Carol McAtee's Blog

McAtee & Associates, CPAS

With today’s post, we want to share….  

                   6 Costly Social Security Traps to Avoid

Hidden deep within Social Security’s Handbook and Program Operations Manual System are lots of what we call “gotchas.” Some may be familiar. Others won’t. Take a look if you want reassurance that you aren’t falling into any of the system’s traps.

If your blood pressure rises, bear in mind that the folks at Social Security aren’t to blame. They didn’t design this maddening system, which despite its many deep flaws has done enormous good over the decades for hundreds of millions of Americans. No one at Social Security is trying to get us to make the wrong decisions and end up with lower benefits than possible. But very few people at Social Security know the rules well enough to guide us to the right choices. So, as the old saying goes, forewarned is forearmed.

1. If You Take Two Benefits at Once, You Lose One of the Two

Social Security won’t pay you two different benefits at the same time. Instead it will pay you the larger of the two benefits (or something pretty close to this amount). For example, if you are married and take or are forced to take your retirement benefit when you take your spousal benefit, you’ll lose your retirement benefit if your spousal benefit is larger. Social Security won’t say it has eliminated your retirement benefit. Instead, it will claim it’s giving you your retirement benefit plus the difference or excess between the two. But, in reality, it has used the spousal benefit to wipe your retirement benefit. You can receive two different benefits, but not at the same time.

Spouses and qualified divorced spouses who were 62 before January 2, 2016, can receive two different benefits (their retirement and their spousal/divorced spousal benefits), but not at the same time. Those spouses who were widowed before taking their retirement benefit can take their widow(er) benefit before or after they take their retirement benefit. The same holds for qualified divorced widow(er)s.

2. You Can Contribute to Social Security Your Entire Working Life and Receive Nothing Whatsoever in Extra Benefits

Suppose you start working at age 16 and continue working through full retirement age (FRA). Every week, week in and week out, you and your employer pay 12.4% of every dollar you earn in Social Security payroll (FICA) taxes. Also, suppose you earn relatively little in absolute terms and also relative to your spouse. Then you may do best to wait to collect your spousal benefit starting at FRA (spousal benefits don’t increase after FRA), assuming your partner has filed for his or her retirement benefit.

At age 70, you file for your own retirement benefit, but now you get hit by Gotcha #l. And if your spousal benefit exceeds your age – 70 retirement benefit (that is, inclusive of the Delayed Retirement Credits), your total payment will continue to equal just your spousal benefit. Yes, Social Security will describe your total check as consisting of your own age – 70 retirement benefit plus your excess spousal benefit. But the sum of these two components will just equal your spousal benefit. So, you’ll get nothing in extra benefit s for all the years you contributed. Furthermore, when your spouse dies, you’ll collect a survivor benefit based on their earnings record, which will be even larger than your spousal benefit, which is larger than your own retirement benefit.

3. Suspending Your Retirement Benefits Can Cost You Big Bucks

This gotcha pertains to those whose auxiliary benefit is larger than their retirement benefit even inclusive of the maximum amount of Delayed Retirement Credits that can be accumulated. For these people, the amount by which their auxiliary benefit exceeds their retirement benefit is treated by Social Security as their excess auxiliary benefit.

Now suppose you are in this boat and you decide to suspend your retirement benefit and restart it at 70. Under the new “Bipartisan Budget Act of 2015” signed by President Obama in November, you can’t collect any excess benefit of any kind during the period your benefit is suspended. So you get nothing whatsoever until you reach 70. At 70, you restart your retirement benefit only to find that the total payment is no larger than you would have received during the suspension period had you not suspended. Yes, your retirement benefit is larger thanks to the Delayed Retirement Credits. But, given the assumption that your excess benefit at 70 is still positive, this excess benefit is lower by exactly the amount by which your retirement benefit is larger. Hence, suspending in this situation is simply a decision not to take benefits for the period of suspension. It does nothing to raise your total benefit payment.

In other words, you would have suspended for nothing, losing potentially thousands of dollars in lifetime benefits. If you realize you made a mistake in suspending your retirement benefit (and seeing no change in your monthly payment is the clincher), you may be able to undo the mistake and recover all your suspended payments. But, it appears, only if you suspended before April 30, 2016.

