Monthly Archives: June 2016

   How Does Your Vacation Home Affect Your Taxes?

No matter your goals for a second home, understanding the tax breaks for your vacation residence can help you relax in style.

What is a Vacation Home?

First, you’re going to have to unlearn your definition of a vacation home. According to the IRS, a vacation home can be any residence that has sleeping space, cooking space, and is “permanent in place”. In this case, permanent doesn’t mean immobile. Therefore, boats and RVs can be designated as vacation homes.

Also, a vacation home does not have to be located in a typical vacation destination. Sure, vacation homes can be found up in the mountains or out on the sandy beaches, but they can also be found in the middle of nowhere, surrounded by farm land or a small condo in the middle of a noisy city.

Whether a multi-million dollar property or bare-bones living, all vacation homes share the same tax benefits. The only variable is how you intend to use your property.

Just for You: Personal Use

The first option for your vacation home, as far as filing your taxes are concerned, is owning a second home for personal use only. If you and your family are the only inhabitants, then here’s what you need to know.

You can deduct the same expenses as with your primary residence: property taxes and mortgage interest. You could even deduct home office expenses if you meet the criteria.

And here’s some great news, the IRS will even let you rent your vacation home and keep the income, tax free. Of course, there are rules – to maintain personal-use status of your vacation home (and keep your rental income tax free) you must rent your home for 14 days or less.

If you rent your home for more than 14 days out of the year, then the tax rules change.

Rental Use

The second option is to designate your vacation home as rental only. This is a good way to help pay off your retirement residence.

If you rent your vacation home for more than 14 days out of the year, then you must report your rental income on your tax return. However, you get tax breaks in the form of maintenance deductions and costs related to rental expenses. This means you can deduct towels, furniture, and toilet paper costs – because it’s a rental.

When your vacation home is a designated rental property, you can also deduct insurance costs, repairs, and housekeeping costs. To maximize your deductions, make sure that you treat your vacation home like a business, and make sure to involve yourself in the process.

Split the Difference: Combo Use

When you split the time between using your vacation home for yourself and renting it out to others you have to separate the income earned and expenses accordingly, but that’s the great thing about working with a Dallas CPA. Let us know how you use your vacation home, and we can determine how to make the most of tax benefits and tax deductions specific to your situation.

   What to Do if You Get a Letter from the IRS

It’s summertime, which means the IRS is busy sending out letters to taxpayers if there were issues processing the returns filed this spring. Receiving any correspondence from the IRS can be intimidating, but it doesn’t have to be. Check out these tips for what to do if you receive a letter from the IRS.

  1. Don’t panic. You can usually deal with a notice simply by responding to it.
  2. Most IRS notices are about federal tax returns or tax accounts. Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do.
  3. Your notice will likely be about changes to your account, taxes you owe or a payment request. However, your notice may ask you for more information about a specific issue.
  4. If your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return.
  5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
  6. If you don’t agree with the notice, you need to respond. Write a letter that explains why you disagree, and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub. Allow at least 30 days for a response.
  7. For most notices, you won’t need to call or visit a walk-in center. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call.
  8. Always keep copies of any notices you receive with your tax records.
  9. Be alert for tax scams. The IRS sends letters and notices by mail. They don’t contact people by email or social media to ask for personal or financial information. If you owe tax, you have several payment options. The IRS won’t demand that you pay a certain way, such as prepaid debit or credit card.
  10. Skip steps 1-9 and send a copy of the letter to your Dallas CPA. We will assess the issue and the appropriate response.

If you need to make a payment visit IRS.gov/payments to make payment with Direct Pay for free, or by debit or credit card through an approved payment processor for a fee.

If you get a letter from the IRS, you may initially be alarmed. The best thing you can do is to send a copy of the letter to your Dallas CPA Firm or tax preparer to ensure the matter is handled appropriately.

   Multilevel Marketing, Direct Sellers, & Taxes

There’s been a large increase lately in the popularity of multilevel marketing companies and people, especially women, becoming a part of these businesses as a side income or even as a full time career. The rise of these companies such as Stella & Dot, Avon, Mary Kay, Young Living, Herbalife, Rodan + Fields creates a unique tax situation that many of these direct sellers may not be familiar with. Read on for some common tax questions associated with direct selling and what you need to know:

Q:How does the IRS view direct selling?

A: Generally, multilevel marketers are considered direct sellers. The IRS defines a direct seller as “a person who sells consumer products to others on a person-to-person basis, such as door-to-door, at sales parties, or by appointment in someone’s home.” A direct seller, as the sole proprietor of his or her business, is considered to be a self-employed, independent contractor, and the only owner of this unincorporated business. (Husband-and-wife teams are considered to be a single owner; any other business unions, for tax purposes, are deemed a partnership or corporation.)

