Category Archives: Taxes

Tips for Individuals on Deducting Charitable Donations

The organization must qualify. Charitable contributions must be made to “qualified organizations” as provided by IRS Publication 526, Charitable Contributions. Remember, you can’t deduct donations to specific individuals or political organizations.

You must itemize. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

What you can deduct: You can deduct cash contributions and in most cases, the fair market value of most property you donate. Clothing and household items must be in “good used condition or better” to be deductible.

Receive something in return? If your contribution entitles you to receive merchandise, goods, or services, you can deduct the amount that exceeds the fair market value of the benefit received.

Pledges and payments: Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in May but paid the charity only $200 by year end, you can only deduct $200.

Recordkeeping: You must keep records of the contribution. Save a cancelled check, bank or credit card statement, or a dated/ written receipt from the charity with the amount of the contribution. For text message donations, keep your phone bill showing the receiving organization, the date, and the amount.

Donations made near year end: Include credit card charges and payments by check in the year you donate to the charity, even if you don’t pay the credit card bill or draft from your bank account until the next year.

Large donations: For contributions of $250 or more, you need more than a bank record. You need a dated/written receipt from the charity stating the dollar amount donated and whether the organization provided goods or services in exchange for the gift. If you donated large items, the receipt must include a description of the items and a good faith estimate of value.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Deducting Casualty Losses

Casualty losses can occur when there’s damage or destruction of your property caused by a sudden or unexpected event or natural disaster, such as theft, tornado, fire, hurricane, flood, or earthquake. The good news in what’s normally a bad situation is that in most cases, these losses are deductible.

Individuals deduct the losses as an itemized deduction. If your property is insured, you can’t take a deduction unless you timely submit a claim to your insurance provider. Rules for calculating the loss can be tricky, and differ based on the type of property and extent of destruction. In general:

  • For personal-use property and for property not completely destroyed, your loss is limited to the lesser of your adjusted basis in the property on the date of the casualty or its decrease in value as a result of the casualty, less any insurance reimbursement received or expected to be received.
  • For completely destroyed business or income-producing property, including rental property, your casualty loss is equal to your adjusted basis in the property, less any insurance reimbursement received or expected to be received.
  • For personal-use property, in addition to the limitations above, the first $100 of each incident of casualty loss is not deductible. The remaining amount of casualty loss is further reduced by 10% of your adjusted gross income.

Taxpayers in Presidentially Declared Disaster Areas have a choice of tax years for deducting related disaster losses – either the tax year in which the disaster occurs, or the immediately preceding tax year.

Each choice has its pros and cons and will vary based on your particular situation, so it’s important to get some help before you decide. Claiming the disaster loss for the year before the loss occurred saves taxes immediately, without the need to wait until the year after the loss occurred. On the other hand, taking the deduction in the year of loss may save taxes if you’re in a higher bracket that year. Lots to consider!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Tax Deductible Vacations?

Although technology has revolutionized the way we do business, there are still situations where it’s necessary for a face-to-face meeting with staff, management, or customers. With a little planning for the current vacation season, you can mix some leisure time in with your business travel and still get a tax deduction.

Deductible Travel Expenses – If your trip within the U.S. was primarily for business and, while at your business destination, you extended your stay for a vacation, made a side trip, or had other personal activities, you can deduct only your business-related travel expenses.

It’s important to keep records such as receipts, canceled checks, or bills, to support your expenses and be able to prove the number of days spent on business. The following is a list of expenses you may be able deduct depending on the facts and circumstances:

  • 50% of the cost of meals
  • Travel by air, rail, and bus fares
  • Baggage charges
  • Hotel expenses
  • Expenses of operating and maintaining a car
  • Local transportation costs for taxi fares or other transportation to and from the airport
  • Cleaning and laundry expenses
  • Computer rental fees
  • Telephone or fax expenses
  • Tips on eligible expenses

However, these same type of expenses aren’t deductible for non-business days. Personal entertainment costs on the trip, such as a sightseeing tour, aren’t deductible, regardless of the day on which they fall. Cost deductions for a spouse accompanying you on a business trip are allowed only if your spouse is a bona fide employee. Merely having your spouse-employee perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. Your spouse’s presence must be necessary to your business pursuits – not just helpful.