4. If You are Forced to Take Your Retirement Benefit at the Same Time as Your Spousal or Divorcee Spousal Benefit, Your Retirement Benefit Will Generally Wipe Out Your Spousal or Divorced Spousal Benefit

The formula that takes your Average Indexed Monthly Earnings and turns it into your Primary Insurance Amount (PIA)—your full retirement benefit—is highly progressive. Benefits paid to lower paid workers are a much higher percentage of their pre-retirement incomes than is the case for highly paid workers. Consequently, even if you’ve earned relatively low covered wages during your working years, taking your retirement benefit will likely mean never receiving a spousal benefit because 1)taking your retirement benefit keeps you from ever taking another benefit by itself and 2) spousal benefits are at best only half of your spouse’s PIA, so your retirement benefit will likely exceed your spousal or divorced spousal benefit and, therefore, wipe it out. 

Stated differently, excess spousal benefits or divorced spousal benefits are generally zero or very small if we’re talking about two spouses or two ex-spouses who earned even modest levels of wages.

5. Being Deemed Before Age 70 Leads to Permanently Reduced Retirement Benefits

Apart from those grandfathered against post-FRA deeming, being deemed whether before or after FRA, but before age 70, forces you to take your retirement benefit earlier than 70, which means your retirement benefit will permanently fall below its value were you to start it at age 70. Furthermore, if your excess spousal benefit is zero, you’ll receive only your reduced retirement benefit.

Yes, you can undo some of the damage by suspending your retirement benefit at FRA and starting it up again at 70 at a 32% higher real (after inflation) level. But this 32% kicker coming from the Delayed Retirement Credit will be applied to your reduced retirement benefit, not to your full retirement benefit. So once this gotcha gets you, you are gotten for life.

6. You Need To Get It in Writing

It’s one thing to ask Social Security for a benefit to which you are eligible and to start receiving it when you want. It’s another thing to actually get what you asked for when you ask for it. If you don’t specify in writing on your benefit application form in the Remarks section exactly what benefits you are filing for and which benefits you aren’t filing for and precisely when you want to receive the benefits for which you are applying, you won’t have any legal proof to appeal a mistake by Social Security if it makes one. It’s very hard to write anything on an application form over the phone. You can file over the phone for some but not all benefits, and Social Security will send you a copy of your application perhaps with the Remarks section properly filled in based on your dictation. The safest way, though, would be to visit your local office and make sure your wishes are properly noted by the claims rep in the Remarks section and make sure you leave with a dated (in effect, time-stamped) copy of your application.

Excerpted from Get What’s Yours–Revised And Updated (Simon & Schuster,  2016)
by Laurence J.Kotlikoff, Philip Moeller and Paul Solman.

 

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAS

As a follow-up to our last post, The Home-Based Business: Basics to Consider, we suggest you use today’s post to assist you in determining if you may qualify for a home office deduction for your home-based business; or, if you are an employee, for a business office for the benefit of your employer…

         Do You Qualify for the Home Office Deduction?

If you use part of your home for business, you may be able to deduct expenses for the business use of your home, provided you meet certain IRS requirements.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

If you’re not sure whether you qualify for the home office deduction, please contact us. Help is only a phone call away.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAS

With the tremendous growth in home-based businesses, this is a timely topic to review in this week’s blog. . .

     The Home-Based Business: Basics to Consider

More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs–home-based businesspeople.

And, with technological advances in smartphones, tablets, and iPads as well as rising demand for “service-oriented” businesses, the opportunities seem to be endless.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:

• Can you describe in detail the business you plan on establishing?
• What will be your product or service?
• Is there a demand for your product or service?
• Can you identify the target market for your product or service?
• Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss, and involves an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead and make improvements and adjustments along the way.

While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

• Are you a self-starter?
• Can you stick to business if you’re working at home?
• Do you have the necessary self-discipline to maintain schedules?
• Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction.  Please contact us for details on this potential tax deduction.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

• Work certificate or a license from the state (your business’s name may also need to be registered with the state)
• Sales tax number
• Separate business telephone
• Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.

