Blog

As a tax accountant, I meet with clients who try to tally up income and expenses from their rentals couple days before their appointment to finalize taxes. That’s understandable but it is not recommended since there is a possibility that you might not have all the expense records.

According to the IRS, the “tax gap” exists because of the complications of reporting rental income and expenses. It is not just you; the tax law related to rentals is simply too complex.

There are three things you should know about rentals because the rules are little different from what you might expect.

Depreciation

In most cases, you can immediately expense an asset using expensing rules, also called Section 179. Using these rules, you write off the cost of business assets in the year you purchase them. Unfortunately, Section 179 is not available for residential rental property. Typically, you’ll depreciate residential rentals over 27.5 years. Appliances, carpeting, and furniture are depreciated over 5 years.

Rental losses

When rental expenses exceed income, the loss may not be deductible on your current year federal income tax return. Your income level and your participation in managing the property affect the deduction of any losses.

Losses you’re unable to use in the current year are “suspended.” Suspended losses can be applied against income from your rental in future years and can also reduce gain when you sell your property.

Sale of rental property

Depending on how you acquired your rental, the tax basis — the amount used to calculate gain or loss when you sell — may not be your cost.

For instance, say you used the property as your personal residence before renting it. In that case, your basis could be the fair market value of the home on the date you converted it to a rental instead of what you originally paid. Tax rules get really complicated if you turn your primary residence a rental and vice versa.

If you are dealing with rentals, it is always recommended you seek expert advice and consult with a competent and experienced tax professional.

By now you have probably heard about the bill that will require businesses and sole proprietors to file 1099-Misc forms every time they spend $600 or more, even if it means sending a 1099-Misc form to Office Depot.

The good news here is that IRS is requesting that businesses and sole proprietors affected by this bill submit comments. We live in a democracy and this is democracy at its best because if enough people complain, there might be a solution to this burdensome requirement.

Here are the 3 ways you can submit comments to the IRS:

E-mail: Notice.Comments@irscounsel.treas.gov. Include “Notice 2010-51″ in the subject line.
Mail: Internal Revenue Service, CC:PA:LPD:PR ( Notice 2010-51), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
Hand deliver: CC:PA:LPD:PR ( Notice 2010-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

The deadline to submit comments is Sept. 29, 2010.

Since most businesses might not know that there is a recourse to the new 1099 requirement, please share this post with other small business owners so that together we can avoid spending time fulfilling IRS requirements and concentrate more time in running and growing our businesses.

As a Certified QuickBooks ProAdvisor, I deal with clients everyday who are having problems with numbers not reflecting the correct state of business finances. Majority of the time the problem lies with wrong installation and setup of QuickBooks. Most small business owners try to setup QuickBooks themselves and in the process end up creating future problems.

QuickBooks is simple to use but only when it has been configured right. You can easily eliminate 80% of QuickBooks problems by properly configuring QuickBooks during the installation and setup.

Avoid future mess by configuring QuickBooks right. eZeeTAX is currently offering FREE QuickBooks Installation and Setup. This is summer only special and ends August 31, 2010.

Call us at (408) 725-9110 or Contact Us to set-up an appointment. Don’t worry, you don’t have to be in San Francisco Bay Area to be eligible for the FREE installation and setup.

Hanging on to debt is like a disease that you would rather not treat right now and in the end pay (or not) for it by filing for bankruptcy. We think we need to carry a balance on our credit cards and make minimum payments even though we could pay it off. The hidden cost of debt is the interest which is so implicit that the good folks in the Government decided to make it part of the credit card reform.

Dealing with tax payers day in and day out, I see how must of them are in a financial hole since they complain about how they are indebted to everyone, from banks to friends. Even though the pundits have tricked you into believing that there are two kinds of debt, good and bad, I would argue that when you pay insane amount of money in order to get access to more money then it is all bad. Think I am crazy? Ask the person trying to pay off a credit card who can only afford to pay the minimum…

The most common reason people give me for having money in the savings account when they have pile high credit card debt is because they consider their savings account as a rainy day fund. Instead of having money in savings account paying less than 1% (these days), trying paying off your debt. The national average on credit card interest rate is currently 14.35%. (Source: CreditCards.com)

Rainy day fund is a good idea, in fact it is a great idea but you should do the math to calculate if it is worth it. Here is one example:

John Doe has $5,000 in credit card debt and $10,000 in savings. Interest rate on his credit card is 14%, or $700, but the $10,000 in savings earns just 2% annually, or $200. He could pay off the debt, saving the $700, and still earn $100 annually on the remaining $5,000 in savings.

Do you see what is happening in this example? It doesn’t make sense for you to keep more money in your savings account even though your credit card debt is lower and you can use the money from savings account to pay off the credit card. Don’t divide your money by doing mental accounting, in most cases you will not benefit.

Before you start an emergency fund, pay off your debt and then I guarantee you will save more and faster than you previously did.

Q: What is deductible as “actual car expense” when using a personal car for business purposes?

A: Automobile expenses pertaining to a trade or business are deductible under the tax code as ordinary and necessary business expenses.

