before year’s end.

Pull Expenses Into 2013
Both individual and business returns tend to be prepared on a cash basis. Thus, if you can spend the money in 2013, you will get it to count on your return. Have some medical purchases (e.g. glasses, contacts, etc) that you were planning to make in January? Move them into December and they’ll be deductible on this years tax return. The same is true for that mortgage payment of yours. If the bank cashes the check in December, the mortgage interest will increase your deduction for this year.

Shift Income into 2014
Are you a self employed business person? Do you operate on a cash basis? Well, if you want to reduce your taxable income for 2013, why not consider billing your customers late or giving them a little grace period to pay so that the revenue hits your desk in 2014.

Make Those Last Minute Retirement Contributions
Do you have a company 401(K) account but haven’t contributed the Federal maximum of $17,500? Well, each dollar you contribute reduces your taxable income. Already received your last paycheck? Not to worry, you can still make a contribution to your IRA AND if you meet certain income limitations, you can shave a little off your tax bill. If you are self employed, you can make contributions to SEP and SIMPLE plans to receive a tax benefit on your return.

Give To Charity
Were you considering making a donation next year to a certain charitable organization? If so, consider making them in 2013 and you can reduce your taxable income. Have some items in your house that are taking up space? Why not give them to the Salvation Army, Goodwill or your other local charitable organization? You’ll be able to deduct the fair market value of the goods on your tax return and help out someone in need. Just make sure you follow these tips to get the most out of your donation.

By Administrator|2013-12-29T11:45:52-06:00December 29, 2013|Categories: Tax Talk|Tags: last minute tax tips, Tax deduction, Taxable income, year end tax moves, year end tax tips|Comments Off

Understanding The 1031 Exchange

Most real estate investors have at least heard of the 1031 exchange, but very few have actually completed such a transaction. The 1031 exchange is a powerful tool to have in your creative real estate arsenal, as it allows you to dispose of one property and acquire another without paying capital gains tax on the property you are disposing of.

However, a 1031 exchange requires careful attention to the requirements, particularly as they relate to timing, in order to avoid potential ghoulish dealings with the IRS.

To start with, it is important to understand exactly what a 1031 exchange is. Named after the section of the Internal Revenue Code under which it resides, a 1031 exchange is the swap of one asset for another similar asset. In other words, in order to take advantage of this tax section, the type of property swapped must be of a similar “nature or character.” For example, livestock of different genders are not considered like-kind property.

Fortunately, this is not much of an issue with real estate, as the code allows for the exchange of any real property for any other real property. The property (generally) must be a business or investment asset, meaning the property generates revenue or helps in generating revenue. Typically, these properties will be warehouses, offices or rental homes. Primary residences and other property that do not generate regular income do not qualify, such as a second home or vacation home.

Properties located inside and outside the country cannot be exchanged for each other. Also, real property cannot be exchanged for personal property, such as a house for farm equipment. Lastly, personal residences are not eligible for like-kind exchanges; the property must have been an investment or business property to qualify.

One of the nicest features of the rule is that the properties do not have to be of similar “grade or quality.” In other words, it’s perfectly legitimate to exchange a house in much need of repairs for a property that is in pristine condition. The like-kind exchange is an ideal vehicle for trading up properties without paying capital gains taxes.

Timing is a key element to a successful 1031 exchange. In order to qualify for the capital gains deferral, the decision to treat a property sale as part of a 1031 exchange needs to be made before the closing date of the sale of that property. Then, the seller must identify the property to be acquired in the exchange within 45 days of the closing date of the sold property. The new property must then be acquired within 180 days of the date that the prior property was sold.

The 1031 Exchange Explained Visually

When it comes to identifying the replacement property, there are some interesting rules, and you can pick which rule you want to follow. The property needs to be of equal or greater value, but you can select multiple properties as potential properties to buy, subject to the following rules:

1. You can select up to three distinct properties as possible replacement properties for the exchange, regardless of their value, OR…

2. You can select any number of properties, as long as their total fair market value does not exceed double the value of the property you sold, OR…

3. You can select any number of potential properties to buy, as long as the fair market value of the property you eventually close on within the 180 day window is at least 95% of the value of the property you sold.

In order to protect the “integrity” of the like-kind exchange, the IRS requires that you use a qualified intermediary in order to complete the transaction and qualify for the capital gains exclusion. The qualified intermediary escrows the proceeds from the sale of the first property, and ensures that the funds are only used to acquire a like-kind property.