Projecting Income

It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow

Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

If a home-based business is in your future, a tax professional can help. Don’t hesitate to give us a call for assistance setting up your business and making sure you have the proper documentation in place to satisfy the IRS.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAS

McAtee & Associates, CPAS

This week, we want to share with you a quick look at what nonprofits need to know about tax compliance…

Tax Compliance Issues for Nonprofit Organizations

Whether you’ve just started a nonprofit, recently submitted your organization’s first Form 990, or are the executive director, it’s important not to lose sight of your obligations under federal and state tax laws. From annual filing and reporting requirements to taxes on business income and payroll compliance, here’s a quick look at what nonprofits need to know about tax compliance.

Annual Filing and Reporting Requirements: Form 990

Once you’ve applied for and received tax-exempt status under Section 501(c)(3) and filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, and received your exemption letter from the IRS, your organization is officially a nonprofit, and is exempt from federal income tax under section 501(c)(3). Tax exempt status refers to exemption from federal income tax on income related to the organization’s mission, as well as the ability to receive tax-deductible contributions from donors.

The next step is to comply with annual filing and reporting requirements, specifically, Form 990, Return of Organization Exempt from Income Tax.

Generally, tax-exempt organizations are required to file annual returns. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status.

Note: Certain organizations such as churches (including church-affiliated organizations and schools operated by a religious order) as well as organizations affiliated with a governmental unit are not required to file Form 990. Refer to your IRS exemption letter if you’re not sure.

There are four different Forms 990; which form an organization must file generally depends on its gross receipts. Forms 990-EZ or 990 are used for organizations with gross receipts of less than $200,000 and with total assets of less than $500,000. Form 990 is used for nonprofits with gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000.

When gross receipts are less than or equal to $50,000, certain small organizations may file an annual electronic notice, the Form 990-N (e-Postcard); however, organizations eligible to file the e-Postcard may choose to file a full return. Private foundations file Form 990-PF regardless of financial status.

Form 990 is submitted to the IRS five and a half months after the end of an organization’s calendar year. For example, for nonprofits whose calendar year ends on December 31st, the initial return due date for Form 990 is May 15. If a due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Extended due dates of three and six months are available for Forms 990; however, for Form 990-N the due date is the “initial return due date,” e.g. May 15 and extended due dates do not apply.

NOTE: Unlike individual tax returns filed with the IRS, which may be postmarked on April 15, Forms 990 must be received (not postmarked) by the IRS before the May 15 due date.

Unrelated Business Income Taxes (UBIT)

Unrelated business income is defined as income from a trade or business which is regularly carried on and is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.

While it may come as a surprise to some, nearly all tax-exempt organizations are required to pay taxes on unrelated business income, which might include proceeds from an annual holiday card sale or souvenirs related to an educational exhibit in support of the nonprofit’s mission.

If the IRS determines that a nonprofit is significantly underreporting income from unrelated business activities, it may lose its tax-exempt status.

Employment and Payroll Compliance

Similar to for-profit companies, nonprofit organizations must comply with both federal and state payroll reporting requirements. Federal tax withholding, social security taxes, and Medicare taxes must be deposited through the Electronic Federal Tax Payment System (“EFTPS”), and the organization must file Form 941 on a quarterly basis. Nonprofits are also required to report reimbursements to employees for out-of-pocket expenses; however, nonprofits that create an accountable reimbursement plan or ARP that meets IRS guidelines are able to avoid these reporting requirements.

State Tax Compliance

Most nonprofit organizations incorporate before applying to the IRS for tax exempt status. As such, they must comply with state laws such as annual or periodic registrations. Each state has different laws, but in general, nonprofit organizations must update basic contact information including mailing address, names of responsible parties, and registered agents. Some states require that charitable organizations apply for sales/use or property tax exemptions as well.

Further, charitable organizations that solicit donations in a particular state are subject to state solicitation laws that require the nonprofit to register with the state(s) and to report on the nonprofit’s fundraising activities. For nonprofits that solicit donations from residents in more than one state, compliance is often challenging. Organizations that fail to register are subject to hefty penalties.

