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.

Unemployment and Other Income – Yes That’s Taxable

Unemployment and Other Income – Yes That’s Taxable

by | Sep 7, 2020 | Business Tax, Individual Tax

 

Income may come from a lot of sources. Most of it is taxable. Taxpayers often report income on their tax returns from things such as wages, dividends from stocks, and business-related income. However, there are some not-so-commonly known income sources that are taxable, such as income from unemployment. Here’s a list of some “yes-that’s-actually-taxable” income:

  • Unemployment benefits – A hot topic as of late. Many people who suffered a job loss or furlough during this pandemic rely on this financial lifeline. Just as if they had earned a wage, unemployment money is taxable. Submitting a W-4V Form will allow a withholding to be applied to the unemployment income.
  • Gains from the sale of property – The capital gains made from the sale of property like buildings and stocks are taxable. Notably, this also applies to the sale and exchanges of virtual currency like bitcoin. Check out our article on capital gains for more info.
  • Gambling winnings – Lady Luck have a thing for you? Well you’ll be on the hook for the income taxes connected to those sweet, sweet winnings. Winners are issued a Form W-2G to report those winnings above a certain threshold on your income tax return.
  • Bartering – Exchanges of services, such as a plumber doing plumbing work for an accountant in exchange for accounting services, is consider taxable and needs to be reported as income. Generally gets reported on Schedule C.
  • Alimony (paid to you) – Alimony money paid to you in a divorce arrangement is treated as taxable income. Report any alimony money on the Form 1040 Schedule 1 on line 2a.
  • Loan forgiveness – Worked a deal with a bank or collection agency on an outstanding debt to have it forgiven? Well, depending on some circumstances, that forgiven debt balance may be taxable income. Check out our article on cancelled debts for more info.

Generally, it may be easier to consider your sources of income as most likely taxable unless otherwise specifically exempted, such as child-support money or qualified gains made from the sale of your home.

 Figuring taxable income can get complicated. Business owners already have enough on their plate running and expanding their business. Having the right backup can help move your business forward, and we at MiklosCPA can help you. We are a California-based firm that supports emerging businesses with their tax and accounting needs so owners can focus on their business goals and dreams. Learn more how we can help your business by giving us a call. Also follow our social media pages for future “good-to-know” articles like this and other interesting tax tidbits.

Income Tax? Sales Tax? – A Plethora of Different Taxes

Income Tax? Sales Tax? – A Plethora of Different Taxes

by | Aug 7, 2020 | Business Tax, Individual Tax

An old college acquaintance recently made a fiery statement on social media stating that a certain kind of nonprofit “is not taxed” and that they should “lose their tax exempt status.” For the sake of peace, I won’t specify what kind of nonprofit it is. As for the matter of that “lose their tax exempt status” statement, it demonstrates a common, hazy misconception that taxes are all the same. 501c3 nonprofits are exempt from INCOME tax, but may be (and usually are) subject to other taxes, such as sales tax and employee taxes.

In reality, there are actually many different types of taxes. It’s worth getting a general picture where those taxes may appear in your daily life.

Just My (Tax) Type

Generally speaking, taxes can be broadly split into these categories:

  • Income Taxes
    • Taxes based upon your income earned. Factors such as the type of income, how it was earned, and where it was earned often affect how your income tax is calculated. This tax exists at the federal and state level. Some states do not have an income tax. The IRS is the most well-known agency involved in income tax. Nonprofits may qualify for an “exemption” from income tax through the IRS and state income tax agencies.
  • Consumption Taxes
    • Very broad category of taxes based on taxable transactions that take place. Some common ones are:
      • Sales Tax – taxes applied often to retail sales. Does not exist at the federal level but almost all states enact some form of sales tax.
      • Use Tax – taxes applied to the use of goods where a sales tax would normally apply. E.g. purchasing items from out-of-state with no sales tax applied. Exists often at the state level.
      • Excise tax – A tax applied to a specified type of good, such as alcohol, gasoline, and cigarettes. Exists usually at the state level.

 Property Taxes

    • Taxes based upon the value of owned property or any improvements made upon it. Often exists at the county and city level.
  • Payroll Taxes
    • Otherwise known as “employee taxes.” These taxes apply towards business owners with employees. Exists at both the federal and state level. The taxes collected go to assorted unemployment and social security programs.

 

There’s quite a plethora of taxes that can affect our daily lives! Business owners should especially be aware of these taxes, and we at MiklosCPA can help! MiklosCPA supports business owners in emerging and mid-sized firms with their accounting and tax needs. We got your back so you can focus on what drives you, your business! Give us a ring (or email) and learn more how we can help your business. Meanwhile, let’s keep in touch and follow our social media pages.

Let’s Make a Deal – the Like-Kind Exchange

Let’s Make a Deal – the Like-Kind Exchange

by | Jul 15, 2020 | Business Tax, Individual Tax

For decades, the Internal Revenue Code allowed for “section 1031” exchanges, more commonly known as like-kind exchanges, which allowed business owners of a plethora of “qualified property” such as real estate, vehicles, and livestock to make arrangements to swap equivalent property without incurring an income tax liability. Inevitable discrepancies and questionable exchanges cropped up over the years. This led to revisions following the enactment of the Tax Cuts & Jobs Act of 2017. Like-kind exchanges became limited solely to business or real estate investment property. However, utilized correctly, it still can be advantageous for business property owners.

Like-Kind Property?

Currently, only business or real estate investment property qualify for like-kind exchanges. Personal property like your home cannot be used in like-kind exchanges. The property must generally be of the same nature or character, even if they may differ in quality or grade. For example:

Wendy owns an apartment complex in Buena Park, CA built in 2015 worth $3.5 million. Her business friend, Irene, owns an apartment complex worth also approximately $3.5 million. It is in well-kept condition, built in 2008, and is located in Indio, CA. The two own qualified property in these circumstances and can make arrangements for a like-kind exchange.

 

Like-kind exchanges may also allow the seller to defer depreciation recapture, which tends to increase the taxability of that property if it were in a regular sale. Utilizing like-kind exchanges may also come with advantages in relation to state taxes, depending on the applicable laws and regulations that the like-kind exchange takes place in. Form 8824 is used to report any like kind exchanges.

 

Like-kind exchanges can help property owners save time from going through the extra steps of making a sale and acquiring new property. However, figuring a roadmap to a successful like-kind exchange may require some guidance from a team knowledgeable of any anticipated tax concerns, such as us here at MiklosCPA, a California-based firm. MiklosCPA supports clients of emerging and specialized firms with their tax and accounting needs. Drop us a line to learn know more of our services. Or, let’s stay in touch & follow our social media pages.

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