The qualified intermediary works with your title company, escrow company, or closing attorney to facilitate the transaction. The key element of this part of the transaction is to ensure that you never actually obtain receipt of the funds from the property sold, and there is no record of it passing through your own personal accounts.

Normally when an investment property is sold, you must recapture the sum total of the depreciation you have claimed on the property. In other words, your taxable capital gains include not only the actual appreciation in the property’s value, but also the amount that you deducted as depreciation over the time you owned.

A beautiful benefit of the 1031 exchange is that there is no depreciation recapture required. Instead, the accumulated depreciation in the old property affects your basis in the new property you are buying in the exchange.

Since the purpose of the like-kind exchange is to avoid paying capital gains tax on appreciation of properties, there is no benefit to using a 1031 exchange on a property on which you have a loss. By selling a property for a loss, a portion of that loss becomes deductible. The 1031 exchange rules do not recognize losses as an adjustment to the basis in the newly acquired property, so there is no benefit in using this vehicle for that purpose.

Our hope is that this article has provided you with enough information to make the decision of when to use the 1031 exchange rules to your benefit. As with all things, however, be sure to consult with a licensed tax professional for advice regarding your specific transaction, and remember that you must use a Qualified Intermediary in order to complete the transaction.

Are you are thinking of disposing of your property and have questions? Why not give us a call? We are here to help, and only a phone call away!

Keys Rules For Section 1031 Exchanges (harp-onthis.com)

By Administrator|2024-08-26T15:06:54-06:00November 25, 2013|Categories: Tax Talk|Tags: 1031 Exchange, 1031 Exchange Definition, 1031 Exchange IRS, 1031 Exchange Requirements, Like-Kind Exchange, Rules of 1031 Exchange|Comments Off

How to Obtain 501(c)(3) Tax-Exempt Status

During the course of an average year, we often get asked if we help clients set up nonprofit organizations. We also get asked how much it cost; to which we often respond, it depends. Why you may ask? Well, depending on the activities that your organization will conduct, it changes the amount of detail that you must provide in the application. In this post, we’ll provide you with a general overview of how to go about obtaining tax exempt status.

Obtaining Tax-Exempt or 501(c)(3) Status
Most of the real benefits of being a nonprofit stem from your 501(c)(3) tax-exempt status. These include, but are not limited to the tax-deductibility of donations, access to grant money, and income and property tax exemptions. To apply for tax-exempt status, you must complete IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Completing this form can be a daunting task because of the legal and tax technicalities you’ll need to understand. Thus, we suggest consulting with a CPA, attorney or other professional who is experienced in preparing this form.

When to File For 501(c)(3) Status
To get the most out of your tax-exempt status, you’ll want to file your Form 1023 within 27 months of the date you incorporate. If you file within this time frame, your nonprofit’s tax exemption takes effect on the date you filed your articles of incorporation. Thus, all donations received from the point of incorporation onward will be tax deductible. If you file later than this and can’t show “reasonable cause” for your delay (i.e. convince the IRS that your tardiness was understandable and excusable), your group’s tax-exempt status will begin as of the postmark date on its IRS Form 1023 application.

How to Prepare Your Tax Exemption Application
Form 1023 is divided into 11 parts. Illustrated below is a brief overview of each of the 11 parts so you can familiarize yourself with the type of questions you’ll be asked to address.

Identification of Applicant This section tells the IRS about your organization. It asks for basic information like the name of your nonprofit corporation, contact information, and when you filed your articles of incorporation. Your nonprofit must have a federal employer identification number (EIN) prior to applying for 501(c)(3) tax exemption, even if it doesn’t have employees. Furthermore, if your organization held an EIN prior to incorporation, you must obtain a new one for the nonprofit.

Organizational Structure This section requires that you attach a copy of your articles of incorporation and your bylaws.

Required Provisions in Your Organizing Document There are certain clauses that you must have in your articles of incorporation in order to get your 501(c)(3) exemption:

A clause stating that your corporation was formed for a recognized 501(c)(3) tax-exempt purpose (e.g., charitable, religious, scientific, literary, and/or educational)
A clause stating that that any assets of the nonprofit that remain after the entity dissolves will be distributed to another 501(c)(3) tax-exempt nonprofit – or to a federal, state, or local government for a public purpose

In this section, you state where these clauses can be found in your articles (by page, article, and paragraph).

