Tax Planning

As a business owner, you’re entitled to a plethora of tax deductions. These tax deductions can help you to offset business income, which ultimately helps you be more profitable. Of course, you need to be careful with your tax deductions. Always consult with your CPA about which deductions are available to you, and how to take them. You don’t want to get into trouble with the IRS. Here are some common business deductions to be especially careful with.

Mileage Deductions

If you have a dedicated company car, the mileage expense deduction is pretty straightforward, although you do have to be meticulous about recordkeeping. You need to show that all the mileage was used for business purposes, which may entail a coordination between business appointments and the distance between your office and the client’s place of business. If your business driving is more speculative rather than appointment based (for example, you drive around town and knock on doors looking for business), it’s harder to prove that 100% of the mileage is business-related.

If you use one vehicle for both business and personal reasons, it’s even harder to avoid raising red flags. At least 50% of the use of the car must be for business purposes in order for you to be able to deduct mileage. And you’d better have really good records to back up your claim, too. Talk to your CPA about acceptable ways to track mileage that the IRS will be happy with.

Home Office Space Deduction

The IRS understands that more and more small business owners are working from home. That’s why they generously allow a home office space deduction. You can calculate this deduction either by using a percentage method or a square-foot method. But what you can’t do is take a deduction for a home office space if you use that space for any other purpose than a home office. The home office must be dedicated space. In other words, if your home “office” is the kitchen table or a partitioned area of the living room, that’s not going to work as far as the IRS is concerned. And if you think they will never know, you might want to reconsider. First of all, your house layout can easily be accessed online. If you say you’re using an entire bedroom as a home office in a two bedroom home and you’re filing married with two child deductions, that’s definitely going to raise some eyebrows and probably a red flag.

Employee Rewards

The IRS wants business owners to be able to reward deserving employees and as such, some employee gifts and bonuses are deductible. However, not every employee gift is deductible. For instance, you can’t gift your employee anything valued over $25 per year (and expect it to be deductible). And bear in mind that bonuses are taxable for employees as ordinary income, although they are deductible to the business owner. Consider enclosing a small note about the employee’s tax responsibility if you want to help your employees stay out of hot water.

Memberships

If you’re in a position to be able to afford memberships for yourself, that’s great. But not all membership fees are deductible. You can deduct membership fees for professional and trade organizations such as ASCE, the American Society of Civil Engineers. But you can’t deduct memberships to your local private golf club, even if you plan to network with clients there. You can, however, deduct the cost of meals taken with clients at the private golf club; a small but important distinction. Currently, the meal expense deduction stands at 50% of allowable expenses.

Entertainment

If you’re accustomed to treating visiting clients to tickets for the big shows that are in town, be careful. As of tax year 2018, business entertainment deductions are no longer allowed. The only entertainment expenses you are allowed to deduct are those for promotional purposes, such as events your business hosts. 

Travel Expenses

Business travel expenses can land you in hot water if you don’t understand what’s allowed to be deducted and what isn’t. Your CPA can help to guide you as to what’s deductible so you can spend wisely while traveling for business. For starters, if you’re just traveling across town and back, that’s not considered deductible business travel because the travel must last “substantially longer than an ordinary day’s work.” In other words, the travel must be an overnight event. But too long is not good, either. The travel must be less than a full year. In addition, your business trip must be 100% business-related. It can’t be partly for business and partly for pleasure, though you’re certainly permitted to sightsee on your own dime. If you do personal activities, those expenses are not deductible. The best thing to do is to confine your business trip to business activities as much as possible, keep every single receipt and then give everything to your CPA when you’re ready to have your taxes done.

Donations

This is a tricky business deduction. Technically, you’re allowed to take deductions for donations to qualified charities, but there are rules involved. First, only corporate entities can take charitable donation deductible. If you’re not a corporation, you can still take a deduction, but it will be on your personal return. Second, the charity must be qualified by the IRS’s standards. Certain deductions are allowable and others aren’t. Cash and gifts are deductible, but time is not. So for instance, if you want to have your employees volunteer for an afternoon at the local charity around the holidays, you can’t deduct their payroll for that day. You may be able to deduct donations of business inventory and intellectual property such as patents, but only a percentage. Your CPA can provide details.

As you can see, there are numerous tax deductions that can help your business to offset income. But using these allowable deductions correctly requires knowledge and understanding that you may not have. It’s always a good idea to confer with your tax professional so that you can make sure you’re getting all the deductions you’re entitled to without raising any red flags.

Whether it’s carols blasting in the malls, or menorahs in the window, the holiday season is upon us. For small businesses, it can be a great time to say “thank you” to the clients who’ve helped you have a successful year. Some companies choose to send holiday cards, which only cost pennies, but others want to go above and beyond. Sending a gift can make a deeper impression.

When planning your holiday shopping, should you add your clients to your list?

Reasons to Give Clients Gifts

Your clients support your business and keep your business afloat. It’s only natural to want to show them appreciation. Giving them tokens of your gratitude for their business can build goodwill and develop a closer relationship. Strong business relationships are so important that a Harvard Business School study found that 85% of professional success comes from people skills.

Giving gifts ensures that you remain in the person’s mind, as it’s hard to forget someone who gave you something nice. While it may not bring it business immediately, if a future business need arises that you can fill, they’re more likely to reach out. If it’s been a while since they brought your company business, it’s a subtle reminder of the work you’ve done for them in the past.

Consider a gift as a long-term investment in the client relationship. It may not pay immediate dividends, and the return on the investment may not directly tie to the present, but it contributes to the overall goodwill between you and a client.