Stay Informed

These are just a few of the tax-compliance issues facing nonprofit organizations. If you have any questions, would like more information, or need help setting up an accountable reimbursement plan that meets IRS requirements, please give us a call.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAs

As a follow-up to last week’s post, this week we want to share more tax planning tips with you…….

                 Six Facts About Charitable Donations

If you give money or goods to a charity in 2016, you may be able to claim a deduction on your federal tax return. Here are six important facts you should know about charitable donations.

1. Qualified Charities. You must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible. An exception to this rule is contributions under the Slain Officer Family Support Act of 2015. To check the status of a charity, use the IRS Select Check tool found on IRS.gov.

2. Itemize Deductions. To deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. Benefit in Return. If you get something in return for your donation, you may have to reduce your deduction. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.

4. Type of Donation. If you give property instead of cash, your deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market. If you donate used clothing and household items, they generally must be in good condition, or better, to be deductible. Special rules apply to cars, boats and other types of property donations.

5. Form to File and Records to Keep. You must file Form 8283, Noncash Charitable Contributions, for all noncash gifts totaling more than $500 for the year.  The type of records you must keep depends on the amount and type of your donation. To learn more about what records to keep, please call our office for assistance.

6. Donations of $250 or More. If you donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether you received any goods or services in exchange for the gift.

Once again, please call our office with questions about and assistance with properly filing your return to claim deductions for your charitable donations. We’re here to help.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

Carol McAtee & Associates, CPAS

It is time to….

            Start Planning Now for Next Year’s Taxes

That’s right.  If you start your tax planning now, you may be able to avoid a tax surprise when you file next year.

Now is a good time to set up a system so your tax records are safe and easy to find. Here are five tips to give you a leg up on next year’s taxes:

1. Take action when life changes occur. Some life events such as a change in marital status or the birth of a child can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer.

2. Report changes in circumstances to the Health Insurance Marketplace. If you are enrolled now or enroll in insurance coverage through the Health Insurance Marketplace in 2016, you should report changes in circumstances to the Marketplace when they happen. Reporting events such as changes in your income or family size helps you avoid getting too much or too little financial assistance in advance.

3. Keep records safe. Print and keep a copy of your 2015 tax return and supporting records together in a safe place. This includes W-2 Forms, Forms 1099, bank records and records of your family’s health care insurance coverage. If you ever need your tax return or records, it will be easier for you to get them. For example, you may need a copy of your tax return if you apply for a home loan or financial aid for college. You should use your 2015 tax return as a guide when you do your 2016 taxes next year.

4. Stay organized. Make tax time easier on everyone by having your family place tax records in the same place during the year. That way you won’t have to search for misplaced records when you file your return next year.

5. Consider itemizing. You may be able to lower your taxes if you itemize deductions instead of taking the standard deduction. Owning a home, paying medical expenses and qualified donations to charity could mean more tax savings. The IRS has not published the 2016 forms yet, but you can refer to the 2015 forms at www.irs.gov for a list of deductions which are found in the instructions for Schedule A, Itemized Deductions. If you did itemize in 2015, use your 2015 Schedule A as a guide.

Ready to save money on your taxes?

Planning now can pay off with savings at tax time next year.

Call us today and get a jump start on next year’s taxes.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAS

If you’re thinking about selling your business, your first step is to consult a competent tax professional, so after reading this week’s blog please call us for an appointment to get started on the process toward a profitable sale…

                                 Selling Your Business

There are many reasons to sell a business. Maybe you’re in ill health or ready to retire. Or, you’re tired of working all the time; and now that the business is profitable, you’re ready to cash in. Whatever the reason, selling a small to medium sized business is a complex venture and many business owners are not aware of the tax consequences.

You will need to make sure your financials are in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be), and develop a tax planning strategy to minimizes capital gains and other taxes in order to maximize your profits from the sale.

Accurate Financial Statements

The importance of preparing your business financials before listing your business for sale cannot be overstated. Whether you use a business broker or word of mouth, rest assured that potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements may lead to loss of the sale.

Business Valuation

Many business owners have no idea what their business is worth; some may underestimate whereas others overestimate–sometimes significantly. Obtaining a third party business valuation allows business owners to set a price that is realistic for potential buyers, while achieving maximum value.