Narrative Description of Your Activities Here you provide a detailed, narrative description of all of your organization’s activities (past, present, and future) in their order of importance (i.e. in order of the amount of time and resources devoted to each activity). For each activity, explain

the activity itself, how it furthers an exempt purpose of your organization, and the percentage of time your group will devote to it
when it was begun (or when it will)
where and by whom it will be conducted
how it will be funded (the financial information or projections you provide later in your application should be consistent with the funding methods or mechanisms you mention here).

Compensation and Financial Arrangements The purpose of this section is to prevent people from creating and operating a nonprofit for the sole benefit of its founders, insiders, or major contributors. You’ll need to give information about all proposed compensation to, and financial arrangements with initial directors, initial officers, trustees, etc.

Members and Others That Receive Benefits From the Nonprofit If your nonprofit will provide goods or services as part of its exempt-purpose activities, you must report this on Form 1023. The IRS wants to ensure that your nonprofit is set up to provide goods and services to all members of the public — or at least a segment of the public that is not limited to particular individuals.

Your History If your nonprofit is a “successor” to an incorporated or preexisting organization the IRS wants to know this. Your nonprofit is most likely a successor organization if it has:

taken over the activities of a prior organization
taken over 25% or more of the assets of a preexisting nonprofit
been legally converted from the previous association to a nonprofit

Details on Your Specific Activities This part asks about certain types of activities, such as political activity and fundraising, that the IRS scrutinizes closely. For example:

501(c)(3) nonprofit organizations may not participate in political campaigns
Certain types of fundraising are restricted, including bingo and gaming activities, fundraising for other nonprofits, or using a professional fundraiser

Financial Data All groups seeking 501(c)(3) exempt status must provide a statement of revenues and expenses and a balance sheet. An organization that has been in existence for five years or more must provide financial data for its most recent five years. Other groups must provide financial data for each year they have been in existence and good faith estimates for future years for a total of three or four years, depending on how long the organization has been in existence.

Public Charity or Private Foundation This section relates to your nonprofit’s classification as a public charity or private foundation. Public charities, which include churches, schools, hospitals, and a number of other groups derive most of their support from the public or receive most of their revenue from activities related to tax-exempt purposes. Most groups want to be classified as a public charity because private foundations are subject to strict operating rules and regulations.

Fee Information You must pay a fee when you submit your Form 1023 application. Check the IRS website for user fees that vary depending on your nonprofit’s gross receipts.

By Administrator|2013-11-14T11:20:27-06:00November 14, 2013|Categories: Tax Talk|Tags: 501(c)(3), how to get tax exempt status for nonprofit, How to Obtain 501(c)(3) Tax-Exempt Status, how to obtain tax exempt status, IRS Form 1023, IRS Form SS4|Comments Off

10 Tips For Deducting Charitable Contributions

This week we received a question from a taxpayer about how to determine the deductible portion of a silent auction item purchased at a charitable event. While the answer is pretty clear, it reiterated to us just how confusing deducting that charitable contribution/donation can be to a taxpayer.

Charitable contributions made to “qualified organizations” may help lower your tax bill. But what is considered a qualified charity and what type of documentation do you need to keep? Here are our 10 tips to help ensure your contributions not only help the charity, but reduce your tax liability on your tax return.

First and foremost make sure you are giving to a qualified organization. Also, note that you cannot deduct contributions made to specific individuals, political organizations and candidates. Want to check and see if an organization is qualified? Use this link.
In general, an individual may deduct contributions to most charitable organizations up to 50% of his or her adjusted gross income (AGI), but that limit is changed to 30% of their AGI for other organizations. When you look up a charity you can click on “deductibility status” and it will tell you which percentage applies to that particular charity.
To deduct a charitable contribution, you must file Form 1040 AND itemize deductions on Schedule A. Thus, if you are taking the standard deduction, none of your charitable giving will benefit you from a tax perspective.
Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction record or a written communication from the organization. The communication should contain the name of the organization, as well as the date and amount of the contribution. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
If your contributions of cash or property equal $250 or more, you must have a bank record, payroll deduction record or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283 to your return.
Donations of stock or other non-cash property are usually valued at their fair market value. Clothing and household items must generally be in good used condition or better to be deductible.
Fair market value is generally the price at which property would change hands between a willing buyer and seller.
Like our friend who purchased an item at the silent auction, if you receive a benefit (e.g. merchandise, tickets to a ball game or other goods and services), because of your contribution, then you can only deduct the amount that exceeds the fair market value of the benefit received.
Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
If you donate a vehicle, you most certainly will have to fill out Form 8283 as well as get a letter from the organization. However, there are additional conditions that you may have to meet. You can find them here.

