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.

Congress Passes “Tax Extenders” for 2014

Congress has passed the “tax extenders” to extend many tax provisions for 2014 that had expired at the beginning of the year.  A few of the more common provisions are listed below.

Small Business highlights:

  • The small business (Section 179) depreciation deduction limit on purchases of assets remains at $500,000 limit instead of dropping to $25,000
  • 50% bonus depreciation on new property has also been extended

Personal Tax highlights:

  • Tax free IRA charitable contributions can be made for those over 70 ½
  • The sales tax deduction will continue to be allowed in lieu of the state tax deduction on schedule A, itemized deductions.
  • The higher education tuition and fees deduction will remain that same
  • Mortgage insurance premiums will continue to be deductible as an itemized deduction

We expect these provisions to be extended for 2015 as well but that will require additional legislative action.

The Truth About Business Gifts

We are quickly approaching the holiday season and companies are planning their gift lists.  Here is the truth about business gifts…

Business gifts are deductible to only $25 per recipient per year with married couples being considered one recipient.  You may want to give a great customer a lovely Christmas basket that cost you $100, and of that kind gift, $75 may be subject to tax because it is not deductible.

Promotional materials or small items under $4 with a logo do not qualify as a gift and should remain classified as a promotional expense.

Gifts are a great way to thank your clients or customers and encourage their continued support, but take the time to weigh the cost benefit before filling out your Harry and David order forms.

gift

The Skinny on Deducting Meals

hamburger

One of the most common questions I get asked by clients is how much they can deduct for meals.  To answer the question I am going to break this down.

Are meals ever deductible?

Yes! The caveat with deducting your meals is whether they are directly related to or associated with your business activity.  Additionally, you must be able to prove that the purpose of the meal was business and that there is more than a general idea that you will be engaged in business with them in the future.  Some examples of non deductible meals:

  1. Deciding not to bring your lunch from home and grabbing a sandwich does not constitute a business activity and is not deductible.  If you were traveling to and from clients and needed to stop for lunch because you could not reasonably go home or bring your lunch, you may have grounds for a deduction.
  2. Generally meals with business associates and coworkers are not deductible unless you can establish a clear business purpose.
  3. Having a meal with someone with the hope that they may be a client or customer someday does not make the meal deductible.

Additionally, you will need to keep records of your expense and business purpose should your deduction be challenged.  Using a spreadsheet or writing the information right on the receipt doesn’t take very long and could save you hours in the future.

Most meals are only 50% deductible

Even when your meals are legitimate and deductible most are only deductible up to 50%.  This means that it is important for companies to discuss and decide the appropriateness of using this deduction.  Spending $5,000 on meals throughout the year could result in an additional $2,500 of taxable income and depending on your tax rate, the numbers can add up.

Exceptions to the 50% limit

There are circumstances where meals are fully deductible:

  1. As a fringe benefit.  You can deduct the cost of meals served on the premises for the convenience of the employer.  An applicable scenario would be a lunch meeting where the employer provides lunch so that they can continue working.
  2. As compensation. You can deduct the full cost of meals if they are added as taxable income to the employee’s wages.
  3. As a promotional activity.  Meals provided to the general public as part of a promotional event can be fully deductible.  A promotional event would include the snacks at a retailer’s open house event.
  4. At special occasions. If you provide meals for your employees at a social or recreational event such as a holiday party or summer picnic, the cost of the meals is fully deductible.

The deduction for meals is a nice way for business owners to conduct their activities in a more enjoyable and stress free atmosphere as well as providing a nice benefit to employees.  Because it is an attractive deduction it has the propensity to be misused and abused.  The IRS can easily disallow your deduction if you cannot provide appropriate support for your deduction upon audit.  My advice is to add this deduction to your business toolkit: use it when it is appropriate for good business practice but remember its limitations.

Minnesota Residency: Hot Topic for the DOR

According to experts, the Minnesota Department of Revenue is cracking down on taxpayers with possible Minnesota residency status.  Claiming Minnesota residency or the opposite can make a big difference according to your tax situation.  Minnesota is in the top five states for the largest top tax rate, and is one of the states with the largest estate tax rate.  It is not surprising then that many taxpayers who live in or spend time in multiple states might want to claim another state for their residency.