Tax Consequences of Selling

As a business owner you probably think of your business as a single entity sold as a lump sum. The IRS however, views a business as a collection of assets. Profit from the sale of these assets (i.e. your business) may be subject to short and long-term capital gains tax, depreciation recapture of Section 1245 and Section 1250 real property, and federal and state income taxes.

For IRS purposes each asset sold must be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill, or property held for sale to customers, such as inventory or stock in trade. Assets are considered tangible (real estate, machinery, and inventory) or intangible (goodwill or trade name).

The gain (or loss) on each asset sold is figured separately. For instance, the sale of capital assets results in capital gain or loss whereas the sale of inventory results in ordinary income or loss, with each taxed accordingly.

Depreciable property

Section 1231 gains and losses are the taxable gains and losses from Section 1231 transactions such as sales or exchanges of real property or depreciable personal property held longer than one year. Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your Section 1231 transactions.

When you dispose of depreciable property (Section 1245 property or Section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a Section 1231 gain.

Business structure

Your business structure (i.e. business entity) also affects the way your business is taxed when it is sold. Sole proprietorships, partnerships, and LLCs (Limited Liability Companies) are considered “pass-through” entities and each asset is sold separately. As such there is more flexibility when structuring a sale to benefit both the buyer and seller in terms of tax consequences.

C-corporations and S-corporations have different entity structures and sale of assets and stock are subject to more complex regulations.

For example, when assets of a C-corporation are sold, the seller is taxed twice. The corporation pays tax on any gains realized when the assets are sold, and shareholders pay capital gains tax when the corporation is dissolved. However, when a C-corporation sells stock the seller only pays capital gains tax on the profit from the sale, which is generally at the long-term capital gains tax rate. S-corporations are taxed similarly to partnerships in that there is no double taxation when assets are sold. Income (or loss) flows through shareholders, who report it on their individual tax returns.

Need help?

As you can see, selling a business involves complicated federal and state tax rules and regulations. If you’re thinking of selling your business in the near future, don’t hesitate to call our office and schedule a consultation.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

Carol McAtee & Associates

This week, we would like to share some valuable information for you in the event you are considering claiming a bad debt deduction…

                                 Claiming Bad Debt Deductions

The tax treatment of a worthless debt instrument or loan turns on whether the worthless loan is characterized as a business bad debt or a non-business bad debt. From a tax perspective, characterization of a bad debt as a business bad debt is preferable because a qualifying business bad debt is fully deductible under Code Sec. 166(a), whereas a non-business bad debt is deductible only as a short-term capital loss subject to the $3,000-per-year limitation for capital losses [Code Sec. 166(d)(1)]. A short-term capital loss offsets short-term capital gain, with any excess used to offset long-term capital gain. When short-term capital losses exceed capital gain, the excess can only offset up to $3,000 of ordinary income in the year the loss occurs. Any unused balance of the short-term capital loss can be carried over to subsequent tax years (Code Secs. 1211, 1212 and 1222).

An uncollectible loan will constitute a deductible business bad debt if the debt was bona fide, arose from a debtor-creditor relationship and was based on a valid and enforceable obligation to pay a fixed or determinable amount of money, and if the intent of the parties at the time of the transfer was to create a debtor-creditor relationship [Code Sec. 166(d)(2)(A)]. In addition, the debt must become either wholly or partially worthless in the year for which a deduction is claimed, and must constitute either a bona fide debt created or acquired in connection with the taxpayer’s trade or business, or a debt for which the loss from worthlessness is incurred in the taxpayer’s trade or business [Code Sec. 166(d)(2); Reg. §1.166-5(b)].  Code Sec. 166(d)(2) defines a non-business bad debt as a debt other than one created or acquired in connection with the taxpayer’s trade or business, or the loss from worthlessness incurred in the taxpayer’s trade or business.

 “Bona Fide Debt” Defined

In order for a loan to constitute a bona fide debt for purposes of Code Sec. 166, at the time the funds are transferred, a valid, bona fide enforceable debt must exist. A bona fide debt is defined as a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money. Note that a gift or contribution to capital will not be considered a debt for purposes of claiming a bad debt deduction [Reg. §1.166-1(c)].