By Administrator|2013-11-01T14:33:50-06:00November 1, 2013|Categories: Tax Talk|Tags: AGI limits charitable contributions, Do I need a receipt for giving $250 to a charity, do I need an appraisal for a donation over $5000, Form 8283, how to deduct charitable contributions, tax deduction for charitable contribution, tax deduction for charitable giving, tax deduction for donating a vehicle|Comments Off

How To Make Estimated Tax Payments

A while back we wrote a post on just how the mechanics of income taxes worked with regards to you receiving a refund or having to pay Uncle Sam. In the end it boils down to how much you had withheld from your paycheck versus the amount of tax you owe at your income level. But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check? Then this post will clue you in on how you make your payments and keep Uncle Sam happy.

What is estimated tax?

Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding. Just think of it as what your employer does for you (i.e. withholds taxes from your check) when you don’t have an employer so to speak.

Who has to pay it?

If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments. Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.

If you are filing as a corporation you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.

When do you have to pay it?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

For the period: Due date:

Jan. 11 – March 31 April 15

April 1 – May 31 June 15

June 1 – August 31 September 15

Sept. 1 – Dec. 31 January 15 of the following year

How do you pay it?

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The worksheet in Form 1040-ES will help you figure the amount. You can then make your payment(s) using the voucher contained within or electronically via the EFTPS system.

What happens if you don’t pay it?

If you didn’t pay enough tax throughout the year (either through withholding or estimated tax payments), you may have to pay a penalty for underpayment of estimated tax. You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

By Administrator|2013-10-25T15:48:04-06:00October 25, 2013|Categories: Tax Talk|Tags: 1040-ES, EFTPS, estimated tax due dates, estimated tax penalty, Estimated taxes, how to make estimated tax payments, how to pay estimated taxes, mechanics of income taxes|Comments Off

How To Stop Procrastinating Filing Your Taxes

So, you don’t want to do your taxes eh? Well, there are tons of people who have thrown that task to people like us (i.e. paid preparers) so this post will be brief. Why? Because we’re pretty busy over here!

If you are delaying filing your return(s), why not take a look at this little info-graphic to help you get moving. Yeah, we didn’t make it and it’s from a competitor. But hey, we like what it has to say and did we mention we were busy?

Here’s to tax season!

taxes, infographic, h&r block

By Administrator|2013-03-24T17:34:03-06:00March 24, 2013|Categories: Tax Talk|Tags: i don't want to do my taxes, I don't want to file my taxes, procrastinating doing my taxes, tips to help stop procrastinating doing my taxes, tips to help stop procrastinating doing taxes|Comments Off

How Income Taxes Work

As we’re busy working through tax returns this season, we kept noticing a recurring theme. What’s that you may ask? Well, it’s the fact that there are a number of taxpayers who don’t have a clear understanding of how the tax system works. What do we mean by this? Keep reading.

A week ago we were working on a clients return. She had a modest income and produced various deductions that had in fact reduced her tax able income to zero. When she mentioned that she had some other items and we entered them in, she was perplexed that her refund didn’t increase. Well, we walked her through her return and showed her how she no longer had a tax liability and was only entitled to receive back what she had paid in. We then explained that deductions reduce taxable income rather than directly increase your refund. No one had ever told her this!

So with that being said, here is a brief overview of how the tax system works for most wage earning individuals (i.e. W2 employees).

Income What you take home from your job, what your bank pays you in interest, what your investments earn you in dividends and what your state gives you for a tax refund. All of these things get added up and total your income. This is where the calculation starts, but this is far from where it ends.

Deductions Did you pay interest on a student loan? Are you a teacher and pay for supplies used in your classroom? Did you make a contribution to a 401(k) or another pension plan? All of these amounts get subtracted from your income.

Taxable Income Once you take the income and subtract deductions, you wind up with something called Adjusted Gross Income (AGI). From here you get to take another set of deductions (the standard or you’ll itemize) and you get an exemption for every person in your household. AGI minus the above yields your taxable income which is just what it sounds like, the amount you actually are taxed on.