Here are some things to consider if you are trying to avoid residency status in Minnesota:

Intent – Individuals are domiciled (treat as a permanent home) in Minnesota if it is their intent that Minnesota be their permanent home.  Even if they are temporarily absent from Minnesota they can claim Minnesota as their residency if they intend to return.

183-day Rule – An individual can be considered a Minnesota resident if they spent at least 183 days in Minnesota.

An individual can also be considered a Minnesota resident if they own or rent an abode in Minnesota. Property is considered an abode when it is winterized, such as a typical residential home.  A summer cabin without heat or with only seasonal accommodations will not be considered an abode.

An individual can be considered a Minnesota resident even if they did not spend 183 days in Minnesota, as long as they did not spend 183 days in any one other place.  This would be the case if the taxpayer traveled for a majority of the year.  They did not spend 183 days in Minnesota but they did not intend to make any of the places they were traveling their permanent domicile.

Other Factors – The DOR will consider a variety of factors to determine if a taxpayer is a resident of Minnesota. Some of these include:

  1. The location of the taxpayer’s property
  2. Jurisdiction for drivers license
  3. Jurisdiction for professional licenses
  4. Voting Registration
  5. Employment location
  6. Location of clubs or social organizations
  7. Location of religious involvement
  8. Mailing address
  9. Etc.

If you are considering a change in your domicile but still intend to spend time and produce income in Minnesota, it is recommended that you keep meticulous records.  Make sure you are consistent with your address and any residency questions.  Keep logs of how much time you spent in and out of Minnesota and be very clear about your domicile intentions.

For any questions about your specific tax situation, please consult your tax advisor.

Tax Planning 2014

It is time to consider your end of the year tax plans.  The laws for 2014 have not been finalized yet, however most analysts are expecting the expiring provisions to reinstate for 2014 and 2015.

A few of those provisions include:

  1. Tuition and fees deduction: this is an above the line deduction for up to $4,000 of qualifying education expenses.
  2. State sales tax deduction: this is a deduction you can take in lieu of a state income tax deduction on Schedule A.
  3. Charitable IRA transfers: where taxpayers ages 70 ½ or older can make direct transfers to charities of up to $100,000 from their IRA.

The tax rates are not expected to change in 2015, though due to time-value of money, most people will benefit by accelerating write-offs in 2014 and deferring income to 2015. Here are a few ways to accelerate your write-offs:

  1. State & Local Income Taxes:  if you make estimated payments or expect to owe state income tax, we recommend making your estimated payment by December 31st; doing so will allow you to take the deduction for taxes paid in 2014 instead of 2015.
  2. Donations: You can make charitable contributions that are planned for 2015 in 2014.  As long as the payment is made or mailed by December 31st, it qualifies.  One strategy would be to charge a donation on your credit card, that way you can claim the deduction in 2014 while deferring the cash payment to 2015.
  3. Medical Expenses: If you have reached 10% of your AGI in medical expenses (7.5% for those over 65) take advantage of qualified elective procedures in 2014.
  4. Mortgage Interest:  you could make your January 2015 mortgage payment early and deduct 13 months of mortgage interest in 2014. However in 2015, unless you use the same strategy, you will only have 11 months of interest to deduct.

These four strategies really only help you if you can itemize deductions.  If you just barely qualify to itemize in 2014, using these strategies should increase your itemized deductions in 2014, but be aware they may cause you to revert to the standard deduction in 2015.  The 2014 standard deduction will be $12,400 (MFJ), $13,600 (MFJ over 65), $6,200 (Single), $7,750 (Single over 65), and $9,100 (HOH).

AMT

For those of you who would like to accelerate you state and local income tax deductions be aware if you are in the AMT.  There is an add back of state and local income taxes for AMT so accelerating your deduction will not help you at all.  Also exercising incentive stock options will cause the discount to hit AMT unless you sell the shares by December 31st.

Changes for 2015

The limit on retirement contributions will increase in 2015 to $18,000 or $24,000 if 50 or older.   The phaseout of AGI for Roth IRA contributions will be $183,000 to $193,000 for couples and $116,000 to $131,000 for singles.  The phaseout of AGI for regular IRA’s will be $98,000 to $118,000 for couples and $61,000 to $71,000 for singles.

 

Make sure you consult with your tax advisor for any tax planning considerations, and we will do our best to let you know of any changes in the law as they occur.  Happy Planning!