A debt is bona fide if there is an unconditional obligation on the part of the transferee to repay and an unconditional intention on the part of the transferor to secure repayment of the funds. Whether a transfer of funds constitutes a loan may be inferred from objective characteristics surrounding the transfer, including the following:

• The presence or absence of a debt instrument, collateral securing the purported loan, interest accruing on the purported loan, repayments of the funds transferred and a fixed schedule for repayments of the funds transferred
• Any other attributes indicative of an enforceable obligation to repay the funds transferred
• Whether the alleged borrower has the ability to repay the alleged loan at the time the alleged lender transfers the funds

The courts have identified and considered the following 13 factors to use in determining whether a bona fide debt exists:

• The names given to the certificates evidencing the indebtedness
• The presence or absence of a fixed maturity date
• The source of payments
• The right to enforce payment of principal and interest
• Participation in management flowing as a result
• The status of the contribution in relation to regular corporate creditors
• The intent of the parties
• “Thin” or inadequate capitalization
• Identity of interest between creditor and stockholder
• Source of interest payments
• The ability of the corporation to obtain loans from outside lending institutions
• The extent to which the advance was used to acquire capital assets
• The failure of the debtor to repay on the due date or to seek a postponement

“Worthlessness” Defined

Whether a debt is worthless depends on the facts and circumstances of each situation, including the value of any collateral securing the debt and the financial condition of the debtor [Reg. §1.166-2(a)]. The taxpayer has the burden of proving that his or her debt is worthless, and failure to do so will result in denial of the bad debt deduction. The taxpayer should be able to show an identifiable event that renders the debt worthless and uncollectible. Legal action is not necessary to prove that the debt is worthless if the surrounding circumstances indicate that the debt is worthless and uncollectible and that legal action to enforce payment would in all probability not be successful [Reg. §1.166-2(b)]. Bankruptcy is generally considered an indication of the worthlessness of at least a part of an unsecured and unpreferred debt [Reg. §1.166-2(c)]. The bad debt deduction is limited to the difference between the claim and the amount received on distribution of the bankrupt debtor’s assets [Reg. §1.166-1(d)(2)].

Objective indicators of worthlessness may include the following:

• A decline in the debtor’s business
• A decline in the value of the debtor’s assets
• The overall business climate
• Serious financial reverses suffered by the debtor
• The debtor’s earning capacity
• Events of default
• Insolvency of the debtor
• The debtor’s refusal to pay
• Actions taken by the creditor to pursue collection
• Subsequent dealings between the creditor and debtor

No single factor is conclusive. The mere fact that a business is in decline, that it has failed to turn a profit or that the debt obligation is difficult to collect is insufficient to prove that the debt has become worthless.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.

McAtee & Associates, CPAS

Some taxpayers may be required to pay an Additional Medicare Tax if their income exceeds certain limits. Here are some things that you should know about this tax…

        What You Need to Know About the Additional Medicare Tax

1. Tax Rate. The Additional Medicare Tax rate is 0.9 percent.

2. Income Subject to Tax. The tax applies to the amount of certain income that is more than a threshold amount. The types of income include your Medicare wages, self-employment income, and railroad retirement (RRTA) compensation. If you’re not sure if you have income subject to these rules, please give us a call for assistance.

3. Threshold Amount. You base your threshold amount on your filing status. If you are married and file a joint return, you must combine your spouse’s wages, compensation or self-employment income with yours. The combined total will determine if your income exceeds your threshold. The threshold amounts are:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• Single: $200,000
• Head of household: $200,000

3. Withholding/Estimated Tax. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year. If you are self-employed, this tax must be included when your estimated tax liability is figured.

4. Underpayment of Estimated Tax. If you have too little tax withheld, or do not pay enough estimated tax, you may owe an estimated tax penalty.

5. Form 8959. If you owe this tax, Form 8959, Additional Medicare Tax, must be filed with your tax return. You must also report any Additional Medicare Tax withheld by your employer on Form 8959.

If you have any questions about the Additional Medicare Tax, help is just a phone call away.  Please give us a call for assistance.

If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER  PARTY ANY MATTERS ADDRESSED HEREIN.