If you sell your business you might owe a hefty income tax on the appreciated interest.

Saving grace: At least you may be able to avoid the 3.8% Medicare surtax on net investment income (NII), depending on the exact circumstances.

But what about your kids and other family members who are shareholders? They could get walloped by the surtax.

Strategy: Hire family members who are co owners (if they don’t already work for the company). Keep them on payroll until you sell the business.

As a result, when the deal finally closes, the relatives with business interests should be able to squeeze through the same tax loophole as you, the business owner.

Here’s the whole story: The 3.8% surtax applies to the lesser of NII or the excess above modified adjusted gross income (MAGI) of $200,000 for single filers and $250,000 for joint filers. For this purpose, NII interest, dividends, royalties, rents, gains from dispositions of property and income from passive activities, but not tax-free interest or distributions from qualified retirement plans and IRAs.

Another exclusion from the definition of NII is critical to many family-owned businesses. It specifically doesn’t include gains from the sale of property owned in an active trade or business that is not a C Corporation.

That lets many owners who operate their businesses as Sole Proprietorship, LLCs, Partnerships and S Corporations off the hook. However, owners of these businesses who sit on the sideline will have to face the surtax if the business is sold.

Example: Your small business is operated as an S Corp and is currently valued at $12 million with an adjusted basis of $2 million. You and your spouse own 80% of the business and the remaining 20% is split evenly between your two adult children, a son and a daughter. So each child currently owns shares worth $1.2 million with a basis of $200,000.

Your son already works for the company, but your daughter doesn’t. Assuming you sell the business for $12 million, each child will reconize a taxable gain of $1 million ($1.2 million – $200,000).

According to the regulations, the gain from the sale won’t count as NII for your son because he is a material participant in the business. But your daughter will probably owe the 3.8% surtax on at least $1 million of NII (not even counting investment income from other sources). That comes to $38,000 on top of the regular income tax

This harsh result can easily be avoided if you hire your daughter to work for the business. Your daughter will owe taxes on wages, but will be eligible for tax-free fringe benefits.

Tip: The job must be legitimate. The surtax can’t be avoided simply by putting a child on the books.

At Bourke Accounting we can help you negotiate the murky waters of tax law. Give us a call at 502-451-8773 and make your appointment today to work through any and all tax issues.

You can’t deduct the cost of the time and effort you spend on behalf of charity. BUT that doesn’t mean your good deeds will go for tax naught.

Strategy: Track your out-of-pocket costs. Even though you can’t deduct the value of your endeavors, you can write off actual expenses associated with charitable activities. Furthermore, you don’t have to be a board member or one of the charity’s biggest donors. This tax break is available to regular volunteers and others who help out sporadically.

What sort of expenses are we talking about? Here is a partial list.

• Transportation: If you use your car for charity, deduct the related costs attributed to gas and oil, repairs, insurance, etc. Alternative: You might opt for the flat-rate deduction of 4 cents per mile (plus related parking fees and tolls). Similarly, you can deduct plane, train or bus costs for traveling to charitable events.
• Telephone charges: You may deduct the full cost of long-distance telephone calls, faxes and cellphone charges made on behalf of a charity. If you install a landline in your home that you use solely for charitable purposes, the entire cost is deductible.
• Home entertainment: If you host a fundraiser or board meeting, you can deduct the entire cost of the catering expenses as a charitable deduction. Note: The 50% limit on entertainment and meal expenses doesn’t apply here.
• Fundraising dinners: Normally, you can deduct the portion of the cost that exceeds the fair market value of a fundraising dinner. For example, let’s say you and your spouse attend a dinner that costs $100 a head. If the meal is valued at $35 a head, you can deduct $130 ($200 cost – $70 value). Note: For amounts exceeding $75, obtain written documentation from the charitable organization.
• Uniforms: A deduction is allowed for the cost of uniforms used while performing charitable services as long as the clothing isn’t suitable for everyday wear. Classic example: You can write off the cost of Boy Scout or Girl Scout uniforms.
• Foreign exchange students: If you host a foreign exchange student in your home, you can deduct up to $50 per month for each month the child attends high school. To qualify, the student must live in your home under a written agreement with a qualified charity. Also, the exchange student can’t be a relative.
• Charitable conventions: You may be able to deduct the cost of attending a convention on behalf of a charity – such as meals and lodging – if you’re an official delegate to the convention. But the convention must be the primary purpose of the trip. The deductible amount includes meals and lodging while you attend the convention. Caveat: The cost of any side trips to tourist attractions isn’t deductible.

