BHB Advisors LLC, CPAs and Consultants

 

Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

Hobbies and taxes – when your pastime generates income

Did you know that if you make money from your hobby you are required to report it on your tax return?  Here are some facts about hobbies:

Business or Hobby?

First of all, how do you tell if your activity is a business or a hobby? The main feature of a hobby is that you do it for recreation, not to make a profit. But you should consider other factors and ask yourself the following questions:

  1. Do you perform the activity in a businesslike manner?
  2. Do you put in enough time and effort to indicate that you intend to make it profitable?
  3. Do you depend on the income for your livelihood?
  4. Are your losses due to circumstances beyond your control, or are they normal in the course of the activity?
  5. Do you change your methods to improve your profitability?
  6. Do you or your advisors have the knowledge necessary to carry on the activity as a successful business?
  7. Have you been successful in making a profit in similar activities in the past?
  8. Does your activity make a profit in most years? And how much does it make?
  9. Do you expect to be profitable in the future from appreciation of assets used in the activity?

If you are unsure whether your activity is a business or a hobby you should consult your tax advisor to discuss your unique situation.

Hobby Expenses

Even if you are engaged in a hobby activity you are allowed to deduct ordinary and necessary expenses.  This means the expenses must be regular and appropriate for the activity.  You are only allowed to deduct hobby expenses up to the amount of your hobby income.  If you have more expenses than income, you are not allowed to deduct the loss from your other income. Also you must itemize deductions on your tax return to deduct your hobby expenses as they are reported on Schedule A of your tax return.

 

If you have additional questions about hobby activities please consult your tax preparer.

Deductible Moving Expenses

Moving expenses can be deductible, under the following conditions:

  1. You must be moving because of your job, starting a new one, or working at a new location.
  2. You must move close to the day you start your new job, generally within 1 year of your start date.
  3. Your new job must be 50 miles farther than your commute from your old home to your old job.  If your commute from your old home to your old job was 12 miles, then your new job must be 62 miles from your old home.
  4. You must plan to stay at your new job full-time for at least 39 weeks the first year or if you are self-employed your must plan to work full-time for at least 78 weeks during the first two years.

If you qualify under these conditions, you may deduct:

  1. Travel Expenses- this includes transportation and lodging for your household while moving to the new location but not meals.  The mileage rate for moving expenses is 23.5 cents per mile in 2014.
  2. Household Goods and Utilities: You may deduct the cost of packing, crating, and shipping your things as well as temporary storage if necessary.  You are also allowed to deduct the cost of disconnecting or connecting utilities.

You are NOT allowed to deduct any part of the purchase price of you new home or the cost of entering or breaking a lease.

If you are reimbursed for any of these expenses from your new employer, you may have taxable income.  Consult your tax preparer for your unique situation or if you have any questions about the deductibility of your expenses.

Lastly, CONGRATULATIONS and GOOD LUCK on your new endeavor!

moving

Audit Triggers

Around 1% of individual tax returns are audited annually.  If you have prepared you return truthfully, there is no reason to fear an audit.  Even in cases of math errors, or a mistake, most people will not be subject to a full blown audit.  Most returns that are audited contain one of the following triggers:

  1. High income – Taxpayers with income over $200,000 or higher are more likely to be audited. With 1 out of 9 audited for taxpayers that report one million or more.
  2. Failing to report income – The IRS computers are pretty proficient at matches W-2's and 1099's to your individual return.  Make sure you save these forms and give them to your tax preparer.  If you receive one in error, contact the issuer immediately.
  3. Large charitable deductions – if you claim charitable deductions that are out of proportion of your income you could be audited. The IRS compares these deductions with the average of those at the same income level.  Also failing to file the correct forms for non-cash charity over $500 or when an appraisal is necessary can make you a target. Solution: document well and save your documentation.
  4. Day traders – If you claim day-trading losses on Schedule C you may be subject to an audit just because of the sheer complexity of the rules.
  5. Rental losses – especially when the taxpayer claims to be a real estate professional; are more likely to be audited, again because of the specificity of the rules.
  6. Schedule C filers – Statistics have shown that the most underreporting of income and overstating expenses is done by the self-employed.  Because of this the IRS looks closely at Schedule C filers, especially at meals & entertainment and travel expenses.  Record keeping and documentation are essential in this area.
  7. 100% business use of a vehicle – keep a detailed calendar and mileage log to prevent the IRS from disallowing or reducing your deduction.  Also if you claim a mileage rate you may not also claim actual expenses for a vehicle.
  8. Writing of losses for a hobby activity – hobby expenses are only allowed up to hobby income.  Only business losses are allowed to offset other income.  If you have questions on whether your activity is a business or hobby see our article titled Hobbies & Taxes. (link to article)
  9. Claiming the home office deduction – a home office can only be deducted if it is used regularly and exclusively for business. It may not double as a playroom, guest room, etc.  The IRS may check out your claim so make sure you can prove the exclusivity of your space.
  10. Alimony Deduction – to qualify for this deduction the payments are subject to specific rules.  For instance the payments must be made pursuant to a divorce or separation agreement and must end on the occurrence of the former spouse’s death. Many divorce decrees do not specify the payments appropriately and thus the IRS makes them a target.
  11. Cash based businesses – if the nature of your business is cash based such as a bar or salon you could be targeted for audit.  Cash based businesses have statistically been likely to inaccurately report income and therefore the IRS likes to keep a close watch on them.
  12. Failing to report a foreign bank account – if you have a foreign bank account that totaled more than $10,000 USD in a year, you are required to report and file specific forms to the IRS.  From the amnesty programs the IRS has used the last few years, they have been gathering information and targeting certain foreign banks to get information on US account holders.  Make sure you are in compliance with your reporting requirements.
  13. Large currency transactions – the IRS gets reports from banks, car dealers, casinos etc of large currency transactions over $10,000.  Banks also tend to report suspicious activity that seems to try to escape notice by making many deposits just under the $10,000 threshold.  If your reported income seems inconsistent with these large deposits you may be in store for an audit.
  14. Higher-than-average deductions – the IRS publishes average itemized deductions for taxpayers in certain brackets.  If your deductions seem out of proportion to your income, you may be scrutinized.  To see how you compare to the 2012 preliminary data see our article Comparing your itemized deductions.

 

Remember you are only obligated to pay the tax you legally owe, you should not fail to take deductions that you are truly due because you fear an audit.  Documentation is vital and if you have questions consult a tax preparer.

It's all about attitude

I can still hear my mother's voice in my head telling my 14 year old self to watch my attitude.  And though she was threatening recriminations for my continued crabby tone, her advice goes way beyond my adolescent angst.  Don't we, as a general rule, tell ourselves to think positively, out of some subconscious superstitious fear of our negative thought suddenly materializing into absolute reality?  And while that one chipper neighbor may drive us a little crazy, there is great value to watching your attitude.

Most business owners work hard to maintain a positive attitude with their clients, but what about their employees? While perusing one of the accounting publications I follow, I found the following article…

Art of Accounting: My Boss Hated the Client By Edward Mendlowitz

Early on my boss took me to a client that I was to work on. He started to explain what needed to be done and what the client did, but then he said, “I hate this client—everything is always messed up and nothing ever makes sense.”

He also told me my work area was in the factory. I would probably have to move a chair next to a carton that would serve as a desk, and he warned me the lighting wasn’t too good.

His remarks were like a kiss of death. For the next five or six months, I dreaded going to the client, always thinking how messed up they were and nothing ever made sense. Then it dawned on me that I was the person doing the work, and things were in order. The carton I worked on was a few feet from where the client packed his shipments. When he did, he always chatted with me about his business, customers, employees and pricing strategies.

He also told me things he liked to do, such as going to the opera (which I did too) and vacations he took or would like to take. The client also would buy me a sandwich to have lunch with him. I got very friendly with him. And then I asked myself why I dreaded going there. I loved working there! It became my favorite client that I eagerly looked forward to visiting.

My boss's idle remark prejudiced me against the client, and it took me months to get over it.

The takeaway for me was that when I became a boss, I only said great things about a client, influencing the staff to like the client and eagerly look forward to working with them. Negative remarks about a client never left my lips! Actually, negative remarks were never applicable—my clients are all great!

And while I feel like I have the opportunity to work with great people, this article was a good gut check for me to take stock on my attitude.  And while the occasional bad day can always be forgiven, it's important not to let your bad attitude ruin your day or anyone else's.

“A bad attitude is like a flat tire. If you don't change it, you'll never go anywhere.” – Unknown

 

Small Business Health Insurance Tax Credit: Update

Though this tax credit has been available since 2010 the rules have changed.

