Archive for the "Tax News & Info" Category

Tax Reform – Qualified Business Deduction

Interested in knowing more about the new 20% deduction for qualified businesses under the Tax Cuts and Jobs Act?  See our client letter: Client Letter – Qualified Business Deduction

Tax Reform – Business Overview

Interested in knowing how the Tax Cuts and Jobs Act impacted businesses?  See our client letter: Client Letter – Business Highlights of Tax Cuts and Jobs Act

Tax Reform – Changes to Individual and Corporate Rates

Have questions about how the Tax Cuts and Jobs Act changed individual and corporate income tax rates?  See our client letter: Client Letter – Tax Cuts and Jobs Act

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.

2017 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

2017 Individual Engagement Letter

Fiduciary Engagement Letter – Available upon request.

Individual Questionnaire  This is a "fill in" PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2016, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

  1. Basic- For taxpayers without Schedule C business income, or rental property.
  2. Business Income- For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  3. Rental Income– For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  4. Complete- This is the complete version for taxpayers with multiple activities such as business, rental, farm, or foreign income.

If you have Adobe Acrobat see our Instructions for filling out your organizer in Adobe.

Planning for Tax Reform

The details of the tax reform bills are emerging and some of the key features include a flat corporate tax rate of 21%, a top individual tax rate of 37%, and an election to choose either a property tax deduction or a state and local income tax deduction, up to $10,000.

For taxpayers in states with high income and property tax, the limit on the deductibility of these taxes next year will cause many people to lose these popular itemized deductions.

If you have the ability to prepay the property taxes that you owe in 2018, we recommend that you pay these taxes before the end of 2017. Prepaying state "income" taxes before the end of 2017 may also help reduce your 2017 tax if you are not subject to AMT (Alternative Minimum Tax).

The new tax bill, that is expected to be released this week, will double the standard deduction and limit the deductibility of some itemized deductions, so making any planned charitable deductions in 2017 or paying mortgage interest before year end may provide a benefit if you are not expected to itemize deductions next year.

Please contact us immediately if you are interested in having us run a tax projection to determine if you would benefit from any tax planning before year end.

Sharing Economy Basics

The rise of easy to use apps have allowed more and more people to take advantage of the sharing economy.  Countless people supplement their current income and a few even leave their steady paychecks behind and work for themselves, on their own schedule, by driving for Uber or renting their home through Airbnb.  This is referred to as the sharing economy, or gig economy.  While this can be liberating for some, there are important tax consequences that are often overlooked or misunderstood.

When you start participating in the sharing economy, you have started your own business and are an independent contractor of the app developer (Uber/Airbnb).  With that comes additional filing requirements and often additional taxes.  The most important, or largest new tax obligation, will likely be self-employment taxes.  Self-employment tax is currently 15.3% of your net self-employment income up to $127,500.  For a more in depth look at self-employment taxes please see our article “Self-Employment Taxes Explained.”  Keep in mind that this 15.3% tax is in addition to the regular income tax.

The income that you receive from the shared economy is taxable.  This is the case even if you do not receive a 1099-MISC, or 1099-K for electronic payments, or only accept cash.  You are also able to deduct from your taxable income, ordinary and necessary business expenses to arrive at net income.  This is the amount that you pay taxes on.

Ordinary and necessary business expenses will be different for the type of work you are doing.  Each segment of the sharing economy has its own attributes.  For example, depreciation, or the reduction in the value of an asset, will be very important to someone utilizing Airbnb.  Not so much for somebody driving for Uber.  The exact opposite will be true of the mileage deduction.  It is important to be aware of which tax deductions you can, and should, take advantage of.  It is equally important to understand the record keeping requirements to document those expenses.

If you are profitable in your gig economy venture, you may be required to make estimated tax payments throughout the year.  When you receive a paycheck, federal and state taxes are withheld from each check.  When participating in the gig economy you do not receive a paycheck, and therefore must send in your estimated tax payments separately.  These payments are due quarterly.

It may seem like you are responsible for all for all of the same things as an ordinary business.  That's because you are!  The IRS does not see your gig economy business any different than a property management company or taxi service provider.  It is important to be aware of each businesses characteristics and requirements to make sure there are no surprises when it is time to file your taxes.  For more information please contact your trusted tax advisor.

If you are thinking of joining Airbnb, please see our article on short term rentals.

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Short Term Rentals

The Twin Cities has been and continues to be a popular site for National events, mostly in the sports genre.  The next event that the Twin Cities is buzzing about hosting is the 2018 Super Bowl.  With this kind of national exposure, Minnesota residents are searching for opportunities to take advantage of the increase in tourism.

With the current media exposure for sites like Airbnb, short term rentals are gaining in popularity for their simplicity and tax benefits.