Q:What forms do I file?

A: Three kinds of federal business taxes apply to direct sellers: income tax, self-employment tax (your social security and Medicare tax), and employment tax. Most of your tax information should be recorded on Form 1040 and its subsequent parts, such as: Schedule A for itemized deductions, Schedule C to record profit or loss, Schedule C-EZ for net profit from business, and Schedule SE for self-employment tax.

Self-employment tax is where many people really get hit. Because you’re not a W-2 employee having Social Security and FICA taxes withheld from your pay, the IRS requires you to pay the full portion (the employer and employee portion).

Employment taxes apply to direct sellers who hire employees (such as a regular secretary). The people in your downline are not considered your employees–consider them independent contractors. If you pay someone more than $600 in a given year, you are required to issue them a 1099-MISC at the end of the year– the same form you will receive to show income for your income/commissions from your product company.

Q:Do I need an Employer Identification Number?

A: Few direct sellers need an EIN. Most use their social security number as their identification number. If, however, you have a Keogh plan, hire employees, or operate your business as a corporation or partnership, an EIN is required. You may apply for an EIN by using Form SS-4. An EIN, obtained through the IRS, can be assigned over the telephone.

Q:What can be considered sources of income?

A: Sources of income include any compensation you receive, including sales, commission checks, prizes, incentives or awards.

Q:What can be considered a business expense?

A: Operating costs required to run your business are considered business expenses and may be deducted. To be deductible, a business expense must be ordinary (common in your field of business) and necessary (appropriate and needed). Expenses might include, for instance, telephone use, advertising expenses, wages, interest on business loans, etc. Business expenses must remain separate from all personal expenses. The biggest mistake people make is not keeping track of their deductions.

Q:Can I deduct business use of my home?

A: You can take a deduction from the business use of your home only if the “office space” is used exclusively and regularly as the principal place of your business, meaning you do the bulk of your selling in your home office.

You may also take a deduction for business use of your home for inventory storage. To qualify for this deduction, your home must be the only fixed location of your business, and the storage space must be separately identifiable, and used regularly and exclusively as storage space for the business. Figure the deductible by taking the square footage of space used for storage and dividing it by the yearly cost of maintaining all the square footage of your home, including utilities, repairs and upkeep costs.

Q:Can I deduct business use of my car and telephone?

A: For direct sellers whose business use of their automobile constitutes 50 percent or more of its total usage, two basic methods are used to establish your deductible: standard mileage rate or actual expenses. The standard rate is simpler to calculate–for every mile logged, 54 cents is deductible. With this method, however, you cannot deduct any of the actual operating costs, including depreciation of your car. To arrive at an actual expense figure, subtract the business portion of your car expenses from the total yearly expense of maintaining your vehicle.

The IRS recognizes two ways you use your auto for business: expenses for away-from-home travel, and local business transportation. While traveling away from home, you can deduct all reasonable and necessary travel costs. Local business transportation is considered as your day-to-day traveling expenses. Commuting (traveling between your home and a regular place of work) is a nondeductible personal expense. However, travel between two or more workplaces in the same day, or between your home and a temporary work location, is deductible. With automobile deductions, you must show the business miles you’ve logged, as well as the total miles you’ve driven during the year. Adequate records, like an account book or diary log, must be kept.

As for phone use, all business calls on a second phone line, or long-distance or call-waiting calls on a primary or secondary phone line, are deductible. You cannot deduct any charges (including taxes) for basic local services on the primary line in a home.

Q:Can I deduct meals and entertainment?

A: Business meals and entertainment are deductible if the expenses are ordinary and necessary to conducting business and can be proven as such. It’s a good idea to indicate on the back of all restaurant receipts what the particular business purchase was for, for which client it was made, and what business topics were discussed.

Q:How should I keep my receipts and arrange my files?

A: Your records must be permanent, accurate and complete. Keep your business expenses separate from your personal ones. One of the easiest ways to do this is to open a separate bank account or credit card used solely for business expenses. This saves you the time of separating out your deposits and debits from your bank statements.

Q:How long should records be kept?

A: General guidelines advise keeping records for at least seven years.

The last bit of advice we leave you with is this: if you’re venturing into the direct selling business, it’s a good idea to sit down with a Dallas CPA to discuss the tax implications and what you should expect. This is especially important if you find your business really starting to skyrocket and you’re generating a healthy income. At that time it may make sense to discuss whether incorporating your business is more advantageous from a tax perspective.