Tax So the next step is to take your taxable income and determine how much tax you have to pay on it. Pretty straightforward.

Credits The important thing to know about credits versus deductions is that credits reduce your Tax on a dollar for dollar basis. Do you qualify for the Earned Income Credit (EIC)? Did you pay to go to school and qualify for an education credit? These things will reduce your tax where a deduction only reduces your taxable income.

Payments This is what you had taken out of your check to cover your tax. It’s pretty much as simple as that.

Refund or Balance Due If the amount of your payments are greater then your tax (less credits), congratulations, you’ll get a refund. Didn’t have enough withheld from your check to cover your tax? Sorry, looks like you have a balance due.

And that in summary is how the system works. The important things to take away from this are:

Deductions reduce your taxable income. They don’t necessarily increase your refund.
Credits are worth more than deductions. Always see what credits you qualify for as some of them change from year to year.
Make sure you pay enough into the system or you will owe. You can adjust your withholdings via Form W4 with your payroll or HR department.

By Administrator|2013-03-17T20:27:37-06:00March 17, 2013|Categories: Tax Talk|Tags: how income taxes work, why do I have a balance due on my taxes, why do I owe on my tax return, why do i owe taxes, why do I owe taxes this year|Comments Off

Do Homeowners Associations Need To File A Tax Return?

Homeowners’ associations (HOAs) are organizations formed by a group of homeowners for the purpose of preserving and maintaining the appearance of an area and the ownership and maintenance of common property. Because most HOAs operate for the benefit of a specific group, rather than the community at large, many have difficulty meeting the tax-exempt purposes required under IRC sections 501(c)(4) and 501(c)(7). As a result, Congress enacted section 528 with the view that it’s not appropriate to tax revenues of an association of homeowners who act together if an individual homeowner wouldn’t be taxed on the same activity.

So what does this mean for your HOA? If you’re the treasurer for a small, self-managed community, there is a good chance that your HOA does not utilize the services of a CPA on a regular basis. As a result, you may be wondering… “hmmm… I don’t think we filed a tax return last year. Do I really need to do this?” The answer, according to the federal government, is “yes.” However, you will be relieved to know that you do have options regarding which form you can file.

A qualified HOA has two choices:

File Form 1120 and pay tax as if it were a C corporation
Elect to file Form 1120-H, U.S. Income Tax Return for Homeowners Associations

Now just what is a qualified homeowners association? Well, it is one in which the following apply:

At least 60% of the association’s gross income for the tax year consists solely of membership fees, dues or assessments from property owners
At least 90% of the association’s expenses for the tax year consists of expenses to acquire, build, manage, maintain, or care for association property, or in the case of a timeshare association, for activities provided to, or on behalf of, members of the timeshare association
No private shareholder or individual profits from the association’s net earnings except by acquiring, building, managing or caring for association property or by a rebate or excess membership dues, fees or assessments

Why elect to file Form 1120-H?

Net exempt function income is not subject to tax
You are not required to pay estimated taxes
A specific deduction of $100 is allowed
You are not subject to AMT
No balance sheet is required on the return
It is a simple one page form
The election to file Form 1120-H is available on a yearly basis.

Why file Form 1120?

You can tax advantage of graduated rates (15%, 25%, 34%, etc)
Form 1120-H is a flat 30% rate (32% for timeshare associations)
In certain situations, the tax may be lower filing Form 1120 versus Form 1120H
If there is a net operating loss (NOL), it can be used to offset another tax year. A NOL is not allowed on Form 1120-H.

How does Exempt Function Income factor in?

Exempt function income consists of dues, fees, or assessments paid by property owner-members for maintenance or improvement of the property. Conversely, interest, dividends, coin laundry income, vending machine income, rental of units owned by the association and rental of parking/storage/party room areas are all taxable. Thus, if you are a large association and have significant income from these sources, you may want to file Form 1120 because it may yield in your income being taxed at a lower rate.

What about state returns?

Each state varies, but if you have to file a Federal return, you may need to file a state return as well. In Illinois, a state return is required if you have income that is taxed at the Federal level.

For more information regarding HOAs, feel free to visit this IRS site.

By Administrator|2013-03-04T08:58:01-06:00March 4, 2013|Categories: Tax Talk|Tags: condo associatino tax return deadline, Do condo associations pay taxes, do HOAs file tax returns, do HOAs pay taxes, Do Homeowners Associations Need To File A Tax Return, does an hoa need to file a tax return, does your HOA file a tax return, HOA tax return deadline|Comments Off

Are My Social Security Benefits Taxable?

