Firm Growth

I’ve been practicing public accounting as a solo since 2007 and each year my practice has experienced growth. I’ve never really advertised, seems to have grown organically through good service and referrals from happy clients.  A few months ago, I hired my first employee, my daughter Hannah Kucera.  Hannah earned an accounting degree from Tarleton State University in 2014 and has two years’ experience as a staff accountant at The Dwyer Group.  She is working part time for my firm and expecting her first baby any day now. Hannah plans on sitting for the CPA exam in the near future.  She’s an eager learner with a warm personality and she adds a youthful dimension to my practice.

In addition to hiring staff, I have taken our QuickBooks practice to the next level, by utilizing hosting from a remote site. While it’s a little pricey, the advantages far outweigh the cost. We are able to access our client’s QuickBooks files from any location by logging in online. In addition, it provides for automated backup and the off-site storage helps prevent data loss. The QuickBooks practice has grown considerably over the past several years, partly because I became a Certified QuickBooks Pro Advisor and partly from client referrals.  It is important to me to provide a safe and secure environment for our client’s financial records.

Another investment I recently made was the creation of the firms’ website, www.wacoaccounting.com. The new website will eventually take the place of my blog site, as blog posts can be added to the website to keep our content current. Once my subscription to Word Press expires in November, www.lisathetaxlady.com will be no more! I hope the folks who have subscribed to my blog will visit the new website to read my tax tips, IRS advice, small business updates, and other accounting news.

Itemized or Standard Deduction?

The IRS statistics show that most taxpayers use the standard deduction. However, you may be able to reduce your tax bill if you itemize on Schedule A.

What expenses are deductible on Schedule A?

I think most people are familiar with the typical itemized deductions, which requires a Schedule A to be filed. Home mortgage interest, real estate and personal property taxes, and state and local income taxes or sales taxes and charitable donations are among the largest deductions. Other itemized deductions, such as medical expenses and unreimbursed employee business expenses are not allowed in full.  Medical expenses must exceed 10% of adjusted gross income and unreimbursed employee business expenses must exceed 2% of adjusted gross income in order to be deductible on Schedule A.  There are other deductions, such as casualty and theft losses, gambling losses, and hobby expenses, which qualify as itemized deductions, but are not frequently encountered.

Standard deduction

The standard deduction for 2015 for each filing status is as follows:

Single $6,300

Married Filing Jointly $12,600

Head of Household $9,250

Married Filing Separately $6,300

To the extent the total of your itemized deductions does not exceed the standard deduction for your filing status, you will not benefit from itemizing your deductions. The standard deductions are fairly high, and, as a result, fewer people are able to benefit from itemizing their deductions.

What if I bought a house in 2015?

I have to admit, this is the reason I’m writing this post. I have had several new tax clients this year who were first time homebuyers in 2015.  They have all come to me excited, anxious to see what their refund will be since they are certain homeownership will reduce their tax burden.  All of these clients have been disappointed.  Why?  Because they bought their homes late in 2015 and did not pay an entire year’s worth of mortgage interest and property taxes, they are not able to itemize their deductions.  Additionally, mortgage rates have decreased significantly over the past few years, so the amount of interest paid to purchase a home has decreased.  I would prefer to pay less in interest than reap a tax benefit.  The taxpayers who purchased homes in 2015 will most likely be able to itemize their deductions on their 2016 tax return because in 2016, they will pay a full year’s worth of interest and taxes.

2016 Automobile Mileage Rates

The IRS released the 2016 standard mileage rates for business, medical and moving in December. The rates have decreased from 2015, probably due to the decrease in the cost of gasoline.  Effective January 1, 2016, the standard mileage rates for the use of an automobile are as follows:

54 cents per mile for business miles driven

19 cents per mile driven for medical or moving purposes

14 cents per mile driven for charitable organizations

Actual or standard mileage rate?

Taxpayers have the option of using their actual expenses incurred for the use of their automobile. However, that does not mean that you can avoid keeping a mileage log.  You have to know the percentage of business use and personal use in order to properly substantiate the actual expenses you claim as business use.

Audit signal?

I attended a seminar this month and the instructor told us that anyone who claims their automobile is 100% business use is set up for an audit by the IRS. Best practice is to log your miles, giving details of where you drove and the business purpose.  For me, I use a small spiral notebook that I keep in my car.  I record where I’m going and the beginning and ending miles.  I also keep my oil change records to further substantiate my mileage.  Upon an audit, I can produce both, and the IRS can compare my mileage on a particular date to my oil change records.

Highlights of the Protecting Americans from Tax Hikes Act of 2015

With just a couple of weeks before year end, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The legislation deals with more than 50 tax provisions that expired December 31, 2014.  Some provisions were extended, while others were made permanent.  I want to discuss some of the more popular provisions.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a credit for the first four years of higher education expenses. The AOTC has been available as a $2500 credit for taxpayers whose AGI is below the threshold amount of $80,000 single and $160,000 married.  The credit had been set to expire in 2017, but was made permanent with the PATH Act.

