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Speedometer pointing at 40mph.  Delaware CPA. Wilmington Accountant.  Deduct MileageRather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.  

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.  

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. 

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify. 

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses are deductible only to the extent they exceed 10% of your adjusted gross income.

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later. 

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

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Divorce on red letters on a white paper with divorce typed - tax alternatives for divorced or separated parentsAs a parent who is (or was) involved in a separation or divorce, 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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Gift Tax Return. Picture of a children, parents and grandparents on a walk. Delaware CPA

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return. 

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, 
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file. 

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

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2017 To Do List - Set up SEP (Simplified Employee Pensions)
Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous. 

SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested. 

Deadline for set-up and contributions

A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:
 

  •  A calendar-year partnership or S corporation has until March 15, 2017, to establish a SEP for 2016 (September 15, 2017, if the return is extended).
  • A calendar-year sole proprietor or C corporation has until April 18, 2017 (October 16, 2017, if the return is extended), because of their later filing deadlines.

The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return. 

Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017).

Contribution amounts

Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee.

For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively.

Setting up a SEP is easy

A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement. 

Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us. 

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Businesses need check-ups, tooBusinesses generally issue year-end financial statements to let investors and lenders evaluate their financial health. But proactive stakeholders — including the company’s CEO and board of directors — may want more than one “snapshot” per year of financial results. Interim statements let stakeholders know how a company is doing each quarter or month, but they also have drawbacks and limitations.

Benefits 

Interim reports may provide signals of impending financial turmoil due to, say, the loss of a major customer, significant uncollectible accounts receivable or pilfered inventory. Or they might confirm that a turnaround plan appears successful or that a startup has finally achieved profits. In short, they allow stakeholders to check up on performance, giving them either midyear peace of mind or the opportunity to implement corrective measures early on.

Limitations

But beware: Interim financials usually don’t conform to U.S. Generally Accepted Accounting Principles. Outside accounting firms rarely review or audit interim statements because of the cost to do so. Absent external oversight, internal finance and accounting personnel with bad news to report might be tempted to cook the books to appear more profitable.

Interim numbers may omit many of the adjustments that external accountants make at year end, such as estimates for bad-debt write-offs, accrued expenses, prepaid items, management bonuses or income taxes. In addition, some companies save tedious bookkeeping procedures, such as physical inventory counts and updating depreciation schedules, until year end. So interim account balances might reflect last year’s amounts or be based on historic gross margins.

It’s also important to realize that some companies are seasonal. If there are operating peaks and troughs, for example, you can’t multiply quarterly profits by four to reliably predict year-end performance. For seasonal operations, you may want to benchmark last year’s monthly (or quarterly) results against the current year-to-date numbers.

When the numbers don’t add up

If interim statements reveal irregularities or trigger concerns, consider seeking outside accounting expertise. We can conduct a forensic investigation or agreed-upon procedures that target high-risk account balances or an account that was previously adjusted by auditors. Contact us for more information.
 

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Map of the United States - Deduction for domestic productionThe Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies. 

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts. 

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible. 

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax. 

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t ― unless less than 5% of receipts aren’t attributable to DPGR. 

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as: 

• Tangible personal property (for example, machinery and office equipment),
• Computer software, and
• Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.
 

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"Audit" written on a date planner bookIf your business issues audited financial statements and follows a calendar year end, your external auditing procedures have already begun. At a minimum, you’ve signed an engagement letter, sent over preliminary financial statements and allowed your CPA to observe any year end physical inventory counts. But there are some steps you can still take to streamline audit fieldwork.


Think like an auditor

An external audit is less intrusive if you anticipate your auditor’s document requests and inquiries. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.

What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest. 

Prepare for audit inquiries by comparing last year’s financial statements to the current ones. Your auditor is likely to ask questions about any line items that have changed materially. A “materiality” rule of thumb for small businesses might be to inquire about items that change by more than, say, 10% or $10,000.

Review 2015 adjustments

Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP). 

For example, auditors may need to prompt clients to write off bad debts, evaluate repairs and supplies accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.

You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance. 

Plan ahead

An external audit doesn’t have to be a time-consuming or disruptive event. The key is to prepare, so that audit fieldwork will run smoothly.

Earned Income Tax Credit

Working grandparents may be eligible for the Earned Income Tax Credit (EITC) and should claim it if they qualify. The EITC is a refundable credit; those who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.

Grandparents (and other relatives that care for children) may not be aware that they could claim the children under their care for the EITC. A grandparent who is working and has a grandchild who is a qualifying child living with him or her may qualify for the EITC, even if the grandparent is 65 years of age or older.

Generally, to be a qualified child for EITC purposes, the grandchild must meet dependency requirements, special rules and restrictions apply if the child’s parents or other family members also qualify for the EITC. There are also special rules for individuals receiving disability benefits and members of the military.

To qualify for EITC, the taxpayer must have earned income from a job or from self-employment (certain disability payments may qualify as earned income for EITC purposes) and satisfy some other requirements. The IRS recommends using the EITC Assistant to determine eligibility, estimate the amount of the credit and more. To get the credit, taxpayers must file a return, even if they do not owe any tax or are not required to file.

Taxpayers claiming the EITC this year will receive their refunds later than in the past due to The Protecting Americans from Tax Hikes Act of 2015. Although the IRS will begin releasing affected refunds on February 15, early filers are not likely to have access to their refunds until at least the week of February 27. The additional delay is due to several factors, including the President’s Day holiday and the time needed by banks and financial institutions to process direct deposits of refunds.

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IRS Phishing scam warning sign on a keyboar

The IRS, state tax agencies and the tax industry have renewed their warning about a recurring email scam targeting payroll and human resources departments. In this scam, the email appears to come from an actual corporate officer and requests individual employee Forms W-2 or an earnings summary that contains similar information from the company’s payroll or human resources departments. The IRS has urged payroll and human resources officials to double check any executive level or unusual requests for Forms W-2 or lists of employee Social Security numbers (SSNs).

The W-2 scam first appeared last year. Cybercriminals tricked payroll and human resource officials into disclosing employee names, SSNs and income information. The thieves then attempted to file fraudulent tax returns in order to obtain tax refunds.

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. 

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

Changing the tax treatment

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction. 
 

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Experience is the Difference®