To be eligible for this credit and employer is required to:

  1. Pay employee health insurance premiums under a qualifying arrangement.  A qualifying arrangement would require the employer to pay at least 50% of the premium for each employee enrolled in the coverage provided by the employer.  The employer is not required to pay the same percentage for each employee.
  2. Employers must obtain the insurance through the Small Business Options Program (SHOP).
  3. The employer's premium contribution is limited to the average cost of health insurance determined by area or state. For 2013 Minnesota's average cost for singles was $5,588 and $14,077 for families.
  4. Have fewer than 25 full time equivalent employees, and
  5. Pay average annual wages of less than $50,800 per full time equivalent employee.

The maximum credit is 50% of the employer's contribution to toward the employee's premiums, and can be claimed for up to two years.  The credit begins to phase out with annual wages starting at $25,400 and/or 10 full time equivalent employees, and is completely phased out at $50,800 and/or 25 full time equivalent employees.  The credit can be claimed using Form 8941, but any credit received must reduce the company's health insurance premium expense deduction.

If you think you qualify for this credit or have questions, please consult your tax advisor.

Comparing your itemized deductions

The IRS has released preliminary data from 2012 of the average itemized deductions per blocks of income levels.  Check out the table below to see how you compare.

AGI2012

Here are some things to keep in mind while analyzing the data:

  1. The total column includes miscellaneous itemized deduction and theft & casualty losses
  2. The averages for taxes paid include states without an income tax who elected to deduct state sales tax
  3. In 2012 only medical expenses above 7.5% of AGI were deductible

There is a misconception that having above average itemized deductions will automatically subject taxpayer to audit.  Only in some cases is this true.  The IRS takes into account things like higher deductions for taxes paid in states with higher income taxes and will match mortgage interest to the 1098 forms from lenders.  If you are concerned or have questions please make sure to consult your tax preparer and make sure you hold on to your records.

Premium Tax Credit Check up

If you have insurance through the Health Insurance Marketplace, you may be getting advance payments of the premium tax credit. These are paid directly to your insurance company to lower your monthly premium. Changes in your income or family size may affect your premium tax credit. Any taxpayers who  receive an advance premium tax credit might want to consider if they have experienced changes in their circumstance in the first half of the year.  Any advances on the premium tax credit will be reconciled on the taxpayer's individual return, and if too much has been taken the taxpayer will be required to pay back the excess.  Taxpayers that wish to avoid any surprises from this calculation should make sure to report any change of circumstance to their Marketplace as they occur.  Some of the changes that should be reported include marital status, change of dependants, significant changes in annual income, finding a job that provides health insurance, or changing residence.

HSA contribution limit changes for 2014

The contribution limit for HSA's from 2013 will increase in 2014.  The contribution limit for individuals will increase to $3,350 and to $6,650 for family coverage.  Taxpayers born before 1961 will still have the option to contribute another $1,000.  Reminder: the limit for 2013 is $3,250 for individuals and $6,450 for families.

Taxpayer Bill of Rights

While taxpayers have always had rights that could be found within the tax code, the IRS thinks it's time to shine a light on them.  They will begin posting the taxpayer bill of rights on their public buildings, linked to the front page of their website, and included in taxpayer correspondence.

Taxpayer Bill of Rights

  • The right to be informed
  • The right to quality service
  • The right to pay no more than the correct amount of tax
  • The right to challenge the IRS's position and be heard
  • The right to appeal an IRS decision in an independent forum
  • The right to finality
  • The right to privacy
  • The right to confidentiality
  • The right to retain representation
  • The right to a fair and just tax system

 

If you have questions or feel like your rights aren't being upheld, the IRS is encouraging the taxpayers to contact them directly, or they are more than happy to work with a taxpayer and their representative.

Tax Planning at 16?

If you have a child or grandchild that worked a summer job this year consider making a payment to a Roth IRA for them.  You are allowed to pay in to a Roth IRA for a child or grandchild to the lesser of $5,500 or the child's earnings.  A $5,500 contribution to a 16-year-old's Roth IRA that earns 7% interest a year will grow to $151,000 by age 65 and $212,000 by age 70.  The more years those contributions are made; the balance will be significantly larger.  For the parent or grandparent, this gift is non-taxable to the extent of the yearly $14,000 exclusion ($28,000 if your spouse concurs).  Start thinking ahead now, your child or grandchild will surely thank you for it later.

Just a reminder, if the student did not owe taxes last year and does not expect to owe any this year they can elect to claim an exemption from withholding by filing a W-4. If the child makes less than $6,200 and has less than $350 in unearned income they will be exempt from filing and should elect to have zero withholding.