Check the Company’s Gifting Policies

Many organizations have gift-giving policies. These policies have been instituted to keep bidding on contracts and hiring new companies fair and balanced. Larger organizations want to avoid the reputation risk  should they appear to take bribes. Some industries, such as banking, are subject to laws and regulations related to bribery, and must comply. If you offer a gift that isn’t allowed by a client’s corporate policy, you could place them in an awkward situation.

Policies commonly place a limit on the dollar amount. Gifts over a certain threshold must be reported to Human Resources. Or, they could prohibit gift-giving to individuals. In those cases, you are allowed to send a box of chocolates, but it must be addressed and intended for the entire team. Before pulling out your credit card to order a client gift, pick up the phone and call your client.

You can ask your client directly, or reach out to Human Resources, to find out their policy. Use discretion when deciding who to approach. Abide by the policy, and get creative, if needed.

Things to Consider when Selecting Client Gifts

Make it personal and thoughtful. Has the client mentioned that they love fly fishing? Send them customized fishing lures. Does the team solve complex problems?  Maybe they would enjoy a puzzle to set up in the break room. When deciding on a gift, ask yourself if you would like to receive it.

Be careful with branding and logos. A gift is meant to show appreciation for the client’s business; it’s not a marketing tool. Adding large branding turns it into a sales item, particularly if it renders the item virtually unusable. Again, ask yourself if you would want to use a wine cozy with a logo on it before you order 100.

If you’re going to send a food item, consider possible food allergies and try to pick something inclusive. Sending smaller gifts throughout the year, with a variety of food items such as cheese, meats, or candy, can also help build goodwill while avoiding the trap of excluding a key team member.

When selecting gifts, choose quality over price point. A cheap gift reflects poorly on your business. Sending a smaller, but higher-quality present is a better reflection. If their office is nearby and you know it would be acceptable, you can drop the present off in-person. If this would not go over well, or isn’t possible, have the gift professionally packaged and shipped. 

Tax Implications of Gift-Giving

When it comes to gift-giving, tax laws can be a bit odd. A gift of a turkey isn’t taxable, but a gift certificate redeemable for a turkey would be if the value was more than $25. In addition to respecting the client’s gift policy, you also don’t want to create a tax headache for them. Employers who give their employees gift cards must include them in wages.

What if you want to use your gifts as a tax deduction? The IRS has placed stringent rules around the deductibility of gifts. You can only deduct $25 per person, per year. Some companies try to get around this by taking clients to a show, as entertainment is 50% deductible, but the client must attend with you. Bottom line? Gift-giving shouldn’t be a major part of your tax planning strategy. Always talk to your accountant before making financial business decisions that have a tax impact.

Above all else, give cheerfully and gratefully. Your attitude towards the gift can communicate itself to your client, and it should never come from a place of obligation or resentment. A joyful attitude is always in season.  

The deadline for implementing the FASB’s new leases accounting standard, ASC 842, is fast approaching. Many private companies are only just now realizing that they need to examine their leases in light of the new requirements to bring most leases on-balance sheet. Adding right-of-use assets and corresponding liabilities could change important ratios and impact lending agreements, and more.

If you haven’t already, now is the time to think about how you will ensure compliance in 2020.

Overview of the Standard

The FASB passed this new standard due to concern that a company’s balance sheet did not truly reflect its assets and liabilities without including lease obligations. After all, they are an ongoing expense and, in some industries, can significantly impact the business’s results.

An agreement counts as a lease if it contains the right to control the use of a specific asset or the lessor obtains substantially all of the asset’s economic benefits. Both conditions must be met for you to consider your agreement to be a lease. Under ASC 842, companies can have three types of leases; a sales-type lease, a direct financing lease, or an operating lease.

Sales-Type Leasesunder ASC 842 for Small Companies

Only lessors can classify some leases as sales-type leases. With this type of lease, you derecognize the underlying asset and account for the net investment in the lease on the Balance Sheet. There are three main criteria that a lease must meet to qualify as a sales-type lease. The fair value of the leased property must vary from its carrying amount at the lease inception; it must involve real estate, and there must be a transfer of ownership to the lessee at the end of the lease.

The net investment is based upon the total of the present value of all future lease payments plus the unguaranteed residual value. Interest income is added to the net investment, and then payments are decreased from the net investment over time.

Finance Leases under ASC 842 for Small Companies

All leases with terms longer than a year and greater than $5,000 in value now count as a finance lease. In addition, the lease must transfer the underlying asset to the lessee at the lease’s end. A finance lease must have the option to purchase, and its term must represent the majority of the asset’s remaining economic life.

When you sign a new finance lease, you must record a liability based on the present value of future lease payments and offset this liability with a right-of-use asset. With a finance lease, you must determine the borrowing rate implicit in the lease. This can be your incremental borrowing rate.

If your business has no debt, and therefore no way to estimate its borrowing rate, private companies must reach out to their banks or other lenders to find out what they would be charged to borrow.

Operating Leases under ASC 842 for Small Companies

Leases with terms of twelve months or less are considered operating leases under ASC 842. This means that you will not have to bring them on-balance sheet. While you must recognize lease expense on a straight-line basis over the lease term, with an operating lease, you do not have to recognize the interest and amortization expense.

The FASB considers the lease’s term to begin from its inception date, which they have not clearly defined. Some companies are choosing to use the date the lease commenced as the inception date, while others have selected the date the lease was signed.

It’s important to note that, for the period of adoption, whether or not a lease is considered short-term does not have to do with the time remaining on the lease. Therefore, if there is only six months remaining on the lease on the adoption date but it was originally a three-year lease, you cannot consider it an operating lease.