Tip: Individually, these deductions may be small, but collectively they add up. Keep the records you’ll need at tax return time. As always if you have any questions please don’t hesitate to call Bourke Accounting at 502-451-8773.

Does your business need trustworthy and reliable employees? You may not have to look any farther than across the dinner table.

Strategy: Hire your spouse to work as an official employee. Why put your spouse on the payroll? Because you can gain five tax benefits:

1. Build up tax-favored funds for retirement

If you meet the tax-law requirements, your company can deduct contributions made to a qualified retirement plan on your souse’s behalf. The annual limits are quite generous. If you company has a defined contribution plan, you can deduct contributions up to 25% of compensation or $54,000, whichever is less.

With a 401(k) plan, another dollar limit applies; Your spouse can defer up to $18,000 to the plan in 2017 (plus and extra $6,000 if he or she is 50 or older). Your company can match those contributions wholly or partially up to tax-law limits.

2. Shift taxable income away from the company

If you operate a C Corporation, any compensation you pay to your spouse would have to stay with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you’ll save tax overall if your spouse draws a salary. But don’t look for any income shifting tax benefit – possibly a drawback – if your company falls in a lower tax bracket than your personal bracket.

Note: S Corporation owners and sole proprietors don’t pay corporate income tax. You report business on your personal return whether or not you pay your spouse a salary. So this could be a wash.

3. Get more tax mileage from business trips

Generally, you can’t deduct the travel expenses attributed to your spouse if he or she accompanies you on a business excursion. However, if your spouse is a bona fide company employee and goes for a valid business reason, you may deduct his or her travel costs, including air fare, lodging and 50% of the meal expenses. The benefit also is tax free to your spouse.

4. Cure health insurance ills

If you’re already paying more to cover your spouse under your company health insurance plan, hiring him or her shifts the expense to your company. Typically, your company can deduct your spouse’s full health insurance costs.

Even self-employes can write off 100% of the cost under a so-called Section 105 medical reimbursement plan.

5. Join the employer-paid life insurance group

You’re spouse is entitled to the same group-term life insurance coverage as your other employees.

Key Point: The first $50,000 of employer-paid, group-term coverage is tax free to an employee.

However, one catch for S Corp owners: Generally, you can’t deduct fringe benefits, such as group-tern life insurance, for any employee who owns 2% or more of the company. By extension, that rule also applies to an employee-spouse.

At Bourke Accounting we are here to answer any questions you have on the ever changing tax laws. Give our office a call today to discuss your tax questions 502-451-8773.

I’m one of those people that love to read…books, magazines, journals. I used to list reading as a hobby on those questionnaires that I would answer but too many people called me a nerd so I stopped and replaced “reading” with “fishing.” I find that in December there are so many lists that are published and some are pretty interesting to read, and some not so much. This list that I am blogging about today is a good one as it begins with the benefits of owning a dog.… so here are some of the things in our lives that are good for us…

Dogs as they help their owners live longer and healthier lives. A Swedish study involving more than 3.4 million participants found that people with a pooch had a lower risk of cardiovascular disease and premature death. The link was especially pronounced among people who lived alone. Those with dogs were 33 percent less likely to die early, and 11 percent less likely to suffer a heart attack.