However, these short term rentals may not be quite as easy as they may seem.  Depending on the location and type of home you hope to rent out, you may have issues with zoning codes, specific license compliance, and association rules.  The fines for violating any one of these could outweigh any income you may hope to earn. Additionally, should any of your guests get injured, you could have a whole host of issues that you did not plan for.  And don't forget the cost of sales tax compliance.

Even with the risks, there are tax benefits to these short term rentals.  Income earned from renting out your main home for two weeks or less is not taxable and does not need to be reported on your income tax return.  The downside is that any expenses you incur to rent out your home are also nondeductible for tax purposes.  Therefore, if the expenses you incur such as license fees, additional insurance, cleaning and any repairs exceed the income received in the activity, there is no tax benefit.

In the end, short term rentals can be a great money making strategy as long as the risks don't outweigh the reward. Make sure that you do the research to stay in compliance and contact your insurance and tax advisors with any questions.

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Employee vs. Independent Contractor

Do you have employees or independent contractors?  This is an important question with potentially large tax implications. Employees are paid through payroll and wages are subject to FICA and unemployment taxes.  Independent Contractors are not subject to payroll taxes, however there are additional reporting requirements for payments of services. This is also an area in which governments are beginning to crack down.  The IRS offers Form SS-8, which can be submitted by either the business or the worker to help determine the correct treatment in uncertain cases.  To help determine into which category your workers fall the IRS has some common law control rules that fall into three categories; behavioral, financial, and type of relationship.

The first category is behavioral control.  This refers to the degree of the right the company has to control the workers job.  An example of this is the type and degree of instructions given.  Generally, an employee is instructed about when, where, and how to work.  An independent contractor (IC) is hired to complete a job and given minimal instruction.  How the worker is evaluated is also a factor.  A contractor is usually only evaluated on the end result, rather than the parts of the process.  Training also factors in.  Training the worker on how to do the job it is strong evidence that the worker is an employee.  It is important to note that actually controlling these aspects of the worker are not important.  What's important is having the right to this control.

The second category of control is financial.  ICs often have significant investment in their equipment, whereas employees typically use the company's equipment.  ICs are usually not reimbursed for their expenses and will have ongoing expenses even if no work is being performed.  Whether the worker is offering their services to the market and not just to the company is strong factor for independent contractors.

The last category is the type of relationship.  This includes contracts, benefits, and length of the relationship.  Independent contractor agreements are always a good idea.  However, the existence of a contract is not sufficient to classify a worker as an IC.  Benefits such as insurance, paid time off, and retirement plans are indicators of an employee relationship, as these are generally not offered to ICs.  A company typically hires an IC with the expectation that the work will be for a specific job, or period.  If there is an expectation that the relationship will continue forever, it is evident of an employer-employee relationship.

It is important to look at the entire relationship between a company and the worker.  It is possible that some factors point to IC status while others point to employee.  You must consider all the factors and document the ones used to make the determination.  For help in making the determination or guidance on how to document it, please contact your trusted tax advisor.

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How Assets Transfer at Death

Estate planning can be very tempting to ignore; the combination of tedium, taxes, and, of course, one's mortality is difficult to face.  Indeed, estate work is the epitome of the cliché "death and taxes".  However, neglecting such plans can leave your loved ones with a confusing and potentially expensive mess to sort out.  This post covers the three fundamental ways assets are transferred at death.

The first and probably most familiar is a Last Will and Testament.  Upon death, your assets make up your estate, and the transfer to your heirs is governed by the Will.  The document must go through the legal process of probate, which validates the Will and allows it to dictate the transfer of assets in the estate.  Probate can impose a burden of time and expense on the estate.  Probate can be limited or avoided by the use of trusts.

A trust is another way to transfer assets, and has the benefit of avoiding a probate.  A revocable trust, or "Living Trust", is type of trust that does not exist as a separate taxable entity from the individual while the individual is alive.  At death, the trust becomes a separate legal entity with its own EIN (employer identification number) and operates according to the trust agreement, which would specify how the assets are to be distributed.  A common error with this estate planning strategy is the failure to retitle all assets to the trust.  The title of assets to the trust is also called "funding" the trust, and any asset left outside the trust must go through the probate process.

While a trust can assist to avoid probate, the time and expense associated with creating a trust document and retitling assets can be every bit as costly as the creation of a Will—not to mention the time and expense associated with following the trust documents and distributing the assets when the time comes.  Therefore, the third way of transferring assets simplifies this process further by designating a beneficiary through each specific asset.  Bank accounts, brokerage accounts, 401(k) plans, and IRAs are all types of assets that will allow you to name a beneficiary or a transfer on death designation.

This is solely a broad overview of estate planning and should not be relied upon as either legal or tax advice.  You should consult with a legal and accounting professional for specific planning related to your situation.

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