 

 

Leaf

Estate Planning Awareness Week 2014

Estate planning awareness week is October 20-26, this is when we take the time to remind all of you how important it is to continuously update your estate plan.

Here are some basic steps in estate planning to consider:

  1. Make a listing of your assets or update your list for completeness and accuracy.
  2. Determine and understand the effect of each assets transfer upon death.
  3. Make sure to review and update your will and your beneficiary designation forms.
  4. Legal documents – the main, 3 documents you need are as follows:

-Power of attorney – for both your financial and medical affairs

-Healthcare directive

-Will

  1. Consider taking advantage of the $14,000 annual gift tax exclusion this year.
  2. The top federal gift and estate tax is 40% on estates/ (lifetime) gifts over $5,340,000 in 2014 and set to index for inflation here after. Consider how this will affect your estate, and what you can do to minimize your liability.
  3. MN estate tax may be due on estates in 2014 with over $1,200,000 in assets. The MN threshold is set to increase $200,000 per year until hitting a ceiling of $2,000,000 in 2018.  Consider how this will also affect your estate.

Revisiting your estate plan on a regular basis with your attorney and tax advisor can ensure a smoother process for your beneficiaries and can assist in making sure your wishes are honored.  Your advisors can also help you enact strategies so that your estate does not pay any more tax than is necessary.  Take the time to sit down and review your estate; it will be worth it.

“Forewarned, forearmed; to be prepared is half the victory.” – Miguel de Cervantes

Death & Taxes: What to do When a Loved One Dies

Continuing with our estate tax theme for October we come to the topic of what to do in the sad event of a spouse or family member's death.  Aside from planning memorial services, there are some tasks that are less commonly thought of.  Below is a list of some things that need to be considered to make this traumatic event less stressful.

  1. Death Certificates – these typically are obtained from the funeral home. Get multiple copies; you'll need them for financial institutions, government agencies, and insurers.
  2. Legal – locate the will and any other legal documents, such as a trust.  Contact an attorney and CPA for next steps on both validating the will and transferring the assets to the heirs.   This will be the first steps to obtain the legal documents to work on behalf of the deceased.
  3. If they were working, contact the person's employer.  Request information about any pay due to the deceased, any retirement funds and if there are any benefits due, such as life insurance.
  4. Banking and Credit Cards – Reach out to their bank to find any accounts and/or a safe deposit box.
  1. Life Insurance – Contact the life insurance agent to begin the claims process.
  2. Postal Service – Provide change of address information for mail forwarding.
  3. Government Benefits – Contact Social Security at 800-772-1213, socialsecurity.gov – and/or any other agencies from which the deceased received benefits, such as Veterans Affairs at 800-827-1000; va.gov – to stop payments and ask about applicable survivor benefits.
  4. Pension – Connect with any other agencies providing pension services to stop monthly checks and get claim forms.
  5. Investment Advisors – Contact the person's investment adviser for information on holdings.

Since we are a CPA firm we will go into more detail regarding taxes.  Below is a list of forms the IRS may require in the event of someone's death.

Prior year income tax return – IRS Form 1040 & Minnesota Form M1

  1. Required if decedent passes before filing taxes for the prior year.
  2. Prior year return is due April 15th of year of death.

Year of death income tax return – IRS Form 1040 & Minnesota Form M1

  1. Due April 15th of the following year.
  2. This will report income from 1/1 to date of death.

Fiduciary income tax return – IRS Form 1041

  1. Required if the estate had income greater than $600.
  2. This return reports the income earned from date of death to end of either fiscal year or 12/31.
  3. Due the 15th day of the fourth month following close of tax year

Estate tax return – IRS Form 706 and Minnesota Form M706

  1. IRS Form 706

-Required if the gross (total) estate of the decedent is worth more than the IRS's applicable exclusion amount  ($5,340,000 for 2014).

-Taxable lifetime gifts must be added to the gross estate for applicable exclusion amount calculations.

-Due nine months after date of death.

  1. Minnesota Form M706

-Required if federal gross estate plus federal taxable gifts made within three years of decedent's death exceed $1.2 million.

-Due nine months after date of death.

Gift tax return – IRS Form 709

  1. Required if decedent made a taxable gift in year of death.
  2. Due earlier of April 15th of the year following gift, or due date of Form 706.
  3. There is currently no gift tax for the state of Minnesota.