Travel Outside the U.S. – Travel outside the U.S. has its own set of unique rules and recordkeeping requirements. When documenting your business trips outside the U.S., your trip will fall into one of three categories:

  • Travel Entirely for Business,
  • Travel Primarily for Business, and
  • Travel Primarily for Vacation.

The factors which determine the category your trip falls into are related to the number of business days versus total days away. If your trip is less than one week, don’t count the day you leave the U.S. but count the day you return to the U.S. On the other hand, if your trip is more than one week, count both the day you leave the U.S. and the day you return. If your trip wasn’t entirely for business, you must allocate travel expenses on a day-to-day basis between days you did and didn’t conduct business.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Are You Paying Yourself Correctly as a Shareholder of an S Corporation?

If you operate your business as an S corporation and pay yourself on a 1099-MISC, then you’re possibly in violation of tax law, which can subject you to substantial tax liabilities and penalties.

The law requires you to pay yourself a salary for the work you do for the corporation. Your salary should be reasonable based upon your position, hours worked, and duties performed. It should also be equivalent to executives or employees in similar businesses. The salary shouldn’t be in the form of distributions or 1099 payments. The payments should be run through payroll to ensure the proper income tax, social security and unemployment taxes are deducted as they are for a non-shareholder employee or a worker in another company. The business can deduct the wages and taxes from income as operating expenses.

You may be tempted to pay yourself as a 1099 recipient, as life seems so much simpler this way – no payroll taxes to deal with, no payroll tax returns to file, and no payroll services fees to pay. However, having your S corporation pay you this way could cost you thousands of dollars in taxes, interest, and penalties! Because this is a violation of tax law, the IRS can reclassify your 1099 payments as W-2 wages and collect the back payroll taxes and interest on the payroll taxes. Penalties for failure to file a Form 941 each quarter, failure to deposit the tax withholdings each quarter and failure to issue a Form W-2 can also be assessed.

There’s no requirement that an S corporation pay out all of its profits to the shareholder as wages. You may be able to apportion the payments between wages and distributions. Distributions are deemed to be a return on the shareholder’s investment. They’re included in a shareholder’s taxable income but aren’t subject to payroll taxes and aren’t considered self-employment income subject to self-employment tax.  Determining this apportionment can be tricky, so contact us for assistance.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Tax Incentives for 529 Plans

While it’s no secret that college costs have increased much faster than inflation, how to best pay for them is still a mystery to many, given the current student debt burden.

According to the College Board, the average four-year costs nationwide in 2014-2015 are $18,943 for an in-state public university and $42,419 for a private college. While costs may vary widely from state to state and depend on how much you actually plan to pay, the earlier you start saving, the better.

A 529 plan – Q&A allows you to save for college for an individual by investing in various funds with taxfree growth and tax-free withdrawals, as long as the funds are used for qualified higher education expenses. As an added benefit, 529 plan earnings aren’t subject to the 3.8% Investment Income Tax on a regular savings/investment account.

While you can choose any state 529 Plan, most states offer a tax advantage for their own state’s plan. Because you can easily change the beneficiary later, they can be great for multi-children families where not all the children may be planning on going to college. Accounts owned by other family members won’t effect the student’s federal aid and college aid, so grandparents, aunts and uncles can also fund a 529 account.

Because 529 plans allow for equal installments over five years, these are also great for estate planning. Up to $70,000 (single) or $140,000 (married) maximum is allowed for 2015.