Camping could help cure the grogginess and lethargy associated with poor sleep. In a University of Colorado, Boulder study, volunteers who went camping for a weekend slept almost two hours longer than normal during the trip; on their return, their melatonin levels started rising more than two and half hours earlier than before. Researchers believe this is because increased exposure to natural light helps reverse the adverse effects that modern indoor lifestyles have on the body’s internal clock.

Chili Peppers may help you live longer. In a study involving 16,000 people over about two decades, University of Vermont researchers found that those who routinely ate the hot pods were 13 percent less likely to die during that period than those who didn’t. They suspect that capsaicin the active ingredient that give peppers their heat, might boost metabolism and help prevent obesity, high blood pressure, inflammation and cancer.

Coffee does more than wake you up. Two large studies involving diverse groups of adults found that people with a daily coffee habit were less likely to die from heart disease, stroke, diabetes, or cancer. Over a study of 16 years, people who drank two to four cups of Joe a day – decaf or regular – were 18 percent likely to die. Researchers believe the drink’s health benefits stem from its complex mixture of powerful disease-fighting antioxidants.

Marriage could help ward off dementia. An analysis of 15 studies involving more than 800,000 people found that those who never married had a 42 percent higher risk for this form of mental decline than those who tied the knot. Married couples tend to encourage each other to stay active, follow a healthy diet, limit alcohol consumption, and stop smoking – habits associated with reduced risk for dementia.

Breakfast could be the most important meal of the day. A study involving 4,052 healthy men and women found that those who generally didn’t eat breakfast were more likely to develop atherosclerosis, or clogged arteries. Researchers say this is likely because breakfast-skippers tend to eat more calories and unhealthy foods later in the day.

Running for a couple of hours each week could reduce the risk of early death by nearly 40 percent. After analyzing existing evidence on the link between exercise and longevity, researchers calculated that one hour of running-even at a slow pace- lengthens life expectancy by seven hours. This adds up over time; people who run regularly tend to live about three years longer than their non-running peers.

And I would remiss of I did not mention….

Finding the Perfect Tax Accountant which will relieve undo stress when it comes to finances. At Bourke Accounting we know life is not black and white. We will work with you through life’s changes; those that are expected and those that are not. Our focus is on tax preparation and bookkeeping services, but our personalized service and dedication brings our clients back year after year. Give us a call today at 502-451-8773 and set up that appointment to let us help!

Say Your aging parents live in a home that has appreciated in value, but they’re no longer reaping any of the home ownership tax breaks during their retirement years. Sound familiar?

Good news: With one stroke of the pen, both you and your parents can win: They’d gain instant access to their home equity (without moving) and you’d pick up some generous new tax deductions.

How? Buy your parent’s house, and then rent it back to them – at the going rate.

Reasons for the sale/leaseback. Under the current home ownership set up, your combined family unit is overpaying the IRS.

Your parent’s mortgage is either paid off or the payments represent mostly principal at this point. Even if they still take interest deductions, your parent’s tax bracket might be low in retirement, so those deductions don’t provide much tax savings.

Here are two good reasons for your parents to opt into this plan:

1. It puts cash in their pockets without them dipping into a home equity loan.
2. It allows them to put their money into safer investments than the real estate market.

Transferring the house. To avoid gift-tax complications, pay a fair price for the home. Support the buying price for the home with a qualified and independent appraisal. Then, both sides should enter into a lease at a fair rental value.

One benefit: Courts have said that landlords can reduce their fair-market rent by 20% when renting to relatives. The lower rent reflects the savings in maintenance and management costs . (L.A. Bindseil, TC Memo 1983-411).

Don’t set the rent too low; the IRS might say the rental home is for your personal use. Therefore, your deductions might be limited to the mortgage interest and property tax, the same as if you owned a vacation home.

Taking deductions. Once you own your parent’s house, you’re entitled to reap the tax benefits of owning rental property.

That includes taking write-offs for operating expenses, such as utilities, maintenance, insurance, repairs and supplies.

You also can claim depreciation deductions for the home, but you can’t depreciate the cost of the property apportioned to land.