Every situation does not necessarily create a filing requirement for each of the above forms.  Please consult your tax advisor should you have any questions regarding your specific situation.

Trusts, Wills, and Probate…. Oh My!

First of all, I need to reiterate that we are not lawyers, we are CPA's.  The purpose of this article is to give you a general overview of these topics from a CPA's perspective, not to give legal advice.  If you have questions about how these concepts could affect you, please consult your lawyer and tax advisor.

Probate

Probate is a court proceeding to validate a will and transfer ownership of property from the decedent to others.  In most places, probate is required when certain assets exceed an applicable threshold.  In Minnesota, probate is required when probate assets exceed $50,000 or when real estate is involved. Probate assets include:

  1. Assets owned individually by the decedent
  2. Assets owned in tenancy
  3. Life insurance, annuities, and retirement accounts with no beneficiary designation, if the estate is named beneficiary, or if the beneficiary has deceased or disclaimed their interests

Probate may still be required even if a will is made if the probate assets exceed the applicable thresholds.

Wills

A will is a legal document that allows the decedent to name a representative of their estate, determine the division of property, and nominate a guardian for minor children.  Should a will not be made, the determination of these factors will fall to intestacy laws. Most intestacy laws rank the heirs in the following:

  1. Spouse, children, and other descendants
  2. Parents
  3. Siblings and children of deceased siblings
  4. Other kin
  5. The State

Wills have no effect on non probate assets.  They cannot override beneficiary designations or determine ownership by joint tenants.  In most cases a will cannot be used to disinherit a surviving spouse but can be quite effective in disinheriting adult children.

Trusts

A trust is a legal entity that holds title of property by one person for the benefit of the other. The terms and conditions of a trust are determined by a legal document such as a will or trust agreement. Trusts can be used to postpone a gift or receipt of inheritance or provides asset management for those unable to perform the management function.

There are three parties to a trust:

  1. A Grantor- creates the trust, determines the terms, and transfers the assets to the trust.
  2. The Trustee – holds the title to the assets and is responsible for their management and distribution
  3. Beneficiaries – persons selected by the grantor to benefit from the trust

A revocable living trust is a common way to avoid probate and provide for your beneficiaries.  Typically in a revocable trust the taxpayer is all three parties.  The assets should be titled in the trusts name, but as the trustee and beneficiary you control and benefit from the assets the same as you did before creating the trust. It is called revocable because you have the power to change or revoke assets or conditions at any time. The trust agreement in a revocable living trust provides for the management and distribution of assets after a grantor's death.  Upon death, the revocable trust becomes irrevocable.

In the case of a revocable trust as with all trusts, it is absolutely essential that the trust is funded per the will or trust agreement.  This generally means that the assets that are meant to belong in the trust need to be retitled to the trusts name and identification number.  Failure to retitle the assets will result in a failure to avoid probate and control of the assets potentially outside of the taxpayers intended action.

The choice of assets to fund your trust should be decided by your estate plan.

Your advisors will be essential in considering how these concepts will affect you.  A complete estate plan will create the greatest assurance that your values and wishes will be respected and acted upon in the case of your death.  Like the old proverb says, “Make hay while the sun shines;” take the time now while you can and feel comforted in knowing that you have provided well for your loved ones.

Health Care Directives

It can be hard to imagine on a beautiful day, when you feel great that anything bad could happen to you.  But the truth is accidents happen all the time. People, previously in the prime of their life, can be found in ICU’s around the world.  When tragedy strikes every family is going to have a different response.  Many people still remember the story of Terri Schiavo, who unexpectedly had a medical condition that left her in a vegetative state on life support.  Terri’s husband spent almost 15 years in a court battle against her parents about whether or not she should be taken off of life support.

That entire battle could have been prevented with a Health Care Directive.

A Health Care Directive is a form that states the person’s health care wishes at end-of-life and in the case of incapacity.  A Health Care Directive may also include a person’s health care power of attorney appointing a health care agent to act on their behalf.  A health care agent is required to follow the directions requested in directive.

Minnesota does not require that their suggested form be used.  They will accept many other kinds of forms including those provided by hospitals, religious organizations, or other national organizations.  Once your Health Care Directive is created it should be distributed to your doctor, health care agent, and anyone who may need to reference it.

This form is an essential part of any estate plan, but should be considered by people of all ages.  Being specific and straight forward will save all involved pain should the worst happen.

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.