Defending Fair Market Value
Determining the value of items on your tax return is always open to interpretation. You do not want that to happen to you during an audit as it can lead to additional tax and penalties. Here are some tips to help defend your Fair Market Value (FMV)
determinations.
“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”
Source: IRS Publication 561
This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation. The difficulty here, is if the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but penalties to boot. Here are some tips to help defend your FMV in case of an audit.
Understand when it is used
Fair Market Value or FMV is used whenever an item is bought, sold, or donated that has tax consequences. The most common examples are:
- Buying or selling your home or other real estate
- Buying or selling personal property
- Buying or selling business property
- Establishing values of other business assets like inventory
- Valuing charitable donations of personal goods and property like automobiles
- Valuing bartering of services
- Valuing transfer of business ownership
- Valuing the assets in an estate of a deceased taxpayer
Ideas to defend your FMV determination
Here are some suggestions to help you defend your FMV determinations.
Properly document donations. FMV of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.
Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley blue book (kbb.com) can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.
Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Keep copies of similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.
Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.
Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.
With proper planning, establishing the fair market value of an item sold or donated, can be done in a reasonably defendable way if ever challenged.
Change in Tip Reporting is Coming – Mandatory gratuities (tips) to become
Automatically adding a tip to your restaurant bill could become a thing of the past in 2014.
Here is what you need to know as a patron, a server or a restaurant owner.
The long-standing practice of automatically charging you a 15 – 20% gratuity at your favorite restaurant is changing as we speak. The practice of charging customers for tips is normally applied to large parties (tables of 8 or more) or at high profile restaurants. The practice came about to ensure servers handling large groups receive adequate tips. Here is what is changing:
Restaurant Owners
Beginning in 2014 any automatic gratuity added to a patron’s bill is deemed to be service income and treated as wages to employees. This change will mean lower take home pay for servers and it will mean larger social security payments for restaurants as the normal social security tip credit will not apply to these fees. To avoid tips being reclassified as wages a tip must;
- be at the discretion of the customer
- the amount must be determined by the customer
- the beneficiary of the tip is generally to be determined by the customer
- the amount is not subject to negotiation or policy
How this is interpreted by restaurants will continue to evolve.
Servers
This automatic gratuity should not be reported by you as tip income when you report your tips to your employer beginning in January, 2014. It should already be included in your wages. If your employer currently has the practice of adding automatic tips to customers’ bills, you may wish to let them know of this impending change.
Patrons
A number of larger restaurants are temporarily doing away with automatically charging you a tip amount on your bill. This is being done as a test to see if customers continue to add a reasonable tip amount when your dining party is large. Decisions will then be made whether to continue to add this automatic tip charge, or allow patrons to determine an appropriate tip.
While this change takes place over the next few months, remember if service is poor, the gratuity can be negotiable even if it is automatically applied to your bill.
Reduce Your Income: Hire Your Kids
If you run a small business that is not incorporated, consider hiring your kids to reduce your tax bill. Here’s why.
If you own your own business, by hiring your children you can save in the following ways:
- Salaries paid to children under 18 are not subject to Social Security or unemployment taxes (in most states).
- No Federal withholding taxes are required if the child is under age 21 and earns under $5,950 per year.
- Even if the child must pay taxes, the child’s rate of tax is normally lower than your own rate.
- You should not have to pay worker’s compensation for the child as you would on a non-family member.
Set it up correctly
To ensure your child’s income is not challenged here are some suggestions:
- Provide a job that your child can reasonably handle. Ideas include; filling the company vending machine, copying, clean up, mailing, help with advertising, light packaging, light typing and customer service.
- Pay your child at least minimum wage and a wage rate that is comparable to what you would pay someone else to do the work.
- Make payments periodic (at least once per month).
- Include a W-2 at year-end.
- Keep the same payroll records as you do for other employees.
Other things to note
- Hiring your children to work for you does not apply if your business is a C-Corporation.
- This benefit works best if your business is unincorporated (sole-proprietor).
- Do not have children conduct dangerous or heavy industrial work as this could come under review by the Department of Labor.
- Treat your child like other employees. This includes time-cards and training.
Besides the tax benefits, hiring your children can gain them valuable experience and help them understand what you do every day.
The New Premium Tax Credit – Claim it now or take it later?