Contact us with any further questions you may have. Make 2016 the year you setup a 529 plan or other savings vehicle to begin preparing for your child’s future.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, taxes (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Ways to Avoid the IRA Early Withdrawal Penalty

All these years you’ve been saving up, diligently funding your IRAs. But now you’ve got good reason to dip into those funds and are wondering whether it’s safe to do so. Distributions from traditional IRAs are taxable and if taken before reaching age 59 ½, they may also be subject to penalty. There are exceptions, however.

For example, if you’re a first-time homebuyer (meaning you didn’t own a principal residence at any time during the previous two years), up to $10,000 can be withdrawn without penalty. And your spouse can withdraw the same amount as well!

Paying for higher education is another common reason to withdraw IRA funds. When funds are used for tuition at an accredited college or vocational school, there’s no early withdrawal penalty, regardless of amount.

Distributions used to pay medical expenses aren’t subject to penalty either, but only the portion that exceeds 10% of your Adjusted Gross Income (AGI) is excluded. If you’re over age 65, the threshold is lowered to 7.5% of AGI.

Below are some other types of distributions from a traditional IRA not subject to an early withdrawal penalty:

  • Distributions to pay for health insurance while unemployed, for some taxpayers.
  • Distributions to military reservists on active duty for more than 179 days.
  • Distributions to an employee over age 55, after the employee no longer works for the employer.
  • Distributions made due to death.
  • Distributions made due to a total and permanent disability.
  • Distributions made due to an IRS levy being placed on the account, unless the funds were distributed to satisfy a different IRS levy on a different property.

There are other exceptions, so if you are contemplating taking an early distribution from your traditional IRA, contact us to see whether you qualify for an exception to the penalty.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, taxes (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Do you have a Capitalization Policy?

In an attempt to alleviate past confusion, the IRS issued new regulations clarifying which costs are classified as repairs and maintenance and deductible in the current year. This is versus those fixed asset expenditures that have to be capitalized and depreciated over a number of years.

General Rule: Taxpayer must capitalize and depreciate all costs that facilitate the acquisition or production of property. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

The regulations provide circumstances for when certain items can be expensed, rather than capitalized.

  1. De Minimis Safe Harbor: Supplies and Materials that are $200 or less per item, per invoice OR have a useful life of 12 months or less can be expensed in the current year.
  2. Routine Maintenance Safe Harbor: Repairs and maintenance that keep business property in ordinarily efficient operating condition, such as inspection, cleaning, testing, and replacement of worn or damaged part can be expensed.
  3. Per Building Safe Harbor for Small Businesses: Taxpayers with average annual gross receipts of $10 million or less in the three preceding tax years can deduct improvements made to a building with an unadjusted basis of $1 million or less. The deduction is limited to $10,000 or 2% of the building’s unadjusted basis. This election is made annually on a timely filed return and is on a building-by-building basis.

Exceptions to the General Rule:

  1. A Capitalization Policy establishes the threshold (minimum cost) for capitalization and depreciation of fixed assets. Taxpayers that have a written policy for accounting procedures in place by the beginning of the tax year can deduct up to $500 per item, per invoice (instead of $200). The $500 de minimis safe harbor election can be made by attaching a statement to a timely filed federal income tax return. This election is not considered a Change in Accounting Method and therefore Form 3115, Application for Change in Accounting Method, is not required. For businesses that had a written Capitalization Policy in place at 1/1/2014, the $500 threshold can be applied on the 2014 Federal return. For businesses that did NOT have a policy in place can still make the election for 2015 by establishing accounting procedures for the 2015 tax year before January 1st.
  2. The IRS has hinted at flexibility in the dollar ceilings where the taxpayer has the burden of showing that such treatment clearly reflects income. If you think your business model can support a higher de minimis threshold, consider filing Form 3115, Application for Change in Accounting Method, with the tax return for the year the change is to be effective.

These regulations are lengthy and complex, so contact your local Padgett office for assistance, as these new provisions will affect every business, even yours!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.