   The New “Federal Student Tax” Scam Targeting Taxpayers

The Internal Revenue Service has issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”

Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.

“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”

Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

Some examples of the varied tactics seen this year are:

  • Demanding immediate tax payment for taxes owed on an iTunes gift card.
  • Soliciting W-2 information from payroll and human resources professionals
  • “Verifying” tax return information over the phone
  • Pretending to be from the tax preparation industry

The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.

The IRS Will Never:

  • Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.

If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page or call 800-366-4484.
  • Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
  • If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

Identity thieves are coming up with new ruses every day, today’s being the “Federal Student Tax” Scam. Don’t fall for it.

   Small Businesses Should Prepare for New Overtime Rules

Are you an employer? If so, you’ve got a major challenge to accomplish in the next few months.

Most businesses aren’t ready for the new overtime rules and worker classification changes to the Fair Labor Standards Act (FLSA) that the Department of Labor recently published, which will impact millions of U.S. workers and their employers. The new overtime rules go into effect December 1, unless Congress intervenes to prevent or modify them.

Why do these changes matter? Because it will almost certainly affect how you pay at least some of your employees. In brief, if you have a salaried worker making under $46,467 per year, you will either need to give them a pay increase, cut them to hourly, or start paying them overtime when they work more than 40 hours per week.

The new overtime and worker classification rules doubles the threshold from $23,660 that salaried employees could make and be considered non-exempt from overtime (meaning employers would have to pay them overtime if they made less than that amount). That threshold, which equals $455 per week, had not been fully adjusted for inflation since 1975, although the last partial update had been made in 2004. Still, it doesn’t take a genius to realize that a worker making under $25,000 is not a critical manager.

In today’s economy, however, can it be effectively argued that even the new threshold of $46,467 is a defining mark for “white collar” managerial positions? Some says the number is somewhat arbitrary, particularly with significant cost of living differences across the nation. Many other business groups are also against the new overtime threshold, including restaurant chains and those who rely heavily on telecommuters.

With the time left before December 1, businesses should prepare for the new overtime rules by reading the following five tips. This is especially important for small businesses, where the owner may also be in charge of hiring and human resource requirements.

  1. Examine Current Pay and Classifications. One of the first steps for employers is to make sure they truly understand their employees’ compensation structure, classification and the rules around FLSA exempt vs. nonexempt status. Employees that earn more than the new threshold of $46,467 can be classified as exempt from overtime if their work consists mostly of executive, administrative or professional duties. This is where having a solid understanding of their actual work duties is critical. Employees who earn less than that new threshold are probably classified as non-exempt, meaning they can earn overtime.
  2. Monitor Employee Hours. Just as important as their classification and pay, it’s critical that employers assess the hours that their employees work, since that is at the core of overtime pay, if an employee ends up being non-exempt. One method employers can use is to either reduce a worker to part-time, or to minimize the amount of work a salaried (but non-exempt) worker spends doing work. Employers should pay special attention to both remote workers, and regular staff who frequently perform work tasks after hours, such as checking emails and responding to clients. Businesses may consider using a time and attendance system that tracks worker hours and can alert them (and their supervisor) when they near or exceed a 40-hour workweek.
  3. Compare the Costs of Pay. As mentioned previously, it may make fiscal sense in some cases to change a non-exempt employee/s from salary to hourly, and then pay them overtime as necessary. This can be most useful when an employee does not consistently work 40 hours per week, but it requires more attention be paid to managing their work schedule. While the net-effect may not be much of an actual change in compensation, however, this action may be perceived negatively by employees. So employers should communicate the actions in advance.
  4. Impact on Pay Equity. In order to ensure that employees are being paid fairly and based on their job, do not make changes on a per-employee basis, but instead based on their roles. This is especially important for businesses with low turnover, where an employee may have been in their same role for many years.
  5. Proactively Control Costs. If workflows in the business require employee action outside of normal working hours and that leads to overtime for non-exempt staff, the business has a duty to pay them overtime. However, this is a good time to reexamine those workflows that might push staff members into overtime. Is it in the best interest of the business for its staff to be working after hours, on weekends or at other times? If it isn’t critical to business function, is it worth what will be an added expense? If not, then establish workplace policies that diminish the amount of work that non-exempt workers perform outside of traditional working hours. This can also be positioned as an effort to increase morale.

The new overtime regulations will have a significant impact on some businesses, while others may find that their increases in productivity over the past decade have been coming not only from technology, but also at the expense of overworked staff.

In the meantime, businesses can use the next several months to analyze their business labor and productivity, and get a better understanding of what they will need to change to minimize the effects of the new rules. It’s also a good opportunity to reassess actual jobs, requirements and descriptions.