Embedded Leases and Private Companies

Companies have been struggling with the concept of “embedded leases.” These are leases contained within a larger lease agreement. It could be an agreement within your master office lease to also lease storage space, or data hosting and other hosting arrangements could contain an embedded lease if specific resources are set aside and dedicated to your company.

Under the new standard, if you fail to identify and properly account for an embedded lease you could have to restate your results or face internal control risk.

Sale-Leaseback Transactions under ASC 842

With sale-leaseback transactions, the lessee (seller) sells an asset to a lessor (buyer) for consideration, and then turns around and makes rent payments to the lessor to retain use of the asset. In the past, a sale-leaseback transaction was off-balance sheet, but now these must be accounted for on-balance sheet.

The terms and conditions for these transactions can be quite complicated, and you are best served involving accounting professionals in both structuring and accounting for them.

Tax Implications of the New Standard

With the new standard, you could have the option of capitalizing certain transaction costs such as third-party commissions and recovering them through amortization. How you decide to handle these costs will impact your tax filings. If you have previously not capitalized theses costs and have decided to now follow your financial statements, you will have to file a form with the IRS to make this change.

It is important to discuss how this new standard will impact your taxes with your accountant and solicit their advice on the best path forward for your business.

The standard is effective for private companies in 2020, so if you have not begun the adoption process, you are fast running out of time. The good news is that many smaller companies could only have one or two leases in place, likely a lease for office space or a copier lease. As well, public companies have already adopted ASC 842, and you can look at their filings for a template and roadmap to adoption.

Which Items are Tax Deductible when Selling a House?

When you list your house on the market, you’re probably thinking about how much money you’ll make or where you want to move next, not about your taxes. A home sale does have tax implications which can either help or hurt you in April.

Find out everything you need to know about selling a house and personal income taxes before you plan on spending the profits from selling your home.

Which Common Home Selling Costs are Deductible?

Not all of the costs related to a home sale are deductible. Here are the costs which can be used to offset any profit and reduce your tax burden.

Repairs Related to the Home Sale. If your realtor insisted that you fix the wobbling back handrail, patch and paint the walls, or make other repairs before listing those costs can be deducted. However, these repairs must have taken place within 90 days of close.

Home Improvements. While 100% of repairs are eligible for deduction in the year you sell the home, the IRS treats improvements differently. Improvements such as adding a deck, installing A/C, or upgrading your kitchen countertops, are only eligible for deduction over a number of years. Talk to your accountant about setting up a depreciation and deduction schedule for them.

Mortgage Interest. Don’t worry, even if you sold your home mid-year you can still deduct the mortgage interest you paid during the year’s first half. The same applies to property taxes.

Realtor Commissions. Nationwide, the average realtor commission you’ll pay is 6%. It’s split between the buyer and the seller’s agent, so even if you decide to sell by owner, you’ll pay 3%.

Points: If you paid mortgage interest, or points, upfront when you bought the house and are still amortizing their deduction, you can take the remaining amount in one lump deduction the year you sell.

Legal Fees. Depending on the complexity of your home sale, you might have to pay a lawyer to prepare and review documents. These fees can be deducted.

Title Insurance. Any title insurance you purchased qualified as a deduction.

Advertising Costs. This deduction will be particularly helpful if you went the “For Sale by Owner” route and paid significant advertising costs. As long as they can be directly related to your sale, you can deduct them.

Escrow Fees. Any fees related to setting up and maintaining an escrow account before close can also be deducted.

If you plan on deducting any of these above expenses, make sure that you keep excellent records. Insist that your handyman provides you with an itemized invoice for repairs done related to selling, don’t lose receipts for paint from Home Depot, and give them all to your accountant at tax time.

Will I pay Capital Gains on my Home Sale?

The tax code contains a capital gains exclusion, which helps homeowners avoid paying taxes on the profit from their home sale. Up to $250,000 of the profit that a single homeowner makes on their sale, and up to $500,000 for married homeowners filing jointly, can be excluded from their taxes. However, the home had to be your primary residence for two out the last five years before sale.

What if I took a Home Office Deduction?

Many independent contractors or self-employed professionals write off a portion of their home on their taxes. The simplified deduction, for home offices of 300 square feet or less, is $5 per square foot. The more complicated method takes actual costs against the home’s overall expenses, allowing you to deduct a portion of your mortgage interest, maintenance and repairs, property taxes, insurance, utilities, and other expenses.

If you sell a property where you’ve been taking a home office deduction, you don’t have to break your profit between the personal and professional square footage for tax purposes. Since this profit is more likely than not to qualify for the home sale tax exclusion, you don’t have to worry about a thing.  

But what if you converted an old garden shed to your home office? Or built one above the garage? You do have to break out home offices not located within the four walls of the main house from your personal profit. You’ll have to allocate a portion of the gains on your sale to your home office, and you’ll owe taxes on this profit.

As well, if you lose the home office deduction, or the size of your home office will change, you’ll need to plan for how this will affect your taxes. Talk to your CPA or accounting professional for specific guidance.

What about my Depreciation Deductions?

One of the perks of writing off a home office on your taxes, deducting depreciation, will hurt you when it comes time to sell the house. Recaptured deductions are taxed at a 25% rate. This may look high, but could often be the same or less than the tax you would have paid if you hadn’t taken the deduction.

Selling a house is a large and complicated transaction. If you have concerns about its impact upon your personal or business income taxes, consult with a professional. They can offer advice for tax planning and reducing any negative effects from your home sale.

Change is a constant part of life. With each change, adjustments have to be made. Certain changes in our lives puts us in a different tax category or changes how we need to file our taxes. Legally, we may come under different rules and requirements. There are tax advantages or credits that come with some of life's changes. Below are a few events that can take place in your life where you may need some professional guidance with the filing of your taxes.

