Income Tax Tandem – Alternative Minimum Tax for Individuals

Income Tax Tandem – Alternative Minimum Tax for Individuals

by | Mar 26, 2021 | Individual Tax

 

Regular federal income tax rules can quickly get complicated. Now imagine, an additional layer of rules and complexity kicking in for taxpayers in certain income tax brackets! Say hello to the Alternative Minimum Tax (AMT).

Tax Tandem

AMT essentially is an income tax that operates alongside regular income tax. It sets a floor of “minimum tax” to pay and requires qualified taxpayers to calculate their tax liability twice, once under the regular rules, then again under the rules in AMT. The taxpayer must then pay the higher amount. AMT primarily affects high-income earners that leverage assorted tax exemptions, credits, and other advantages that in normal tax rules would often leave them with no tax liabilities. In the eyes of elected lawmakers that enacted AMT, these taxpayers were “not paying their fair share of tax.” AMT also use to exist for corporations as well, but was repealed with the Tax Cuts & Jobs Act of 2017.

Do I owe AMT?

You actually have to figure that out by calculating it through Form 6251. After entering your taxable income from line 15 on your Form 1040, you proceed through Part 1 re-calculating assorted “preference items” to tally up to your Alternative Minimum Taxable income (AMTI). Some notable preference items to be recalculated include:

Then your AMTI is deducted by the exemption, which changes each year (for 2020, $72,900 for single, $113,400 for married filing jointly). If that number is greater than 0, you owe AMT and must proceed further to calculate the tentative minimum tax (TMT) owed. If TMT is greater than the tax you owe through the regular income tax rules, you must pay that higher TMT.

Second Chances

Another way to look at Alternative Minimum Tax is that it is a “second chance” for being taxed. However, some foresight and planning around those preference items can help keep that “second chance” down to a minimum. Often times, many of those “qualified” for AMT have other concerns, such as running their emerging business. Knowledgeable tax advisors can guide owners through their AMT concerns and business accounting concerns. Looking for an advisor? Look no further than us here at MiklosCPA. We are a California-based accounting firm that supports many emerging businesses with their tax and accounting needs. How can we help you? Let’s chat. Follow our social media pages for future articles and other interesting tax tidbits.

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Standardized Depreciation Deduction – MACRS

Standardized Depreciation Deduction – MACRS

by | Feb 28, 2021 | Individual Tax

Recently, we looked at depreciation as a method that businesses use to expense long-term assets like vehicles for their records. For income tax though, depreciation is a bit more federally standardized and potentially more complex. The Modified Accelerated Cost Recovery System, or MACRS for short, is the current depreciation system in use for federal income tax purposes. Depreciation for federal income taxes as a deduction are filed through Form 4562.

MACRS Class

Under MACRS, tangible business property that are normally depreciated such as vehicles and buildings are placed into broad classes with pre-set depreciable useful lives that may vary on the class of the property. For example, “office furniture” is set at 7 years, while “automobiles” are set at 5 years, and “nonresidential properties” like warehouses are set at 39 years. Most assets have to depreciate using MACRS, with some exceptions such as film and sound recordings.  The IRS publishes depreciation tables applicable to these classes of assets and how much is depreciated each year in the asset’s useful life.

Depreciation methods in MACRS

MACRS allows for only 3 methods for calculating depreciation; the straight-line method, declining balance method, and the double-declining balance method. Businesses may prefer to use methods like “Units-of-Production” to better measure their depreciation of assets for their books, but they must use the MACRS-approved depreciation methods for income tax.

Bonus Depreciation

On occasion, provisions in federal law allow for “bonus depreciation” that enable an additional deduction. This may allow businesses to fully expense their assets faster than through the regular MACRS system. They usually apply to property acquired & put into service in a certain time frame. For example, the Tax Cuts & Jobs Act of 2017 allow for 100% bonus depreciation on qualified property put in service between 9/27/17 through 12/31/22.

 

Business owners should be aware of the different requirements in MACRS depreciation and depreciation methods your business chooses for their records. It typically leads to discrepancies in depreciation expenses for books and for income tax. Minding such things on top of growing the business can be a burden. Burdens can be shared, and we at MiklosCPA are happy to help shoulder it! We are a California-based firm that helps many small and emerging businesses with their tax and accounting needs. Want to learn more of our services? Let’s chat. Also check out our social media pages for more tax tips, overviews, and other “good to know” pieces.

