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Last year the IRS finalized regulations that are commonly referred to as the “repair regulations” (Treasury Decision 9636). Broadly speaking, these regulations provide comprehensive standards for determining whether a particular expenditure may be deducted on your tax return as a repair expense or must be capitalized and depreciated.

The IRS requires taxpayers to “adopt” the final regulations, effective for their 2014 tax year. Unfortunately, the adoption of the final regulations required virtually every business taxpayer that owns tangible property to file a Form 3115. This complex 8-page form is used to change a taxpayer’s accounting methods.

In order to file the Form and adopt the repair regulations it is necessary to review all of a taxpayer’s expenditures in tax years that began before 2014 and determine whether those expenditures were properly accounted for as repairs or capital expenditures on earlier tax returns by applying the principles of the repair regulations. As you might imagine, a complete review of this type is potentially a lengthy and expensive process.

The IRS received much criticism for requiring all taxpayers to undergo this type of comprehensive review in order to adopt the regulations. Gratefully, the agency recently responded with some significant relief for “small business taxpayers” (Revenue Procedure 2015-20). This relief allows a small business taxpayer to adopt all or most parts of the repair regulations without filing a Form 3115.

You are a small business taxpayer if your trade or business either has less than $10 million in assets on the first day of the 2014 tax year or the business has average annual gross receipts of less than $10 million over the three preceding tax years. If either test is satisfied, you may choose to adopt the repair regulations without filing the Form 3115.

If you are a qualifying taxpayer you may not necessarily want to exercise the option not to file Form 3115. First, if you take advantage of the filing relief you may not make a “late partial disposition election.” This election is a one-time opportunity available only in 2014 to treat prior-year retirements of structural components of buildings (such as a replaced roof) as a disposition that generates a retirement loss deduction. If you previously retired a structural component, you are likely still depreciating the cost allocable to the component. The partial disposition election allows you to claim a loss for the remaining undepreciated cost in 2014.

Secondly, if you choose to adopt the repair regulations without filing Form 3115, no deduction may be claimed in 2014 for amounts that you capitalized prior to 2014 but which are deductible under the final repair regulations. You must continue to capitalize and depreciate those amounts.

It should also be pointed that if you are selected for audit in some future year, the IRS has the authority to change the treatment of your prior expenditures to follow the treatment required by the final repair regulations even though you chose the relief.

The decision to opt out of filing Form 3115 needs to be made on a case-by-case basis by weighing the cost and inconvenience of the filing requirement against the value of any potential benefits.

If you do not qualify for filing relief or choose not to exercise it, a review of your prior year expenditures will be necessary to properly comply with the repair regulations. Generally speaking, this review may result in a deduction on your 2014 return if the amounts of prior capitalized expenditures that may be expensed under the repair regulations plus any retirement loss deductions for structural components under the partial disposition election exceed the amount of previously deducted expenditures that should be capitalized under the repair regulations. If the reverse is true, then the difference must be included in income over a four-year period. 

Our firm stands ready and able to help you comply with the repair regulations on your 2014 return. Please contact us so that we can help you address these rules.

 

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Divorce Tax Alternative
Are you a parent who is (or was) involved in a separation or divorce? If so, you’re aware that many important issues can be overshadowed by emotional concerns during this often contentious process. We would like to offer our family tax expertise to help you maximize the benefits of various child-related tax alternatives. In some instances, the value of these benefits can be quantified in order to offer them as a concession in your divorce or separation agreement. Even if your divorce is finalized, there may be issues that were not adequately addressed during your financial negotiations that can be revisited.

Raising children with an ex-spouse or partner can be very complicated. There are many interrelated tax issues that should be considered, such as:

·    Who gets to claim the dependency exemption for the children?

·    How does the tie-breaking rule work?

·    How does a multiple support agreement affect the dependency exemption?

·    How does a taxpayer qualify for head-of-household filing status?

·    When are children treated as a dependent of both parents?

·    How does a taxpayer qualify for the various child-related tax credits?

·    When can tax-favored education incentives be utilized by divorced or separated parents for their children?

·    How is the “kiddie tax” calculated for children of unmarried parents?

·    How do the tax consequences of child support differ from alimony or maintenance payments?

Taking advantage of the child-related tax benefits available to you can lower your taxable income significantly. By gathering and analyzing pertinent data, we can provide a tax plan tailored to your unique circumstances. Please call our office at your earliest convenience to arrange an appointment.