Getting Married

As a single person, you filed your taxes as a single individual. Now that you are getting married, will it be cheaper to file a joint tax return or separate tax returns? One spouse may own a business or may quit their job. Are there children involved? A CPA can take all of your circumstances into account. Then they can help you set up your tax returns and finances for your best advantage.

Newborn Baby

The tax laws allow exemptions when you have a new baby. You will be able to take advantage of certain tax breaks. A CPA can help you understand which exemptions you qualify for and keep you up to date on current laws.

Adoption of a Child

When adopting a child, there are tax credit allowances available. An employer can offer financial assistance to help pay for the adoption, but tax-free assistance is limited. A CPA can educate you on what tax advantages are available for you given your circumstances and how much tax-free assistance you can receive. For example, both federal and state tax laws also allow for some benefits when prepaying for your child's college education.

Death of a Spouse

With the death of your spouse, there will be questions about inheritance taxes and social security benefits to be answered. How much, if any, will you owe in federal estate taxes or state death taxes? Do you qualify to receive any of your spouse's social security benefits? You may also need help in filing your spouse's income taxes for the amount of time they worked during the year.

Divorce

Many tax related situations will arise due to a divorce. Alimony, child support, splitting of assets and tax returns will all have to be handled. What about property taxes and how the transfer of property may be taxed? Professional guidance will make the process less confusing and easier to navigate.

Legal Separation

Similar to being divorced, being legally separated has its own tax implications. Should you still file jointly or should you file as a single taxpayer? What is required if the children are staying with you or if they are living with your spouse? Other than federal laws, what are the laws in the state in which you live?

When Paying and Receiving Child Support

Paying child support can be a burden on your income, but certain tax deductions may be allowed. Is the recipient of the child support required to pay income tax on the amount paid to them? A CPA can make sure you are filling out your taxes correctly.

Sudden Disability or Accident

If you have an accident and suddenly become disabled, you may have access to some type of disability insurance. Should you count your insurance payments as income? What part, if any, is taxable?

Diagnosis of Long-term Illness

Elderly people often face chronic health issues that may one day take their life. They look for ways and individuals to protect their financial interests. Sadly, many elderly people are victims of financial abuse. A trusted CPA can be a great partner to protect their financial interest and safeguard them from someone taking advantage of them.

Selling or Buying a House

If you itemize, many of the expenses of buying a home and paying a mortgage can be tax deductible. If you sell your home, the government requires you to pay capital gains tax. What is deductible and what amount you will have to pay capital gains tax on is what you and your CPA will have to figure out. In addition, energy-efficient upgrades or the installation of medical home improvements may qualify for tax credits.

Moving to a Different State

If you move to a different state, you will most likely have to fill out tax returns for each state. Income taxes are figured differently in each state. Some states do not require its citizens to pay income tax. Other states have flat rates or taxes are based on your income bracket.

Starting a Business

Depending on the type of business and how many employees you have, you must make sure your accounting practices comply with what the government requires. Certain expenses can be tax deductible and you will need a feasible procedure to keep up with them. In addition, personal and business expenses need to be kept separate. Business taxes are filed on a different form, for starters. Business losses could affect how much you have to pay on income from other sources. Business owners are also allowed to depreciate equipment and buildings that deducts from the taxes they owe. Also, if you work from home, or your home serves as the headquarters for your business, tax laws allow you certain deductions.

You Inherited a Large Amount of Cash or Property

Inheritance taxes can be very costly. Knowing the specifics can save you a lot of money. Making investments with the money could save on paying taxes for the present. Knowing how to categorize inherited property will help in using them as a tax deduction.

Retirement

Retiring changes your tax situation. Social security payments and pensions need to be counted as income. You will need to determine what tax bracket your total combined income puts you in. IRA regulations require a certain amount to be pulled out when you reach a particular age. Some IRA withdrawals are taxable. New tax laws for retirees may change how you fill out your taxes.

If any of the above events happen in your life, visiting a CPA can save you a lot of money and help you meet your new legal requirements. Your CPA will understand how your particular situation and circumstances may qualify you for certain tax breaks and advantages.

Two of the biggest concerns of those who are investing for retirement are not running out of money and maintaining regular cash flow. It can be difficult to switch from a bi-weekly paycheck to carefully timed withdrawals from a retirement account.  Market fluctuations cause balances to rise and fall, leaving an investor with less in their account than they’d planned. 

These are the reasons that some investors consider real estate investments for retirement. A multi-family property yields regular, monthly income similar to a paycheck. Home values typically don’t fluctuate wildly and over time show appreciation. But what are the deeper implications of real estate investing for retirement?

Pros of Real Estate Investing for Retirement

Five thousand dollars in rent, deposited into your bank account every month, can easily take a salary’s place. One of the biggest pluses to real estate investing for retirement is passive income. Tenants pay monthly rents and you can use that income to fund your retirement.

If you can’t afford to pay cash for your investments, you’ll have a monthly mortgage payment. But, depending on your down payment, it could be quite small.  Protecting your cash reserves is important in retirement, so if you’re not fully comfortable purchasing properties directly, look into real estate investment trusts, or REITs.

Before deciding to invest through a REIT or partnership, talk to a Registered Investment Advisor or RIA with deep knowledge of real estate investing. They can outline the risks and rewards of each type of indirect real estate investment available to you, and guide you to one that fits your needs.

With a real estate investment, you’ll have more control over its appreciation. Stock prices rise and fall for reasons entirely out of your control. If a CEO makes a poor investment or an acquisition falls through and your portfolio loses so much value that you have to touch principal that quarter. But with a property, you have more control.