Teachers’ Classroom Expense Deduction

Elementary and secondary school teachers are allowed a deduction of up to $250 per year for supplies and equipment paid for out of pocket by the teacher, for use in the classroom. The Act makes this deduction permanent and modifies the deduction by adjusting it for inflation beginning in 2016.

Sales Tax Deduction

This provision is near and dear to the hearts of Texans, and others who live in states without an income tax. In an effort to create parity, the option of deducting the higher of state sales tax or state income tax as an itemized deduction was added to the tax law with the American Jobs Creation Act of 2004.  The PATH Act makes this option permanent.

Qualified Charitable Distributions from IRAs

Individuals age 70 ½ or over can exclude up to $100,000 from gross income for donations paid directly to a qualified charity from their IRA. This provision was set to expire 12/31/14, but the new law makes this opportunity permanent.  Important to note, the amount excluded from gross income is not deductible as a charitable donation on Schedule A.

Section 179 Expensing

IRC Code Section 179 allows taxpayers to immediately expense the cost of tangible personal property in the year of acquisition, rather than depreciate it over its useful life. Prior to passage of the legislation, the maximum dollar limit had reverted back to $25,000 per year with an investment limit of $200,000.  Effective with passage, the Section 179 expensing limit is set at $500,000 with a $2 million investment limit before phase out.  The PATH Act made this provision permanent and provides for the annual limits to be indexed for inflation beginning in 2016.

Bonus Depreciation

Introduced by the Job Creation and Worker Assistance Act of 2002, bonus depreciation was initially set at 30% for property purchased after September 20, 2001. Subsequently, the amount has increased to 50%.  Bonus depreciation, that is, additional first year depreciation, expired December 31, 2014.  The PATH Act extends bonus depreciation with the following provisions:

• 50% for 2015-2017
• 40% in 2018 and
• 30% in 2019

Important to note, only new property is eligible for bonus depreciation. Both new and used property is eligible for Section 179 expensing.

Impact

While there are many other provisions in the new tax law, the items discussed above provide taxpayers opportunities to do some last minute tax planning prior to the close of 2015. Teachers will want to ensure they have kept adequate records to substantiate their $250 above the line deduction.  Retirees with a charitable bent may want to consider directing their required minimum distribution from their IRA be directed to a qualified charity.

Perhaps the biggest impact of this legislation is to give taxpayers more certainty about the tax law. With the passage of this law, several of the more popular and beneficial tax provisions have been made permanent.

 

Tax Deductible Expenses

I’m often asked if a particular expense is tax deductible.  Everyone is looking for a deduction!  In general, only expenses incurred in a trade or business (IRC §162) or those incurred in the production of income (IRC §212), will be deductible on an individual tax return. I once had someone ask me if a new washer and dryer was deductible.  It would be if it were used in a trade or business, for example in a hair salon to wash towels.  This taxpayer was using the appliances at her home, so the cost would not be deductible.  (Hard to believe someone would ask, but true story.) The IRS has criteria an expense must meet in order to be considered deductible for tax purposes.  The expense must be ordinary, necessary, reasonable, and incurred by the taxpayer.

Ordinary Expense

An expense is ordinary if it is normally incurred in the type of business the taxpayer is involved in.  For example, let’s say Jim Jones owns ABC Newspaper and he is sued for liable based on a story he ran on the front page.  ABC Newspaper has never been sued for liable before, but the legal fees involved in defending the paper would certainly be considered an ordinary expense for the newspaper business.

Necessary Expense

The Supreme Court has held that an expense is “necessary” if it is “appropriate and helpful” in the taxpayer’s business.  Again, what may be appropriate and helpful in one line of business may not be in another.  Dump fees are appropriate and helpful for a tree trimming business but are not appropriate and helpful for a CPA firm.

Reasonable Expense

In practice the reasonable standard is most often applied in situations involving salary payments made by a closely held corporation to a shareholder/employee.  This is a frequent abuse of the tax system, the shareholders pay themselves a very large salary, in an effort to avoid the corporation paying a dividend.  But, it doesn’t apply just to salary expense.  Overdraft fees are an ordinary expense of doing business, and may be necessary to keep the checking account open.  However, if overdraft fees occur daily, they may fail the reasonableness test and not be considered a deductible expense.

Expense Must be Incurred Directly by the Taxpayer

If a taxpayer pays an expense on behalf of someone else, it’s considered a gift and not a deductible expense.  When the sales tax deduction was first enacted, people would go to retailers’ parking lots and find receipts so they could use them for their sales tax deduction.  This rule prohibits such behavior.  The one exception is for medical expenses paid for a dependent, and those are deductible.