 

 

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Gunnip & Company LLP is pleased to announce that it has successfully completed a peer review of its accounting and auditing practice.  After a thorough study of its policies and procedures, the reviewer concluded Gunnip & Company complies with the stringent quality control standards established by the American Institute of Certified Public Accountants (AICPA). The firm received the highest possible rating which exemplifies its commitment to provide the highest standard of excellence in the quality of their work.

Robert D. Mosch, Jr. CPA, Partner, who heads quality control at Gunnip & Company, says “We are proud to once again successfully complete our peer review, especially given the increasing scrutiny of the accounting sector.”

Peer review is a periodic outside review, performed by another accounting firm, of a firm's quality control system in accounting and auditing.  The rigorous review is based on a series of standards for quality control set by the AICPA, the national professional organization of CPAs. 

Gunnip is committed to periodic peer reviews to enhance the quality of its accounting and auditing services.  To see the latest peer review report, please click here.

 

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The IRS announces that, as part of its efforts to curb fraud and identity theft, it will no longer directly deposit more than three electronic refunds to a single financial account or prepaid debit card. Taxpayers who exceed the limit will receive an IRS notice and a paper refund.

The IRS also warns that direct deposit must be made only to accounts bearing the taxpayer's name.

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The Tax Increase Prevention Act of 2014 (2014 Tax Prevention Act) provides a one-year extension of the exclusion from income for the forgiveness of debt on a principal residence. The exclusion now applies to discharges of qualified principal residence indebtedness occurring on or after January 1, 2007, and before January 1, 2015. During the exclusion period, taxpayers who are caught in a mortgage crisis do not have to pay taxes for debt forgiveness on their troubled home loans.

Debt forgiveness relief was originally granted to taxpayers through the Mortgage Forgiveness Debt Relief Act of 2007, effective for debts discharged after January 1, 2007 and before January 1, 2010. The 2008 Stabilization Act extended this relief to debts discharged before January 1, 2013. The 2012 Tax Relief Act extended this relief again to debts discharged before January 1, 2014.

In general, the amount of the forgiveness of debt on a principal residence that is included in income is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. The tax on this income creates an additional burden to taxpayers already struggling financially. The 2014 Tax Prevention Act provides relief from this burden so that taxpayers can recover faster. These rules generally apply to foreclosure or the exchange of an old obligation for a new obligation.

If you have any questions regarding this provision or if you have concerns regarding a home foreclosure, we can answer any questions and discuss your options in greater detail. Please call our office at your earliest convenience to arrange an appointment. 

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In its final session of the year, Congress extended a long list of tax breaks that had expired, retroactive to the beginning of 2014. But the reprieve is only temporary. The extensions granted in the Tax Increase Prevention Act of 2014 remain in effect through December 31, 2014. For these tax breaks to survive beyond that point, they must be renewed by Congress in 2015.

Although certain extended tax breaks are industry-specific, others will appeal to a wide cross-section of individuals and businesses. Here are some of the most popular items.

* The new law retains an optional deduction for state and local sales taxes in lieu of deducting state and local income taxes. This is especially beneficial for residents of states with no income tax.

*  The maximum $500,000 Section 179 deduction for qualified business property, which had dropped to $25,000, is reinstated for 2014. The deduction is phased out above a $2 million threshold.

*  A 50% bonus depreciation for qualified business property is revived. The deduction may be claimed in conjunction with Section 179.

*  Parents may be able to claim a tuition-and-fees deduction for qualified expenses. The amount of the deduction is linked to adjusted gross income.

*  An individual age 70½ and over could transfer up to $100,000 tax-free from an IRA to a charity in 2014. The transfer counts as a required minimum distribution (RMD).

*  Homeowners can exclude tax on mortgage debt cancellation or forgiveness of up to $2 million. This tax break is only available for a principal residence.

*  The new law preserves bigger tax benefits for mass transit passes. Employees may receive up to $250 per month tax-free as opposed to only $130 per month.

*  A taxpayer is generally entitled to credit of 10% of the cost of energy-saving improvements installed in the home, subject to a $500 lifetime limit.

*  Educators can deduct up to $250 of their out-of-pocket expenses. This deduction is claimed "above the line" so it is available to nonitemizers.

The remaining extenders range from enhanced deductions for donating land for conservation purposes to business tax credits for research expenses and hiring veterans.