Make improvements to the structure, or add some landscaping or a new roof, and your property’s value rises.  If you have creditworthy tenants who pay on time and schedule regular rent increases to keep pace with inflation, your property will continue to appreciate in value.

You can also decide on when to sell if home values rise sharply in your area and you want to cash in the equity. If you pick the tenants, you control the people living in your building. And you decide how much of your retirement funds you want to put into property and how much you invest elsewhere.

Diversifying your retirement portfolio protects you against stock market crashes or economic downturns. After you’ve put money away in a 401K, then what? Adding real estate to your retirement plans helps diversify your portfolio and hedge against risk.

Cons of Real Estate Investing for Retirement

Properties have to be managed. From collecting rents to managing tenants to snow removal, a real estate investment isn’t one that is maintenance-free.  In a way, building a retirement portfolio around real estate investments ensures that you’ll never actually retire.

A way around this is to hire a property management company. A property manager handles the administrative duties of properties. They collect the rent, they arrange for repairs, and they contract for lawn care and snow removal. But not all property managers offer the same level of service.

You will have to interview prospective management companies, and check references.  And since it’s not a great idea to be a completely hands-off landlord, you’ll have to monitor the property manager’s performance and periodically review their service. This means that, in the midst of your golden years, you could be firing and hiring a new company.

Property manager fees range from 2—5% of the monthly rents or they charge per-unit.  When putting together a retirement plan, build these fees into your costs. The problem is that price increases can be unpredictable, and if you switch managers your fees could jump. Many property managers also charge a mark-up on repairs, up to 50% of the repair’s total cost.

Which is another con of real estate investing for retirement – repairs. Homes and buildings must be maintained. Furnaces will need servicing or replacing, roofs could take storm damage and need to be replaced, or tenants kick holes in the wall or break windows.  Most experts advise setting aside 1-2% of your monthly rents for repairs.

Unlike retirement investment accounts, whose fees increase at predictable intervals and rarely for huge amounts, one bad year in a real estate portfolio could wipe out all your profits. And leave you with nothing to cover living expenses. If you do decide to fully or partially invest in real estate for retirement, evaluate the building’s condition and build major repairs into your long-term plans.

Vacancy rates can also become an issue. No property will remain rented 365 days a year. Plan on a rental vacancy rate of at least 10%, and keep an eye on trends in the area where you invest. It would be a bad idea to budget to use all of your rental income for your retirement living expenses. Save a little each month for both repairs and to cover the mortgage if the property becomes vacant.  

Property taxes are another negative to investing in real estate. The flip side of price appreciation is property tax increases which could cut into your profit margins. Special levies and city assessments could also cause your property taxes to increase, and you can’t always predict them. Some cities also charge different tax rates for non-owner-occupied properties.

When deciding whether or not to invest in real estate for retirement, carefully consider the pros and cons and crunch the numbers. Enlist a tax professional to help you structure your portfolio to keep the most money in your pocket.

Other Considerations when Thinking About Real Estate Investing for Retirement

Real estate investing isn’t easy, and investors considering this for retirement should think about how much time they have to put into their investment plan. Even if you hire experts to help you narrow down the best locations and properties for your investment, you should take the time to educate yourself about the local real estate market.

Most investors will want to visit the properties they’re thinking of acquiring, which could require travel. And there are other costs to acquire the properties in your portfolio. To even start real estate investing on your own you’ll have to pay home inspectors to examine your properties, real estate agent commission fees, mortgage fees, and points and closing costs. One of the downsides to real estate investing for retirement is the time and money it takes to ramp up a portfolio that’s broad enough to support your retirement goals.

The amount of money you have to invest could limit your real estate investing dreams. A 20% down payment on a rental property could be a good portion of your cash on hand. Don’t forget that commercial lenders charge higher interest rates and sometimes require larger down payments, too.

This is why it’s a good idea to start early before you need to live off the income generated by your investments.  You can roll the income you make in the first few years into acquiring other properties or paying down the mortgages on your existing rentals.

This is one of the reasons that many experts advise starting early and building your portfolio slowly. Don’t wait to start buying properties until one or two years pre-retirement.  Give yourself time to build a portfolio and learn the ropes of being a real estate investor.

Before you make any large investments for retirement sit down and talk to a financial professional and your accountant about your financial health and the tax implications.

Tax Implications of Real Estate Investing for Retirement

When calculating your profits and returns, don’t forget to deduct money for taxes. If you purchase property in an LLC or as an individual, the income will be taxable. It counts as ordinary income, and will for the entire time you own the property. Your age and retirement status has no impact on this, which is a downside to this form of investing for retirement.

Many retirement fund withdrawals are either fully or partially taxable, but in some cases only the gains are taxed.  Money withdrawn from a ROTH IRA is non-taxable as long as you meet withdrawal requirements related to age and the length of time you’ve had the account. High-net worth individuals should carefully balance their retirement portfolios to best manage their tax burden.

To avoid paying taxes on your rental income, talk to your tax advisor about investing through your IRA. Deducting depreciation and the above-mentioned costs associated with rental properties can also help reduce your tax burden.  

In conclusion, while real estate investment for retirement can bring in a steady income stream, it’s not without its drawbacks. Always talk to professionals before making a large change to your retirement investment strategy to make sure that you’re set up for success.

With the acceptance of the Tax Cuts and Job Act reform, we are now seeing the results of one of the most expansive tax law changes in nearly thirty years.  With this came large changes to the forms and reporting structures themselves.  No longer are Forms 1040-A or 1040-EZ available for use – everyone must file utilizing Form 1040.  While the Form 1040 itself is greatly reduced, there is additional paperwork that may need to be completed in order to properly calculate your tax breaks and deduction.  In June of 2018, the IRS released the first drafts of the form for review by its partners in the industry, and after revisions,  Form 1040 was approved and released for public use.  Much like prior years, the Form 1040 will utilize a summary of schedules format.  Taxpayers with relatively straightforward tax situations will be able to file a Form 1040 with no numbered schedules.  However, for those needing to file the form with additional supplemental information, the schedules are far more extensive, including  income and adjustments, tax calculations, credits and designations.