Beginning on October 1, 2013 a new Health Insurance Marketplace is being opened by each state. This Marketplace will allow open enrollment for uninsured to obtain health insurance. If eligible you may also receive a reduction in your insurance premium by use of a Premium Tax Credit. Should you apply the credit now or wait and receive the credit on your tax return? Here is what you need to know.
Effective October 1st, there is a new tax credit available; The Premium Tax Credit. If you are eligible for this credit you can decide to take it now based on your estimated income for 2014 or take it later when you file your tax return for 2014. Who does this impact and what should you do?
What is the Credit and who is eligible?
Topline: If you have health insurance available from your employer, this credit is not for you. If, on the other hand, you are self-employed, your employer recently provided you a notice they are moving health insurance coverage to the “exchange or marketplace”, or you currently do not have health insurance then this information is important to understand.
Beginning in October, 2013 there is a new Health Insurance Marketplace established as part of Obamacare. Open enrollment in these health insurance plans runs from October 1, 2013 through March 31, 2014. If you are eligible and enroll in one of these plans through the Insurance Marketplace you may be eligible to have your premium reduced by the new Premium Tax Credit.
To be eligible for the Premium Tax Credit you must;
- buy your health insurance through the new Health Insurance Marketplace (state exchanges)
- be ineligible for health insurance coverage through an employer or through other government programs
- not be claimed as a dependent on someone else’s tax return
- if married, file a joint tax return
- meet certain income requirements
Take it now or claim it later?
One of the tricky decisions you’ll make if enrolling for health insurance through the Marketplace is deciding to take the Premium Tax Credit to reduce your monthly health insurance premium payments or wait and receive the tax credit when you file your 2014 tax return. Here are some tips:
Predictable income? If your can accurately predict your 2014 income and number of dependents consider applying an estimated credit now to reduce your monthly health insurance cost.
Predictable family situation? If you know the number of dependents you will have in 2014 and your status (married, single, etc.) in addition to your income consider applying the credit during the year. If your family situation changes during the year you can always update your profile in the plan.
Understand the downside. If you misrepresent your income and it impacts your eligibility for the Premium Tax Credit you will have to repay the credit on your tax return. This could become a real financial hardship.
Middle ground? Consider estimating your income, but make it slightly higher than you anticipate. This way your monthly health insurance premium will be a bit higher, but you may also receive a larger refund at the end of the year.
Remember, beginning in 2014 if you do not have health insurance you may be subject to new penalties payable when you file your tax return.
Seven Payroll Tips for Small Business Owners
Having a staff on payroll can seem very commonplace as well as essential to running a small business, but many owners get in trouble with Uncle Sam because they don’t understand the complexity of payroll tax law. On the flipside, by not fully understanding the rules, it’s also common for business owners to overlook ways to manipulate employee pay to save money.
With that said, here are a few tips for business owners to keep their payroll on track and in compliance with the IRS:
1. Make sure that you properly classify your workers. Just because a worker agrees to be paid as an independent contractor doesn’t mean it’s the legal way of paying that person. If the worker performs the same services as offered by your business, the person must usually be classified as an employee. Like with anything related to the tax code, there are exceptions so for more in-depth information on this topic, check out IRS Publication 15
.
2. You will need an employer identification number (EIN) and you will need to supply this number to your payroll-processing company. If your business entity is a partnership or corporation, you already have a number. If you do not have an EIN, contact the IRS at 1-800-829-4933 to apply for one.
3. Check with your bank to see if they offer payroll services. Usually banks consider payroll processing a courtesy, which means the price will likely be substantially lower than what other payroll processing companies charge.
4. Set your budget to include not only the wages that must be paid, but the payroll taxes that also must be paid to the federal and state governments. You are required to match the Social Security and Medicare that is withheld from your employee’s pay, which is equivalent to 7.65% of the gross pay. You must also fund the federal unemployment fund by paying FUTA tax. See Publication 15 for more information on rates and requirements. Depending upon the state in which your business is located, you may be required to pay other employment taxes. Find out the rates and include those percentages in your budget.
5. Ask your payroll-processing company to automatically make the federal and state tax deposits for you. Out of sight, out of mind, and in compliance. It can get very expensive very quickly if you do not keep up with payroll tax deposits. In fact, you can be levied a 100% penalty for failure to turn over the withholdings to the government by the due dates. Publication 15 outlines the due dates and other requirements for making the payroll tax deposits. If your in-house bookkeeper makes the deposits, double check to ensure they were made timely.