Actual car expenses include:

- Gasoline
- Oil
- Tires
- Repairs
- Insurance
- Depreciation
- Licenses
- Lease Payments
- Registration Fees
- Garage Rent
- Parking Fees
- Tolls

You can not use both standard mileage rate and actual car expenses at the same time. A fine or a penalty paid to a government for the violation of any law is not a deductible business expense.

Fore more information please refer to IRS Publication 463

(The following is a FTB News Release)

Sacramento – The Franchise Tax Board (FTB) announced today that it has received applications claiming 80 percent of the State’s First-Time Buyer Credit.

“The time to utilize this credit is definitely running out,” said State Controller and FTB Chair John Chiang. “Any taxpayers interested in this program should work with their mortgage professional to apply as soon as possible.”

As of June 15, 2010, FTB has estimated receiving more than 15,000 applications claiming more than $78 million. Because many of these applications are duplicates or invalid, FTB plans to accept at least 28,000 applications to ensure all $100 million is credited.

FTB will announce the cut-off date on its website giving at least 24 hours notice for applicants to fax their documentation. The credit will be allocated on a first-come, first-served basis using the date and time stamp on the fax. But, submission before the cutoff does not guarantee a credit; FTB will stop allocating credits once the $100 million is exhausted.

The First-Time Buyer Credit is expected to assist roughly 17,500 qualified buyers who purchase a qualified principal residence. A first-time buyer is someone who did not own a principal residence for the preceding three years. The home must be purchased (close escrow) on or after May 1, 2010. The buyer must reside in the home for at least two years immediately following the purchase date. This credit is equal to the lesser of five percent of the purchase price or $10,000.

To apply, an FTB Form 3549-A, Application for New Home / First-Time Buyer Credit, must be completed by the buyer and faxed, along with the final settlement statement, to FTB at 916.855.5577 within two weeks (14 calendar days) after the close of escrow.

California homebuyers still have time to qualify for the state’s other $100 million home tax credit for the purchase of a new home. The New Home Credit is available for taxpayers who purchase (close escrow) a new home after May 1, 2010, and before August 1, 2011, as long as they enter into an enforceable contract executed before January 1, 2011. The seller must certify that the home has never been previously occupied.

For more information, go to ftb.ca.gov and select Tax Credits for New Home Purchase / First-Time Buyer, or search for “2010 Home Credit.”

Recently I finished a tax audit assignment where I had to compile data that was to be used during an audit. My job was to create a paper trail and substantiate the taxpayers claims with receipts, invoices and canceled checks. IRS asked that we document all deposits and show what was taxable and non-taxable. My task was easier because the client was good at record keeping and it saved him a lot of money.

So what records should your small business keep and how long should you keep them? Simple answer is 7 years. Some categories of records are important to a business and some are not. Some are for internal purposes and some for external (IRS).

Let’s take a look at these by category.

Tax records

First, consider the records you need to substantiate your annual income tax return. The IRS says that you must maintain adequate records in order to support the items of income and expense that you claim. That means you must be able to produce receipts, invoices, canceled checks, or banking records supporting expense items. Similarly, you should keep sales slips, invoices, or bank records to support income items.

Accounting records

Most businesses have adequate accounting systems to capture routine transactions, but not for nonroutine transactions such as the purchase of depreciable assets. When you buy a car, computer, or piece of office equipment, be sure to file all purchase documents, assign an inventory number, and immediately set up a depreciation schedule.

Travel and entertainment expenses

Good recordkeeping for travel and entertainment expenses is essential. Although the rules can be complex, in general you should capture where, when, who, how much, and the business purpose for each expense. A well-designed standard expense report form can help insure that your records contain all the required information. Also, if you have employees who drive on company business, make sure they keep an auto log showing the miles driven for each trip.

IRS audits

Generally, the IRS can audit a tax return for three years after the date it was due or the date the tax was paid, whichever is later. However, if there is a major understatement of income, they can audit for six years after the due date (or seven years after the tax year). For that reason, you should keep most income tax records for seven years.

The IRS requires records relating to employment taxes to be kept for at least four years after the date of the return or the date the tax was paid, although here again a seven-year rule is safer.

Corporate records

Every incorporated business needs good corporate records, including documents associated with forming the company, bylaws, business licenses, and minutes of all board meetings. Shareholder records should include stock registers and records of all share issuances and redemptions. Also keep copies of all contracts and leases. Finally, don’t forget current and terminated employee files, and records of employee pension or profit sharing plans. Most corporate and employee pension plan records should be kept indefinitely.

Computer recordkeeping

The IRS has established a series of rules and recommendations concerning how electronic records must be maintained. Generally, such records should contain the same information as paper records and should be kept for the same length of time. These records can be the form of spreadsheets or created using accounting software like QuickBooks.

eZeeTAX’s first ever giveaway is now over and we have a winner. That lucky person is J. Jones and her money saving tip is:

The easiest way to save money is to set up a budget for each expense category. I just recently started using this method and it’s helped us pay our bills on time AND save money.

Not only did she comment, she subscribed to the feed, followed eZeeTAX on Twitter and Facebook, and Tweeted about the contest. She tied with another commentator but as we had mentioned before that in case there is a tie, we will pick the better answer.

Congratulations  J. Jones! You should get the copy of Quicken 2010 next week. We hope you will tell us all about it once you get it.

Everyone else, thank you for all your  money saving tips. Next month we will have another giveaway so stay tuned.