With nearly ninety percent of the taxpayers using tax software, most of the changes will be nearly seamless.  In fact, many may not even realize that there is a change if their software utilizes questions to complete the forms in the background.  For most filers, even those with a bit more complexity, the first two pages still contain the most commonly used lines,  so the difference may be negligible.  For those using the additional forms, here are the more common ones and what they cover.

Form 1040, Page 1 will include only the name and identification number of each person on the return, the return filers address, the checkbox for healthcare coverage, the checkbox for the Presidential Election designation, and the signature line.

Form 1040, Page 2 will continue to include most of the lines that used to be contained on Page 1 of prior year returns.  These are:  wages, interest, dividends, retirement payments, and social security; as well as a summary of the other income items.  The other  items that used to be on Page 2, for the most part, remain.  These are:  standard or itemized deductions, refundable credits and withholding.  It has added in income adjustments from Schedule 1, non-refundable credits from Schedule 3, and payments/credits from Schedule 5.

Schedule 1 will cover additional income items not listed above.  These are: taxable refunds/credits, state offsets for income taxes, alimony received, Schedule C business income or loss, Schedule D capital gains income or loss, Schedule F farm income or loss, unemployment and other non-specifically named income.  It also reports adjustments to income such as: educator expenses, business expenses reportable on Form 2106, health savings accounts, moving expenses, self-employment tax deduction, self-employed retirement plans, early withdrawal penalties, alimony paid, IRA deductions, and student loan interest deduction.  This category includes prizes and award money and gambling winnings as well.

Schedule 2 will cover additional forms of taxation such as the alternative minimum tax and excess advance premium tax credit repayment.

Schedule 3 will cover nonrefundable credits such as Form 1116, child and dependent care expenses, education credits, retirement savings contributions credit, residential energy credits, as well as other non-specifically listed credits utilizing Form 3800 (General Business Credit) and/or Form 8801 (Credit for Prior Year Minimum Tax).

Schedule 4 will cover self-employment tax, unreported Social Security and Medicare, additional taxes on retirement plans, household employees, first-time homebuyer’s credit repayment, health care individual responsibility tax, and other non-specifically named taxes utilizing Form 8959 (Additional Medicare Tax) and/or Form 8960 (Net Investment Income Tax) and/or Form 965-A (Individual Report of Net 965 Tax Liability (Deferred Foreign Income).

Schedule 5 will cover other payments and refundable credits not appearing on Page 2.  These are:  estimated payments and amounts carried forward from 2017, premium tax credit, amount paid with extension, excess Social Security and tier 1 RRTA tax withheld, credit for federal fuels tax, and non-specifically named credits utilizing Form 2439 (Shareholder Undistributed Long-Term Capital Gains) and/or Form 8885 (Health Coverage Tax Credit).  This also includes calculations for the Earned Income Credit, the American Opportunity Credit, and additional child tax credits.

Schedule 6 will cover foreign address and third-party designees.

The Qualified Business Income Deduction is also new this year and allows you to deduct up to twenty percent of your qualified business income from your qualified trade of business, plus twenty percent of your qualified real estate investment trust dividends and qualified publicly traded partnership income.  This is an additional deduction for self-employed taxpayers, over and above the standard deduction or itemized deduction.

With the increase in the standard deduction, there can be some  question of whether or not you need to file at all.  Below are the tax thresholds for 2018, although there still may be other reasons you are required to or wish to file:

• Single, under 65 – $12,000
• Single, 65 or older – $13,600
• Married filing jointly, both spouses under 65 – $24,000
• Married filing jointly, one spouse 65 or older – $25,300
• Married filing jointly, both spouses 65 or older – $26,600
• Married filing separately, any age – $12,000
• Head of household, under 65 – $18,000
• Head of household, 65 or older – $19,600
• Qualifying widow(er) with dependent child, under 65 – $24,000
• Qualifying widow(er) with dependent child, 65 or older – $25,300

You may still need to file a return if you:

• You had at least $400 in self-employment income.
• You owe household employment taxes.
• Social Security and Medicare taxes are owed on unreported tip income.
• You received a distribution from a medical savings account (MSA) or a health savings account (HSA).
• You received an advance payment on the Premium Tax Credit.
• Expect to qualify for the Earned Income Tax Credit.
• You’re claiming education credits and must file to be refunded under the American Opportunity Credit.
• You want to claim a refundable Health Coverage Tax Credit.
• You adopt a child and want to claim the Adoption Tax Credit.
• You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare tax.
• You had withholding.

All IRS forms and instructions are available online at IRS.gov.  Ordering forms may take up to ten business days to arrive.

One of the hardest things to do as a parent is to leave your child in someone else’s care so that you can go back to work.  Sometimes, preparing for the cost of that care can be nearly as difficult.  Some care centers can cost more than in-state tuition at a university.

More than sixty-five percent of American children have two working parents and many children will be in a child care program for much of their youth.  More than twenty percent of the family’s income can be  spent on child care over the course of the year and this cost can greatly influence career decisions.  Forty-two percent of American families rely on a relative or relatives to care for their children.  This can have a  significant upside -- allowing for one-on-one care with a familiar caretaker, often in a familiar environment and relatives can often provide a more flexible schedule.  One down-side is that utilizing a relative for childcare can put a strain on inter-family relationships.  In many cases the relative(s) taking care of the child are grandparents and the increasing mental and physical demands of a growing child came become too much.