So obtain an appraisal allocating the price paid between the depreciable structure and the nondepreciating land. You can use these deductions to offset the rental income received from your parents. You can take any suspended losses when you sell the house.

Bonus benefit: Once you own the house, you may be able to write off occasional travel expenses you incur when visiting the house (your rental investment).

Endgame: Eventually, your parents won’t be able to live in the house. Then , you can sell it, rent it to another tenant or move in. If you move in and make it your principal residence for at least two years, you can sell it and shelter another $250,000 or $500,000 worth of capital gains: a true bonanza!

 

Taxpayers having a financial interest or signature authority over any foreign financial account such as a bank account, a securities account, or other types of financial accounts in a foreign country outside the U.S boarders must report these accounts to the Department of the Treasury if their aggregate balance exceeds $10,000 at any time during the calendar year. This is done by filing the Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).

Those failing to properly file the FinCEN 114 may be subject to civil monetary penalties of up to 50% of the account balance at the time of the violation. Generally though, the IRS will not impose a penalty for failure to file FinCEN 114 if the income from the foreign accounts is properly reported and taxes are paid on the taxpayer’s U.S tax return.

Years after my kids are grown, I discovered that Section 529 plans are something I am now thinking about as my grandchild Odessa was born last month and there are only so many clothes and toys you can buy her, so I thought college…..

The amount you transfer to a Section 529 plan on behalf of a beneficiary qualifies for the annual gift-tax exclusion. Under the exclusion, you can give away up to $14,000 a year – or $28,000 for joint gifts made by a married couple – to an account for the beneficiary without paying any gift tax.

Strategy: Front -load your contributions to a Section 529 plan. The tax law allows you to give the equivalent of five years’ worth of contributions up front with no gift-tax consequences. The gift is treated as if it were spread out over the five-year period.

For instance, you and your spouse might together contribute the maximum $140,000 (5 x $28,000) on behalf of a grandchild this year without paying any gift tax. If you have five grandchildren entering college soon, together you can contribute $140,000 to their Section 529 plans, completely free of any gift-tax consequences.

Tip: Any excess above the annual gift-tax exclusion may be sheltered by the lifetime gift-tax exemption.

We are proud and excited to announce the launch of our new website at:

https://www.bourkeaccounting.com

Our new website can help you in many ways and make your tax time so much easier. How?

Subscribe to our quarterly newsletters: Our website hosts our current tax-related newsletter and also an archive of past newsletters so that you can keep up to date on what is happening in the tax world. Or have the latest tax-saving tips and news sent directly to your email inbox! Go to the Newsletters menu tab and subscribe by adding your email address.

Download forms and checklists: Be prepared for your tax appointment by downloading and filling out the information before you have your meeting. This step will save lots of time at the appointment and make the whole process proceed smoothly and effortlessly. A tax appointment checklist can be found under the “Resources” menu.

Review financial calculators and tax resources: Want to find out how much your mortgage payment would be if you refinance? How much do you need to save each year for your child’s college education? https://www.bourkeaccounting.com, click on “Resources” menu tab and choose from many different subjects that may interest you. Also included under “Resources” are links to updated tax forms, tax due dates and “Where’s my refund?”

Use the Secure Client Portal to securely send and receive files: Need to send a confidential document to us (like a W-2 or 1099) or access files? Send us a request by email and will will create an account within our portal. You can then log in to the portal on our website and upload a document. Conveniently and securely access your current or prior-year tax returns from your computer or mobile device. All files are encrypted using 256-bit SSL (Secure Sockets Layer). This is the same security used by banks and many e-commerce sites such as Amazon.com.

Pay your invoice conveniently: The website may be available 24/7 for you to make a payment to us. The process is safe and secure and can be done quickly. Just go to https://www.bourkeaccounting.com and click on the “Make a Payment” tab in the menu bar.

We really hope that you will explore our website and use some of the great features that we provide for you Free Of Charge Thanks you for visiting!