6. When it’s time to give raises, consider providing them in the form of tax-free fringe benefits such as health, dental, and vision insurance, child care subsidy, a cell phone or a retirement plan. Check out IRS Publication 15-B to see what fringe benefits are available and whether or not they are subject to taxation.
7. As part of the Patient Affordability Act, beginning in 2014, if you have more than 50 employees on staff, you will be required to provide health insurance. You needn’t pay the health insurance premiums, but there must be a plan in place in which your employees may choose to participate.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service.
Take an IRA Deduction Now. Pay Later.
Want to reduce your taxable income using a tax deferred contribution to an IRA but don’t have the funds to do so? If you expect a tax refund, here is a technique that may help.
Here is a tax planning tip for those who file their tax returns early and wish to contribute to a tax deductible IRA, but do not have the funds to do so.
Say you want to pay into an IRA to get a tax break but you don’t have the money? Take heart, there are ways to get around this. The IRS allows you to take the deduction now and pay later when you get your refund.
How it works
Step 1: Prepare your tax return early in the year (early February). Run the tax return considering an income reducing contribution to a tax deferred IRA. If you do not have the funds to put into the IRA, but your tax return has a refund that can fund your contribution, you are ready for step 2.
Step 2: File your tax return with the IRA contribution noted. File the tax return as early as possible to ensure your refund gets back to you prior to April 15th. E-file the return if at all possible.
Step 3: Fund your IRA prior to April 15th. Tell your IRA investment firm you wish your IRA contribution to be for the prior year.
That’s it. You have now effectively had the income reduction benefit of your IRA contribution help fund the account through your tax refund.
The risks
Timing is everything. If you use this technique it is critical that the IRA is funded on or before April 15th. If it is not, your tax return will need to be amended.
Refund not received in time. If you do not receive your refund in time, you may not have the funds to make a timely IRA deposit. In this case, you may need to borrow funds on a short-term basis until the refund is received.
No extensions. The IRA contribution for the prior year must be made by April 15th of the following year (the original filing due date). This is true even if you file your return under an approved extension period.
While not for everyone, this tax tip could help you fund more of your retirement on a tax deferred basis.
Fund Your Retirement or Your Child's College?
With rapidly increasing costs in both health care and in college tuition, deciding which is more important can be a real dilemma. Here are some thoughts.
As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education.
The dilemma
With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do?
Retirement prior to education
In most cases it is more important for parents to put their financial needs ahead of their children. Why?
- One of the best ways you can help your child in the long-term is to ensure you won’t be a financial burden on them in the future.
- Your children can take out education loans, while lending options during retirement years are limited.
- There are numerous programs available to your child to help them afford college.
- While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.
Some tips to consider
There is plenty of opportunity to fund both retirement and college education in a tax advantaged way. You might wish to consider funding basic retirement needs first, then look at tax advantaged educational savings programs.
Retirement: First fund employer provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children.
Child’s Education: Look into Coverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings.
Consider other ways to generate college funds. Here are some ideas;
- Start saving for both retirement and college early. Use time to help grow the value in your accounts.
- Attend a public versus a private college
- Look into work-study alternatives
- Review and apply for grants and scholarships
- If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school.
Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found.
CFO Solution Resources, Inc. merger with Hallmark CPA Group, LLC – Tampa, Fla.
Press Release
FOR IMMEDIATE RELEASE:
CFO Solution Resources, Inc. merger with Hallmark CPA Group, LLC – Tampa, Fla.
Effective October 1, 2013, the firm of CFO Solutions Resource Inc. has merged its practice into the firm of Hallmark CPA Group, LLC in Tampa, Florida.
“The addition of Dennis Fredrickson and his team helps us to better serve our growing practice. We are enthusiastic about continuing the high level of service and expertise the firm has provided its tremendous client base,” said Andrew J. Hall, managing member of Hallmark CPA Group, LLC. “Dennis is a great addition to the team and brings over 15 years of expertise to our firm. He will add a depth of knowledge to our Business Management & Advisory services that our clients can benefit from, and we have been looking for someone to provide these same niche services to our growing client base.”
“During the last five years Hallmark CPA Group, LLC has grown from strength to strength, being awarded ‘Best CPA Firm’ in Tampa by the U.S. Commerce Association. While we are very proud of the achievements during this time, we also recognized that the next step for our team and clients was to merge with a firm of comparable quality that would enable us to expand services to our clients,” said Andrew J. Hall. “CFO Solutions Resource Inc. shares our philosophy of helping our clients grow and succeed and the merger will broaden and deepen our existing industry specializations, enabling us to offer more comprehensive business advice tailored to our clients, while enabling me to focus more on the niche business management arena.”
