Tag Archives: deductions

New HSA Deduction Limits Released for 2017

The IRS recently released the 2017 annual deduction limits for health savings accounts (HSA), which are typically adjusted each year for inflation.

The 2017 limits are $3,400 for an individual with self-only coverage and $6,750 for an individual with family coverage. Such deductible contributions can only be made to an HSA that is maintained in conjunction with a high-deductible health plan.

A high-deductible plan is defined as a plan with an annual deductible of $1,300 or more for self-only coverage, or $2,600 or more for family coverage. The corresponding maximum out-of-pocket expenses are $6,550 and $13,100, respectively.

Health savings accounts continue to be a powerful tool in combating the rise in health costs especially for young healthy people. Employers should continue to evaluate their effectiveness as part of an overall health benefits strategy.

If you have any questions or would like more information, please contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at 301-231-6257.

Tax Compliance Series for Construction Contractors: Tangible Property Regulations

compliance-series-cisg-icon-01Aronson’s IRS compliance articles have focused on a variety of important tax considerations for construction contractors. Today, we continue that tradition by taking a closer look at another common issue: tangible property regulations.

Tangible property regulations became effective for tax years beginning on or after January 1, 2014. The regulations provide guidelines covering materials and supplies, capitalized costs, and costs to acquire, produce, improve and dispose of tangible property.

A taxpayer generally must capitalize amounts paid to acquire, produce or improve tangible property. However, the IRS has provided a de minimis safe harbor election that can be filed on an annual basis to expense all items under a certain dollar amount or with a useful life of less than 12 months. The de minimus amount is $5,000 if you have an applicable financial statement (e.g. audited) and a written accounting policy. If you do not have these items in place, the safe harbor amount drops to $500. It is advised that these elections be filed annually regardless of your policy so that you can be protected for all items that fall below the threshold if ever questioned by the IRS.

While the regulations do provide certain benefits, they come with a fair share of compliance paperwork. Taxpayers will need to complete Form 3115, “Application for Change in Accounting Method,” and consider up to nine elections depending on the accounting methods used.

However, after the new regulations were issued, the IRS appeared to reveal a soft spot for small businesses as they established a small taxpayer relief revenue procedure. This relief permits qualifying taxpayers to adopt the new regulations prospectively without filling out all the required forms. In order to utilize the relief, taxpayers must have total assets of less than $10 million or average gross receipts of less than $10 million for the prior three taxable years. The relief does not exempt a company from making required elections based on its accounting methods used. All forms and elections are required when filing your completed tax return.

This is a significant opportunity available for a one time deduction, particularly in the area of real property you may use within your construction business. You should evaluate if the small taxpayer relief makes the most sense for your business, and whether you can obtain additional tax relief by taking advantage of the one-time deduction available.

For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.

 

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What are My Chances of Being Targeted for an IRS Audit?

According to the recent Kiplinger Tax Analysis, the Internal Revenue Service (IRS) is struggling with its enforcement efforts as the agency’s funding has been significantly reduced over the past several years. Some interesting statistics included:

  • 2012 audit rate for individuals was the 0.96% – approximately 1 out of 100 filed returns (lowest since 2005)
  • 2013 audit rate for individuals is projected to be at 0.80%

The odds may seem very low for the return to be picked for a review; however, taxpayers should look at the following factors (selected by Kiplinger’s Personal Finance Magazine) that could increase further scrutiny by the IRS and potentially result in a full-blown examination of your income tax return:

  1. Large Gross Income – According to the IRS statistics, even though the overall individual rate is below 1%:

i.            Taxpayers with incomes of $200,000 or higher had an average audit rate of 3.26%

ii.            Taxpayers with incomes of $1mil or higher had an average audit rate of 11.11%

