Grossbach Zaino & Associates, CPA's, PC

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New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.


Return due dates


The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.


C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.


Basis reporting


For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.


The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.


Mortgage information returns


Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.


* Surface Transportation and Veterans Health Improvement Act of 2015

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The Rental Route

Buy or lease? It’s a decision many small businesses face. Owning real estate certainly can have advantages, including the opportunity to build equity. But many small businesses in need of space choose the rental route instead.

Cash Flow Considerations

By leasing, a company can avoid taking on debt to acquire a property. Less debt on the balance sheet may allow the company to finance other things, such as receivables or inventory and equipment purchases. And the upfront cash commitment needed to enter a lease agreement may be much lower than the down payment required for a property purchase.

Shopping Tips

If your business is looking around for the right rental location, here are a few suggestions to keep in mind. Not all of these tips are appropriate for all businesses, but some may help you get a lead on a good spot — and a good deal.

  • Find an eager landlord. Rental spots that have been on the market for a while could have some negative features, but they may be worth a look. If you find a location that suits you, you might also find a landlord who is anxious to negotiate.
  • Think about the term. A long-term lease locks in your rental rate — and that can be an advantage if you expect the market to trend upward. But leasing for short periods is often less expensive than leasing for longer periods. If your business is in its formative years, significant changes may lie ahead, so a short-term arrangement could be more practical, too. Adding an “option to renew” clause can help keep your costs down and your options open.
  • Divide and conquer. Could you make do with two smaller spaces instead of one large space? The more flexible you can be, the better your chances of finding a good deal.
  • Check rental comps. Commercial property markets can be very localized. Rents may vary considerably between one locality and another just a few miles away. Unless you’re limited to a specific location, compare rates in several areas.

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Understanding the Kiddie Tax

Transferring investments to your children to take advantage of their lower tax rates may seem like a good idea. However, before you execute this income shifting strategy, consider how the “kiddie tax” might apply.

Basic Rules

The kiddie tax applies when a child has taxable unearned income (as opposed to earned income from a job) above a certain limit ($2,100 in 2015). The rules affect children under age 18 and children who have earned income that is no more than half of their support and are either age 18 or full-time students under age 24.

Once the tax is triggered, the following rules generally apply:

  • The child has a standard deduction equal to $1,050*
  • The next $1,050 of unearned income is subject to the child’s rate
  • Additional unearned income above $2,100 is taxed at the parent’s rate

Example. Bob is in the 25% bracket and his 16-year-old son, Todd, has no income other than $2,500 in investment income. Todd’s standard deduction shields the first $1,050, the 10% rate applies to the next $1,050, and Bob’s marginal rate applies to the remaining $400, for a total tax of $205. Alternatively, if Bob had kept the investments and paid the tax himself, he would have paid 25% of $2,500, or $625.

Is It Worth It?

Though tax savings are possible, consider also the added administrative expense of maintaining a second investment account. And, if your child is going to attend

college, assets held in his or her name may reduce future financial aid awards. You may want to consider a Section 529 college savings account, which produces investment earnings that are tax free if used for qualified education expenses.

* For 2015, the standard deduction will equal the lesser of $1,050 or the child’s earned income plus $350.

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Hobby or Business?

Who knew you had a green thumb? You started gardening as a way to de-stress. Now, you’re growing exotic orchids in your family room. It was a pricey hobby until you learned how to propagate orchids and started selling them to other hobbyists. And now you’re thinking you might be able to turn growing orchids into an income source — and your hobby into a business.

Once people start making money from their hobbies, they frequently start to deduct all of their hobby-related expenses. At this point, the IRS can become very interested in the nature of the taxpayer’s hobby/business. There are certain tax guidelines to keep in mind.

Deducting Expenses

If you earn income from your hobby, you generally can deduct bona fide hobby-related expenses up to the amount of the annual income your hobby generates. You must itemize to claim the deduction. Hobby expenses fall into the “miscellaneous” category, so they are grouped with any other miscellaneous expenses you have, and only the amount exceeding 2% of your adjusted gross income is deductible.

These restrictions don’t apply to business expenses. If you operate an active business, your business-related expenses generally will be deductible, even if they exceed your business income (limitations apply).

Passing the Test

The IRS won’t just take your word for it. It has a set of guidelines to determine whether a hobby qualifies as a business. First and foremost, you must be pursuing the activity with the goal of making a profit. If you’ve made a profit in three of the last five years (two of the last seven if your activity is horse breeding, showing, or racing), the IRS assumes you had a profit motive.