“I am truly excited about this opportunity and believe this creates a great synergy of resources and experience to offer outstanding CPA firm service to our clients in the Tampa Bay, Clearwater, Saint Petersburg and surrounding areas.” said Dennis Fredrickson C.P.A.
Hallmark CPA Group, LLC are a full service CPA Firm offering Audit Assurance & Attestation, Tax Services (both business and personal), Management Advisory, Bookkeeping, Payroll & HR, and Business Planning.
You may contact Dennis Fredrickson (dennis@hcpagrp.com ) or Andrew J. Hall (ajhall@hcpagrp.com) or call (813) 283-0642 more information.
Tax-Free Rental Income
Did you know you can rent out your home or vacation property for up to 14 days and not need to claim the income? Here are some tax tips to take advantage of this opportunity.
Most income you receive is taxable income that is reported to you and to the Federal/State tax authorities. However, there are a few income-producing events that the IRS has said are not taxable. One of them is renting out your home or vacation property.
The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.
Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced with the income from up to two weeks of rental activity.
Would someone want to rent your property?
Sure it sounds good, but why would someone want to rent your property? Here are some ideas:
A sporting event. If a big sporting event is in town, consider renting out your home for participants and fans. Common examples include;
- Football games
- Golf tournaments
- State high school tournaments
- College football and other college events
- Host foreign students/teachers
Rent out your vacation home. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.
Vacationer alternative to hotels. Often times travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets these travelers have a real “local” experience versus staying in a hotel.
Know the risks
The hassle factor needs to be considered prior to taking advantage of this free income opportunity. You should also understand the risks involved. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember to only rent out your property for up to 14 days. Rent received beyond this is taxable and rental income rules apply.
Thankfully there are a number of internet sites that can help you navigate through your options. Here are a couple popular sites to find out more information.
Vrbo.com (vacation rentals by owner)
Tripadvisor.com (includes personal rentals with user feedback)
Using Losers to Make Winners
Effectively using your investment losses can make a big impact in your taxable income. Why? These losses could offset income that is barely taxed, or it could offset income taxed at 39.6% or higher! Here are some ideas to make those losers into winners on your tax return.
Understanding the rules surrounding investment losses can really help minimize your tax obligation each year. This is because investment gains and income can be subject to a variety of federal tax rates as high as 39.6%. This and a newly minted tax law in 2013 that could add a 3.8% Medicare investment tax surcharge make planning around when to take investment losses an important tax planning subject.
Know the meaningful rules
What makes investment losses such an important tax planning subject? Here are the relevant tax ramifications surrounding investment losses.
- Offsetting gains. Investment losses can be used to offset investment gains every year.
- Short-term versus long-term. Short-term investment gains (from assets owned by you for less than one year) can be subject to ordinary income tax rates up to 39.6% while long-term gains have a maximum tax rate of 20% (0% if your income is in the 15% income tax bracket or lower).
- Netting rules. You first net investment losses against investment gains prior to applying losses against your ordinary income. Where possible you must net short-term losses against short-term gains and long-term losses against long-term gains.
- Excess losses. Up to $3,000 of excess investment losses can be used to offset your ordinary income in any one year.
- Unused losses. Unused losses can be carried forward to offset income in future tax years.
So given these rules, here are some tips.
Maximizing the impact of investment losses
- Net losses against short-term gains whenever possible. If you are in a high income tax bracket, try to sell stocks with a loss to offset any investments you wish to sell that you have owned less than one year.
- Defer taking losses if they will be used to offset lower taxed gains.
- Time taking an investment loss to take advantage of the annual $3,000 reduction of income it provides.
- Transfer stock from a low tax rate family member to a higher taxed individual.
- Take full advantage of the loss carry-forward rules. If you sold an investment that had a huge loss in a prior year, you can only take $3,000 against your regular income each year. If this applies to you, conduct an annual review of your portfolio and consider selling investments with a gain to offset more of this loss carry-forward.
Remember, investment losses can be used to offset investment gains and a limited amount of your ordinary income. Since the tax rates vary so greatly, proper planning to match losses against higher taxed items can make these losers a real winner on your tax return.