Hiring a nanny or an  au pair can be a good option.  It offers many of the same advantages as relative care, with mostly flexible hours, in-home care and one-on-one attention, however, it is important to note that hiring a nanny or an au pair is not necessarily as straight-forward as it seems.  These types of caregivers are often the most expensive, since  parents will become the employer.  This  means conducting interviews/background checks/reference checks, preparing a contract, paying household employer taxes, potentially providing benefits, and arranging for back-up care if the nanny or au pair is ill.   It is costly, but  often you get what you pay for , as over fifty percent of nannies or au pairs have a degree in early childhood development or other child-related fields.  This may provide your child with a more educational or well-rounded experience.  In some cases,  if you work it into the contract, many will provide light housework in addition to childcare.

If you do not have a relative near-by or willing, and a nanny or an au pair is out of your price range, many parents opt for using an organized childcare facility.  These centers provide licensed and sometimes accredited places where children have the opportunity to experience things outside of the home and socialize with other children in their age groups.  Many centers include education, field trips and other programs that may be of interest to you and your child.  These centers can be quite costly as well, and in-home daycares are often more affordable.  In home daycare is usually limited in age and number of children  to be cared for and are  subject to different regulations.  They may not hold the same level of licensing or accreditation as larger centers or private care.    The state generally regulates the ratio of children to adult caregivers based upon age of the child.

There are several tax benefits to paying for childcare, since working parents are eligible for a non-refundable tax credit of between twenty and thirty-five percent of their child-care expenses up to $3,000 per year for up to two children under the age of thirteen.  This credit is limited by the amount of income made by the parents and parents making less than $15,000 a year qualify for the highest bracket of thirty-five percent, with the percentage dropping every additional $2,000 until it reaches twenty percent at $43,000 a year.  The Dependent Care Flexible Spending Account is an employer sponsored account that allows the parent to pay for up to $5,000 per household per year of child-care expenses with pre-tax dollars.  This means that a portion of the parent’s wage is taken out prior to being subject to federal, state, Social Security and Medicare taxes.  Keep in mind that you cannot claim both benefits for the same child care expenses.

When looking at childcare options, it is important to first determine your budget.  How much can you spend on childcare?  How will that change with one or both parents able to work?  Be sure to look into what savings options your employer(s) may have and if your employer has an FSA plan, calculate out how much you can set aside.  If your employer doesn’t have a plan, see what child care credits your may be able to take advantage of.  Do the research by interviewing the various childcare options in your area and seeing what may then fit into that budget.  Give yourself plenty of time, as this is a big decision and one that shouldn’t be rushed.    If you do choose to hire a nanny or au pair, make sure you understand the regulations that you must follow when adding a household employee.   Determine if full time or part time care is what you need, of if you can work a flexible schedule that allows for a few longer days but reduces the need for a full week’s worth of care.  See if you have friends with children of similar ages that may be interested in sharing a caregiver.  Look into seeing if you can work remotely a few hours or days a week.  Or perhaps find a side hustle that allows for extra cash without overtaxing your resources.

Childcare is a situation full of emotional and financial pros and cons.  It is important to enter into the decision making process fully armed and ready.  You should invest in a care system that works best for you and your family, while still providing the hours that are needed at a cost that works.

We often think that having a home in multiple states is a great idea, and sometimes we contemplate working while traveling between these homes.  In some cases, our jobs take us to multiple locations.  What happens when we work in multiple states throughout the year?

It is important to determine if you are considered domiciled in a particular state.  If so, you will be subject to that state’s income tax rules and regulations.  We tend to think of domicile as where we spend the most amount of our time, however, each state has different rules regarding the terms and conditions of what is considered a domicile.  Your domicile typically is where you have a “true, fixed, and permanent home”.  Your domicile will not change provided you have a home that you consider the place “to which you intend to return whenever absent”.   Your domicile can be different from your residence.  Your residence is based upon how much time you spend in a state.  These definitions of time that qualify you to be a resident, and therefore subject to taxation, differ from state to state.  Check the regulations for your state,  but keep in mind that most states include days spent in the state as a determining factor.  Some states also require an abode or overnight as a determining factor.  Even if you rent the home out while you are not there, it could still be considered an abode when it comes to the state determinations.  It is recommended that you thoroughly document your use of a second home and/or business.  Most states will default to resident status, and it is up to you to provide the facts and evidence that you were not qualified for state taxation.

Many states also tax you on your worldwide income if you qualify for a domicile or resident status.  Additionally, if you work in another state, you will most likely need to pay taxes on the income derived from that state.  Some states separate the income and tax only their state’s income, while others calculate tax on all income as if you were a resident and then allocate the tax based on in-state sources/all sources.  You may also have to file in another state if you are an S-Corporation shareholder and the business operates in another state, you are a partner in an out-of-state partnership, you own rental property in another state, or you are the beneficiary of a trust in another state.  These are factors that create a nonresident return filing in another state.  These rules apply even if the partnership is held in an investment account.

Regardless of whether you are a part-year resident or a nonresident in the state where you are working or residing, you will probably need to complete an apportionment statement for the income.  This is generally found in each state’s tax return forms.  Part-year residents usually not only pay taxes on income earned from work performed in the state, but also pay tax on all other income received while a resident of the state.  A nonresident will generally only pay taxes on income they earned while performing work in the state, and on income received from other sources within the state.  After you determine your apportionment allocations, you will need to calculate what percentage of your total income is applicable to the state.  This is the apportionment percentage and is used in the additional calculations of the taxation.  Apportionment can be done in one of two ways, depending on the requirements of the state.  Some states require you to calculate your taxes as if you were a resident for the entire year.  Once you have calculated a full year’s worth of income for the state, you then apply the apportionment percentage to this tax to determine what you owe in that state.  The other method is to prorate your itemized deductions and other allowable deductions and credits using the apportionment percentage, so that the taxes you pay to the state are based solely on this prorated amount.