Income Tax Relief – The Credit for the Elderly or Disabled

Income Tax Relief – The Credit for the Elderly or Disabled

by | Jan 26, 2021 | Individual Tax

The Credit for the Elderly or Disabled is intended to help filers living on fixed incomes with their income tax bill. The credit allows qualified taxpayers to claim a nonrefundable tax credit that will directly lower the income tax that they may owe.

A “Qualified Individual” for the elderly or disabled tax credit is:

  • Age 65 or older at the end of the tax year.
  • If under age 65, then all 3 conditions must apply:
    • Retired on permanent and total disability
    • Have taxable disability income
    • At the start of the tax year, the individual had not yet reached mandatory retirement age (this applies to certain regulated professions, such as pilots, but generally inapplicable to most workers).

Just like most tax credits, the Credit for the Elderly or Disabled is only available to US citizens or, in some circumstances, resident aliens. A nonrefundable credit means that claiming it directly lowers your tax due, but does not return additional money back, unlike refundable credits like the Earned Income Tax Credit.

Income limits also apply based on two metrics, the individual’s adjusted gross income (AGI), and amount of nontaxable social security and other nontaxable pension income received. The AGI limit is currently set at $17,500 (2019) for single, and up to $25,000 (2019) for married filing jointly and both spouses are qualified individuals. The limits to nontaxable income received are based on your filing status, $5,000 (2019) for single, and up to $7,500 (2019) for married filing jointly and both spouses are qualified individuals. The credit itself is also based on filing status and mirror the limits for nontaxable income, $5,000 for single and up to $7,500 for married filing jointly. The Schedule R form for the 1040 details the steps, but the formula to determine can be summed up as:

Initial credit based on filing status  –  (nontaxable soc security & other nontaxable income  + excess AGI*) = remaining amount must be above zero          

*Excess AGI is calculated as [ AGI – a set amount depending on filing status ($7,500 for single, $5,000 for MfS, $10k for MfJ) / 2] 

Let’s take an example.

Dwayne is 60 years old, single, retired & on permanent disability. When preparing his Form 1040, he determines his AGI is $15,500 and has nontaxable social security income of $1,500. Using Schedule R to claim the elderly or disabled credit, he figures if qualifies for the credit.

$5,000 initial income reduction (single) – ($1,500 + [$15,500 – $7,500]/2) = ($500)

Dwayne cannot claim the credit because his AGI and nontaxable income push him above the initial credit amount.

Filers who get to this step (line 19 on Schedule R) without a negative number will multiply that amount by 15%, then reference the Credit Limit Worksheet on the Schedule R Instructions. Any foreign tax credit claimed or dependent care expenses claimed on Schedule 3 are subtracted against the line 19 calculation and the remaining amount is the credit to be claimed.

The Credit for the Elderly or Disabled is another example of tax credits available that qualified taxpayers should utilize, but do not necessarily know about without some pointers from tax people. Individuals and business owners, whose forte is something other than tax, may find much to benefit in consulting with tax experts, like us at MiklosCPA. We have helped many small and emerging businesses with their tax and accounting needs so they can focus on what they do best and reach their business ambitions. Interested in learning more in how we can help your business? Let’s chat. Also, follow our social media pages for more future useful tax tidbits like this article.

Preserving History with the Rehabilitation Tax Credit

Preserving History with the Rehabilitation Tax Credit

by | Dec 24, 2020 | Business Tax

The Rehabilitation Tax Credit is one of the more unique pieces in the tax code. It’s a tax credit that incentivizes owners of qualified old or historic buildings to renovate and restore those properties into working, business-related order. It allows a credit of up to 20% of the taxpayer’s qualifying costs involved in restoring the building.

Qualified Rehabilitated Building?

For an owner to claim the Rehabilitation Tax Credit, the building must be a “qualified rehabilitated building.” To qualify, the building needs to meet these standards set in IRC § 47:

  • The building must be a certified historic structure, such as through the National Register of Historic Places.
  • The building must be substantially rehabilitated, which means the expenditures for restoring the property during a 24 month period are greater than $5,000 OR the adjusted basis of the building.
  • Depreciation must be allowable with respect to the building.
  • The building must have been placed in service (for a business purpose) before the beginning of rehabilitation.