If you don’t meet the profit criteria, here are a few of the other questions the IRS may ask:

l Do you keep accurate books and separate your venture’s finances from your personal finances?

l Do you spend significant time and effort carrying out the venture?

l Does the activity involve a significant element of personal pleasure or recreation?

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The Repair Regulations — Opportunities for Businesses

The IRS allows business owners to deduct the ordinary and necessary expenses of operating a business each year. However, business owners also are required to capitalize the costs associated with acquiring, producing, and improving tangible property used in their businesses (such as equipment, supplies, buildings, etc.). Because these two rules had often proved difficult to reconcile, the IRS issued new final regulations in 2013 clarifying how the rules apply. Though these regulations are extensive and complex, small business owners should be aware of some of the opportunities they provide.

General Rules

The regulations delineate when you may deduct and when you must capitalize amounts paid to acquire, produce, or improve tangible property. Generally, amounts paid to improve a unit of property must be capitalized, while amounts paid for repairs and maintenance, as well as for materials and supplies consumed during the year, may be deducted.

Safe Harbor for De Minimis Expenditures

Qualifying businesses may elect to use a de minimis safe harbor that allows them to deduct costs incurred to acquire or produce tangible property in amounts of up to either $5,000 or $500 per item or invoice. The higher limit is available for taxpayers with an applicable financial statement (AFS). An AFS can be a certified audited financial statement used for nontax purposes, such as for obtaining credit. If you don’t have an AFS, you may still qualify for the $500 safe harbor if you expense amounts in accordance with a consistent accounting procedure in place at the beginning of the tax year.

Use of the safe harbor does not limit the ability to otherwise deduct amounts paid for incidental materials and supplies or for repairs and maintenance. Rather, it is an administrative convenience to allow expensing of smaller items without analyzing each one under the relevant rules.

Safe Harbor for Routine Maintenance

You may deduct amounts paid for recurring activities that keep your business property in its ordinarily efficient operating condition. For buildings and their systems, you must reasonably expect to perform the maintenance more than once during the 10-year period beginning at the time the property is placed in service. For other property, you must expect to perform the maintenance more than once during the property’s class life used for depreciation purposes.

Safe Harbor for Small Taxpayers 

Qualifying small businesses may also deduct the costs of work performed on a building with an unadjusted basis of less than $1 million. To qualify for the safe harbor, the business must have average annual gross receipts of less than $10 million. Additionally, the total amount paid during the taxable year for the building’s repairs, maintenance, and/or improvements may not exceed the lesser of $10,000 or 2% of the unadjusted basis of the eligible building property. The building may be owned or leased.

Additional restrictions may apply for you to qualify for these safe harbors. Contact us if we can help you determine how the final regulations apply to you.

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Tax Exempt? Not Always

Public charities and other nonprofits count on being exempt from federal income taxes. However, even after the IRS has formally recognized a nonprofit’s tax exemption, the organization could have a tax liability if it has “unrelated business income.” The purpose of the tax on unrelated business income is to prevent tax-exempt nonprofits from gaining an unfair competitive advantage over commercial businesses that are conducting similar enterprises.

When the Tax Can Apply

The tax is triggered when a nonprofit generates income from a trade or business activity that it regularly carries on, and the activity is not substantially related to the purpose that forms the basis for the organization’s tax exemption. The tax can apply even if the organization uses the profits from the activity to further its mission.

Income-producing activities that should be carefully scrutinized for unrelated business income potential include:

n Sales of souvenirs, prepackaged foods, tee shirts, or other merchandise (but see When the Tax Doesn’t Apply for exceptions)

n Joint ventures with for-profit partners

n Sales of commercial advertising

n Travel tours

Where the potential for unrelated business income exists, it may be possible to sidestep a tax problem by structuring an arrangement differently, altering a product lineup, or making other changes to bring the activity within the scope of the organization’s mission.

When the Tax Doesn’t Apply

As in most areas, the tax law contains exceptions that allow certain activities to escape the reach of the unrelated business income tax. Among them:

n Volunteer efforts in which substantially all of the work is conducted by volunteers

n Selling donated merchandise

n Hospital gift shops operated for the convenience of employees, patients, and visitors

n Agricultural fair and exposition entertainment and recreational activities

n Certain trade shows

Nonprofits are constantly looking for new ways to keep their missions alive by expanding their revenues. Understanding the unrelated business income rules and how the tax can be avoided will help ensure that the IRS does not share in those revenues.

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Business Start-up Costs — What’s Deductible?

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Example. Gina spent $20,000 on start-up costs before her new business began on July 1, 2015. In 2015, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2015 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.