If you are a nonresident, you will still need to use the apportionment allocation form to determine how much tax you will owe in each state.  You will also pay tax on all of your income for the entire year to your resident state.  To many people this sounds like double taxation, and it is, although most states allow you a credit on your resident return for the taxes paid to another nonresident state. Under the law of each state, tax credits are only available with respect to the income taxes that are properly due to another state.  When two states can claim you as a domiciliary, neither state believes that taxes are properly due to the other.  You will need to prove that you are abandoning one domicile for another to avoid taxation in both states.  Be cautious in nonresident filings, as the nonresident states may carry a higher taxation rate than your resident state, or your resident state may cap the amount of credit you can apply.  If you have enough deductions in your resident state that don’t qualify for your nonresident or part-year state, you may end up not being able to reduce the income being taxed.  If this is the case, you won't have enough resident state taxes to use the full credit from the nonresident state, and you can't carry over the excess nonresident taxes to use as a credit in a later year.  This may mean that you will end up paying more taxes in the long run.

Calculating multi-state qualifications and taxation is complex.  It is best to seek the advice of a tax professional prior to engaging in activities in another state.  Be sure you fully understand the rules and regulations of each state you intend to reside, do business with, or invest in, as it  is critical to avoiding unnecessary taxation.

The Tax Cuts and Jobs Act of 2017 has led to changes in the way companies choose to be taxed.  Prior to the tax reform, many businesses were required to use the accrual method of accounting.  But with the change in tax law, businesses with $25 million or less in annual revenue over the prior three years can use the cash method.  More businesses are choosing the cash method of accounting instead of the previous accrual method, but what is the difference between cash and accrual methods of accounting?

Every business must make a decision on how and when to record income and expenses.  Making the choice between the cash and accrual methods is about the timing of when revenue and expenses are recognized and reported.  On their most basic levels, cash accounting is a recording of the transaction when the money actually changes hands, while in accrual accounting the transaction is recorded when it is earned or established.  Cash is immediate and accrual is anticipated.

With the cash method of accounting, revenue is counted when it is received from the customer or client, therefore the  cash method business will not have accounts receivable.  The cash method business also has no accounts payable, as when the expense is paid to the supplier or employee, the transaction is recorded.  There are advantages and disadvantages to the cash method of accounting.  One advantage comes in the cash method’s simplicity.  Since revenue and expenses are only recorded when they happen, the tracking of the company’s cash flow is straightforward.  It is easy to determine when a transaction has occurred because the money is, in clear terms, either in or out of the bank.  This means that, in general, the financial records on any given day are an accurate reflection of the company’s resources.  Since the income is not recorded until it is received, it is also not taxed until it is received.  The cash method allows for  easier income deferral, and easier expense increase, which may present a misleading picture of the company’s financial state.  If the company delays sending  invoices, the customer will not make the payment.  If this crosses years, it will shift the taxable income into a different year than the year in which the service was provided.  If a company chooses to pay its vendors immediately or even pre-pay them, then the expenses will be increased.  For example, if a company prepays its January rent in December, the expenses will be taken against the income for the year that is ending, rather than the year that is just beginning.  The company can also choose to do the opposite and hold on to large amounts of payables, potentially more than the cash on hand, and thereby overstates the health of the company.  Cash method accounting, while easier, can create varied results based upon when to receive income and when to pay expenses.

In contrast to the cash method, the accrual method utilizes  different timing in regards to income and expenses.  In this case, revenue is recorded when it is earned with the expectation that the customer will pay the invoice in the future.  The expenses for goods and services provided to the company are recorded when they are incurred, even if no money has left the bank.  Because of this, the accrual method often shows a more accurate picture of how the business is doing over a longer period.  One disadvantage of the accrual method is that it is harder to account for the cash flow of the business.  It also means greater complexity in reporting by creating the need for dealing with unearned or deferred revenue and prepaid expenses.  Unearned revenue is when money is received by the company for work not yet completed – essentially a prepayment.  This  income cannot be recognized on the income statement, and instead is reported on the balance sheet as a liability.  As the service is provided, the portion of the provided or earned service is moved from the liability to the income statement.   Generally, these are expenses that will be used within one year, as opposed to deferred expenses that are utilized over the course of more than one year.  Prepaid expenses are recorded as assets on the balance sheet until a portion of them is incurred and then it is moved to the income statement.  Accrual method accounting is not without the ability to flux reporting as well.  Like the cash method, you can increase your income by sending out invoices, or decrease them but holding back invoices.

Accrual method also allows for the write off of bad debt.  Bad debt is when you have a customer who you do not believe will pay you.  You have already recorded the income when the customer was invoiced, thereby making it taxable.  Bad debt allows you to remove this income before taxation.  It should also be noted that because income is recognized when earned, that income may also be taxed before the funds are received from the customer.  Because accrual does not show the current cash accounts of the business, it is vitally important to track the businesses funds alongside the income statement.

In general, your accounting method is chosen when you begin your business and file your first return.  If your business qualifies to use either method, you may choose to switch using Form 3115 for approval from the IRS.  You will need to complete a Form 3115 if you are changing from cash to accrual (or vice versa), as well as from FIFO to LIFO (or other method) for your inventory, or from one depreciation method to another.  Before changing your method, research should be done on the resulting adjustments to taxable income.