Owners of qualified rehabilitated buildings may be individuals or corporate entities, such as trusts.  A 24 or 60 month substantial rehabilitation test exists for owners.

Rehabilitation Tax Credit

The tax credit is valued up to 20% of the taxpayer’s qualified rehabilitated expenditures (QREs) used to rehabilitate the building. For expenditures to qualify as QREs:

  • Expenditures must be for nonresidential real property, residential real property (only if a certified historic structure), or real property that has a class life of more than 12.5 years.
  • Expenditures incurred in connection with the rehabilitation of a qualified rehabilitated building.
  • Expenses must be capitalized and depreciated using the straight line method.
  • Expenses in connection to the rehabilitation of a building must be certified by the Secretary of Interior as being consistent w/ the historic character of the property where it is located.

Costs used to acquire or expand the property do not qualify as QRE.  Claiming the credit was amended through the Tax Cuts & Jobs Act (TCJA) of 2017 so that it must be claimed “ratably” over a span of 5 years, rather than all in a single year (pre-TCJA).

Just like other general business credits, unused credits may be carried backward or forward (up to 5 years). Use Form 3468 to claim the rehabilitation credit (and of course if you claim more than one business credit, don’t forget to use Form 3800 for the General Business Credit form).

A tax credit for historic buildings is one of many interesting things that business owner can utilize from the tax code. Having a knowledgeable support team, such as us here at MiklosCPA, to point out these unique pieces can potentially help owners effectively run their business or even see future avenues of growth. We are a California-based CPA firm that assists small and emerging clients in assorted industries. Schedule a call with us and learn how we can help your business! Don’t forget to also check out our social media pages for more “good-to-know” tax tidbits and other

Business Assets & an Appreciation for Depreciation

Business Assets & an Appreciation for Depreciation

by | Dec 11, 2020 | Business Tax

Let’s start off with a little joke. “What did the accountant say to his business client who insisted that his company’s return get filed, ASAP? …….I depreciate if you didn’t.”

Corny puns aside, depreciation is an important concept in accounting and tax. In accounting, depreciation is a method that is used to spread out the cost of an asset, like a vehicle, over its useful life expectancy, rather than expensing it all out in one year and throwing your accounting records off. In tax, the depreciation amount is often used as a deduction and may allow you to recover some of the costs on certain property used in a business.

Depreciating Value

Assets like vehicles, furniture, equipment, and buildings may be depreciated. Generally, it should have a useful life beyond a year and have a salvage value after it lasts beyond its useful life. Land cannot be depreciated though since its treatment is handled more uniquely. In accounting, there are different types of depreciation when recording the depreciation of assets, such as straight-line, double declining balance, and units of production. For example:

Jack purchased a $13,000 vehicle for his business with a salvage value of $2000 after 5 years.  He uses the straight-line method of depreciation ($13,000 cost – $2,000 salvage value / 5 year useful life) and calculates a depreciation of $2,200 each year.

Other depreciation methods like double-declining balance allow for more depreciation in its first few years, or “units-of-production” allow for depreciation based on the usage of an asset, such as a factory machine producing items. The method you choose can affect how much depreciation applies each year and matters to your business.

Depreciation & Tax

The amount that you depreciate on your assets is reported for your taxes and operates like a deduction, such as reporting your depreciation on business assets to the IRS on Form 4562. However, calculating your depreciation within the required guidelines becomes a topic in itself, such as the MACRS depreciation system used by the IRS.

 

Depreciation and the methods your business chooses to depreciate its assets are essential things to consider as your business grows. It can affect your own accounting records in the expenses reported and potentially your profit & loss reports. For tax, depreciation may potentially affect how much you ultimately owe to the government. Depreciation gets tricky, and business owners can make the right choices by having the right advisors, like us here at MiklosCPA. We support small and emerging business clients of assorted industries with their tax and accounting needs. Learn how we can help your business & schedule a call with us! Also check out our social media pages for more useful “good-to-know” articles like this one.

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