  1. Failure to properly report all taxable income – The IRS receives copies of all forms 1099s and W-2s; a mismatch is easily detected by the IRS computers and a subsequent notice will be issued.
  2. Large Charitable deductions – The IRS is aware of the average charitable donation for taxpayers in various income categories (ex., taxpayers with Adjusted Gross Income in $100k-$200k range reported, on average, $3,939 charitable deduction). If your deduction is disproportionately larger, it raises a red flag. Also note that, for noncash donations in excess of $500, a form 8283 must be included with your tax return and, for noncash donations in excess of $5,000, an appraisal is required.
  3. Schedule C – Considered by some as a goldmine for IRS agents, as history shows that most understating of income and overstating of deductions is done by those who are self-employed.

i.            Hobby Losses – don’t confuse a hobby with a business. The activity must be conducted with the intent of making a profit; the law presumes you have a business if the activity at a minimum generates profit three out of five years. Also make sure that you have proper documentation for all of the expenses. If, however, you determine that the activity is actually a hobby, report any income and deduct any expenses only up to the level of income; the law prohibits writing off losses from a hobby.

ii.            Home Office – you must use the space exclusively and regularly as your principal place of business (this area of the home should not be used as a family room in the evenings or a guest bedroom).

iii.            Business Use of a Vehicle – claiming 100% business use of a vehicle is another red flag for the IRS and will get challenged; make sure you keep detailed mileage logs so that the deduction will not get disallowed.

iv.            Meals, Travel, and Entertainment – to qualify for the deduction, you must keep detailed records for each expense amount including: the place, people attending, business purpose and the nature of the discussion/meeting. Taking excessive deduction will draw additional attention from the IRS, so make sure you have proper documentation.

v.            Day-Trading Losses – many taxpayers who trade in stocks and other securities take an aggressive position of a “trader” rather than investor and report trading losses and expenses on Schedule C. The IRS is selecting those returns to determine if the taxpayers actually qualify as bona fide traders.

  1. Rental Losses – The IRS launched a “real estate professional“ audit project several years ago that targets taxpayers with real estate losses who claim to be real estate professionals. As a general rule, in order to qualify as a real estate professional, you must spend more than 50% of the working hours and 750 or more hours each year materially participating in a capacity of a real estate developer, broker, landlord, etc. If however, you hold a full-time job (outside of real estate) most likely you will not qualify as a real estate professional and the losses from your rental activity will be either limited to current year income or suspended to future years.

Claiming a higher than average deduction or loss on your income tax return may draw an unnecessary attention from the IRS; however, if you have proper documentation, you have nothing to worry about.

For more information about potential audit red flags, please contact your Aronson tax advisor or Anatoli Pilchtchikov at 301.231.6200.

 

About the Author: Anatoli Pilchtchikov is a manager in Aronson’s Personal Financial Services Group, where he specializes in tax compliance and consulting for high net worth individuals and their families, corporate executives and business owners. He manages his clients’ overall tax liabilities through proactive planning during the year and preparation of tax returns and projections.

 

Key Tax Provisions of “Fiscal Cliff” Legislation

You are probably aware that Congress passed legislation (the “American Taxpayer Relief Act”) early Wednesday morning, which the President is expected to sign into law to avert (or delay, depending on you viewpoint) the so-called “Fiscal Cliff.” While the legislation only delayed by two months widespread automatic spending cuts, it prevents many of the tax increases that were scheduled to take effect in 2013. With the exception of a targeted tax increase to the wealthiest Americans, the Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently addresses Congress’ reoccurring task of “patching” the alternative minimum tax (AMT). Further, it temporarily extends many other tax provisions that had lapsed at the end of 2012 and others that had expired a year earlier. Among the tax items not addressed by the Act was the so-called “payroll tax holiday.” Thus, the temporary 4.2% rate for the employees’ portion of the Social Security payroll tax will revert back to 6.2%, effective January 1, 2013.
Below is a summary of the key tax provisions:

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Maryland Increases Personal Income Tax Rates

Maryland Governor Martin O’Malley has just signed legislation that, effective for tax years beginning after December 31, 2011, increases personal income tax rates for certain individuals and reduces allowable personal exemption deductions. The salient specifics of the legislation are that:

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