A few days ago a client came into our office to have their taxes done. Despite being married, this person was adamant that they wanted to file under the “single” filing status. When we got to the bottom of it, the reason was due to their perception that their spouse’s social security benefits could impact his tax situation or she could lose them. Despite all of the information we provided this individual, we ended up not doing the return because they didn’t want to use the correct status.

Which brings us to our question; when are Social Security (regular, disability, or survivor) benefits subject to taxation? The answer is it depends. Particularly, it depends on the amount of your Adjusted Gross Income (AGI), the total amount of your Social Security benefits and where your income comes from.

For someone filing using the status of Single, Head of Household, Widow or Married Filing Separately (and you lived apart), your benefits will generally not be taxable unless the total of your modified AGI, plus one-half of your Social Security benefits exceeds $25,000.
If you are married and file a joint return, your modified AGI plus one-half of your Social Security benefits would generally need to exceed $32,000 before taxes kick in.
If you are married filing a separate return, and you lived with your spouse, your threshold is actually zero, and your Social Security benefits generally may be taxable from dollar one.

The following examples will help illustrate some of the various scenarios that taxpayers may find themselves in. Additionally, they will walk through the calculation to determine how much tax they may have to pay.

Example One: Eric and Kathy are filing a joint return for 2012 and both received social security benefits during the year. Eric received net benefits of $7,500 and Kathy $3,500. Eric also received a taxable pension of $22,000 and interest income of $500. Since half of Eric and Kathy’s benefits ($5,500) plus their modified AGI of $22,500 doesn’t exceed $32,000, none of their benefits are taxable. Even though their benefits aren’t taxable, Eric and Kathy must file a return for 2012 because their taxable gross income ($22,500) exceeds the minimum filing requirement amount for their filing status.

Example Two: Jared and Aaronita are filing a joint return and have regular income of $15,000. They also have tax-exempt interest income of $12,000. Jared received Social Security benefits of $15,000 and Aaronita $5,000. Since half of their Social Security benefits ($10,000) plus their modified AGI ($27,000) exceeds the $32,000 threshold, they will have to pay taxes on their Social Security benefits.

Jared and Aaronita’s provisional income totals $37,000; their modified AGI of $27,000 plus one half of their Social Security benefits ($10,000). From this amount, they would subtract their threshold limit of $32,000. This gives them a result of $5,000. The law says that you must include the lesser of 50% of your benefits ($10,000) or 50% of the above result ($2,500) as additional income subject to tax. Based on the above, Jared and Aaronita would include $2,500 of their Social Security benefits as additional income subject to tax. If they are in the 15% marginal tax bracket, they’ll pay about $375 (15% of $2,500) in taxes on their total benefits of $20,000.

Example Three: Ricky and Bobby are married and live together, but file separate returns for 2012. Ricky earned $8,000 from his job and received $4,000 of Social Security benefits in 2012. Because Ricky is married filing separately and lived with his spouse during 2012, he must include 85% of his social security benefits in his taxable income. Thus, Ricky would enter $4,000 on his Form 1040, line 20a, and $3,400 on Form 1040, line 20b.

As you can see from the above, sometimes none of your benefits are taxable but that can increase to 50% all the way up to 85% in some circumstances. Thus, the one thing to keep in mind is that as your income increases, so will the portion of your Social Security benefits that is subject to taxation.

It is also important to note that these rules also apply to Social Security disability and survivor benefits. Many people assume that disability and/or survivor benefits are not subject to the rules regarding taxability of Social Security benefits. Unfortunately, this is not the case. Thus, if you are receiving Social Security disability or survivor benefits, you’ll need to make sure whether any of your benefits will be subject to tax.

This IRS website has a pretty cool tool to help you determine if your Social Security or Railroad Retirement Tier I Benefits Taxable. Additionally, IRS Publication 915 will give you much more detail regarding the taxation of your Social Security benefits and provides a number of worksheets you can use to do your own computations.

By Administrator|2020-09-21T12:33:03-06:00February 17, 2013|Categories: Tax Talk|Tags: Are My Social Security Benefits Taxable?, are social security benefits taxable, are social security benefits taxed, are social security disability benefits taxable, are social security disability benefits taxable income, Are Your Social Security Benefits Taxable?, Social Security benefits tax|Comments Off

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