Finally, the new law authorizes tax-free accounts for disabled individuals who use the money for qualified expenses like housing and transportation. Another provision in the law provides greater investment flexibility for Section 529 accounts used to pay for college.

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Form 1099s must be filed by businesses each year. This year the deadline for filing falls on February 2, though electronic filers have until March 31 to file. The most common form for businesses is probably Form 1099-MISC, used to report miscellaneous payments to nonemployees. This includes fees for services paid to independent contractors, such as consultants, lawyers, cleaning services, and others. Generally, you don't report fees paid to corporations, but there are exceptions (payments to lawyers, for example).

For details or filing assistance, contact our office.

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There are many ways to make your business more profitable, and sound credit policies are high on the list. The current slowdown in the economy is a good reason to reexamine your company's policies. Keep the following items in mind as you review your policies.

* Don't be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they've handled other financial transactions.

* Establish collection policies and follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. That cuts into your profits.

* Calculate what it costs to carry credit for your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $3,000 per year. This example assumes you can borrow money at 5% interest. By speeding up the average collection to 30 days, you cut your carrying costs by half.

* To speed collections, invoice customers when you ship the goods; don't wait until the end of the month. Make sure your invoice clearly shows your payment terms, including penalties for late payment and the discount, if any, for prompt payment.

* Be aware of the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.

Call us if you'd like to review your credit policies.

 

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Are you aware of the numerous age-related provisions in the IRS code? They are probably more plentiful and significant than you thought. Here are a few examples of the age-related tax rules that could affect you and your dependents.

  • At birth up to age 19 and even 24: dependency deduction. Parents can claim a dependency exemption for a child under 19 or for full-time students under the age of 24.
     
  • Under 13: child care credit. This provision gives parents a tax credit for dependent care expenses.
     
  • Under 17: child tax credit. If parental adjusted gross income is below a threshold level, parents can claim a child tax credit of $1,000.
     
  • At 50: retirement contributions. The government allows extra "catch up" contributions to retirement savings. This is a helpful provision to encourage savings.
     
  • Before age 59½: early withdrawal penalty. Withdrawals from IRAs and qualified retirement plans, with some exceptions, are assessed a 10% penalty tax.
     
  • At 65: increased standard deduction. Uncle Sam grants a higher standard deduction, but there's no additional tax benefit if the taxpayer itemizes deductions.
     
  • At 70½: mandated IRA withdrawals. The IRS requires minimum distributions from a taxpayer's IRA beginning at this age (doesn't apply to Roth IRAs). This starts to limit tax-deferral benefits.

Awareness of how the tax code affects you and your family at different ages is important. For tax planning assistance through the various phases of life, give our office a call.

 

 

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Many small business owners pay too little attention to their financial statements. This is due in part to not understanding just what the statements have to offer. In fact, many may not be able to tell you the difference between a Balance Sheet and an Income Statement.

Think of them this way. The Balance Sheet is like a still picture. It shows where your company is at on a specific date, at month-end, or at year-end. It is a listing of your assets and debts on a given date. So Balance Sheets that are a year apart show your financial position at the end of year one versus the end of year two. Showing how you got from position one to position two is the job of the Income Statement.

Suppose I took a photo of you sitting behind your desk on December 31, 2013. And on December 31, 2014, I took a photo of you sitting on the other side of your desk. We know for a fact that you have moved from one side to the other. What we don't know is how you got there. Did you just jump over the desk or did you run all the way around the building to do it? The Income Statement tells us how you did it. It shows how many sales and how much expense was involved to accomplish the move.

To see why a third kind of financial statement called a Funds Flow Statement is useful, follow this case. A printer has started a new printing business. He invested $20,000 of his own cash and borrowed $50,000 from the bank to buy new equipment. After a year of operation, he has managed to pay off the bank loan. He now owns the equipment free and clear. When he is told his net profit is $50,000, he can't believe it. He might tell you that he took nothing out of the business and lived off his wife's wages for the year. And since there is no cash in the bank, just where is the profit? The Funds Flow Statement will show the income as a "source of funds" and the increase in equipment is an "application of funds." The Funds Statement is even more useful when you have several assets to which funds can be applied and several sources of funds such as bank loans, vendor payables, and business profit or loss.

Don't be afraid to ask your accountant questions about your financial statements. The more questions you get answered, the more useful you will find your financial statements.

 

 

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