BNGIowa

So, when can I start depreciation?

In a recent Tax Court Summary Opinion, it was held that the placed in service date, not necessarily the purchase date, is what controls the depreciation and expensing deductions.

 

In the opinion, a music business owner bought pieces of equipment over a two-year span, but didn’t use the items in his business until they were connected and integrated, which happened in the third taxable year. In the third tax year, the taxpayer claimed a section 179 deduction and computed his depreciation deductions accordingly.

 

The IRS contended that the equipment was placed in service in the two years in question because the petitioner tested some of the equipment before the third year.  The IRS also argued that the equipment was ready and available for its specifically assigned function at that time.  Therefore, the IRS believed the taxpayer’s ability to take the section 179 deduction was limited. 

 

 

However, the Tax Court agreed with the taxpayer that the equipment was not used until the third year and was therefore placed in service that year. Although the equipment was tested by the taxpayer to become familiar with it, the equipment was not fully functional until it was interconnected in the third year. The Tax Court stated that individual components are treated as single property for tax purposes when they are functionally independent. Regardless of the amount of testing petitioner performed on each individual component, the equipment was not capable of performing its assigned function until interconnected and capable of supporting the operation of the studio. Each piece of equipment was thus essential to the operation of the studio as a whole and was not useful or able to be used to operate a business by itself.

 

Accordingly, the Tax Court held that the equipment purchased in the two-year span was placed in service in the third year and the taxpayer is entitled to the depreciation and section 179 deductions claimed on his tax returns.

 

For more information on this tax topic or other tax issues, please contact Brent McClure at Kiesling Associates LLP.

American Recovery and Reinvestment Act-Part 3 of 3

The American Recovery and Reinvestment Act of 2009 was chocked full of many tax relief items to individual taxpayers and small businesses.  While the specifics of the Act were subjected to many last minute changes in both the House and Senate, the outcome reflects Congress’ attempt to give targeted tax benefits to the middle and lower class Americans.  At the same time, it seeks to boost economic recovery by allowing small businesses certain tax breaks.  In the last of three newsletter articles, we will discuss some of the small business tax breaks enacted.

Bonus Depreciation

The 50% first-year bonus depreciation is extended through 2009.  The election to accelerate AMT and research credits in lieu of taking the bonus depreciation is also extended to qualifying property placed in service through 2009. Special rules apply to taxpayers who had already made this election for property placed in service in 2008.

Section 179 Expensing

The increase in the section 179 expensing amount to $250,000 and the increase in the phase-out threshold to $800,000 are both extended through 2009. The amounts had originally been temporarily increased by the Economic Stimulus Act of 2008.

Carryback of Small Business NOLs

Eligible small businesses are allowed to carry their 2008 net operating losses (NOLs) back for five years.  An eligible small business is one that has average gross receipts of $15 million or less (using gross receipts test from section 446(c)).

Small Business Estimated Taxes

Qualified individuals are allowed (for 2009 only) to make estimated tax payments that equal only 90% of their preceding tax year liability instead of 100%. To be a qualified individual, the taxpayer must have adjusted gross income of less than $500,000, and more than 50% of the individual’s gross income must come from a small business (a business with an average of fewer than 500 employees).

Work Opportunity Tax Credit

The act creates two new targeted groups for the work opportunity tax credit:  “disconnected youth” and unemployed veterans.  Employers who hire members of these groups during 2009 or 2010 may be eligible to take the credit.

This wraps up our final discussion of the American Recovery and Reinvestment Act of 2009 that discussed individual tax breaks and small business tax breaks.  For additional information, please talk with Brent McClure at Kiesling Associates.

American Recovery and Reinvestment Act-Part 2 of 3

The American Recovery and Reinvestment Act of 2009 was chocked full of many tax relief items to individual taxpayers and small businesses.  While the specifics of the Act were subjected to many last minute changes in both the House and Senate, the outcome reflects Congress’ attempt to give targeted tax benefits to the middle and lower class Americans.  At the same time, it seeks to boost economic recovery by allowing small businesses certain tax breaks.  In the second of three blog posts, we will discuss some additional individual tax breaks that include the homebuyer’s credit, new car sales tax deductions and residential energy credits.

Homebuyer’s Credit

The act increases the maximum amount of the first-time homebuyers credit from $7,500 to $8,000 and eliminates the repayment requirement for houses purchased in 2009.  The “enhanced” credit is refundable, but for homes purchased between April 9, 2008 and December 31, 2008, it must be recaptured ratably over 15 years, or earlier if the home is sold. The stimulus act waives the recapture requirement for homes purchased after January 1, 2009, and extends the sunset of the credit from June 30, 2009 to December 1, 2009. 

 

The amount of the credit remains at 10% of the purchase price of a principal residence of a taxpayer who has not owned a U.S. principal residence in the previous three years. Recapture still applies if the taxpayer disposes of the home or no longer used it as a principal residence within three years after purchase. The waiver of recapture isn’t retroactive to before 2009, unfortunately.

New Car Sales Tax Deduction

Buyers of new cars and light trucks between February 17, 2009 and the end of the year may deduct the portion of state and local sales and excise taxes attributable to the first $49,500 of the vehicle’s purchase price. This is an above-the-line deduction and is allowed against alternative minimum tax (AMT).  The deduction will be phased out for single taxpayers with modified adjusted gross income in excess of $125,000 for the tax year ($250,000 for joint filers).  Taxpayers who elect to take the state and local sales tax deduction in lieu of deducting state and local income taxes (on Schedule A) cannot also take the new car sales tax deduction.  

Residential Energy Credits

Certain energy saving improvements to taxpayer’s principal residence are eligible for a tax credit of 30% of cost, and the lifetime cap raises from $500 to $1,500 for property put in use in 2009 and 2010. Property such as new windows and doors, insulation, and certain energy-efficient property or improvements are eligible for this credit.  Qualified solar electric property costs, qualified solar water heating property costs, qualified wind energy property costs, and qualified geothermal heat pump property costs have no limitation on the 30% cost credit.

 

Next week, our final discussion of the American Recovery and Reinvestment Act of 2009 (Part 3) will discuss the small business tax breaks.  For additional information, please  For additional information, please talk with Brent McClure at Kiesling Associates.

American Recovery and Reinvestment Act-Part 1 of 3

The American Recovery and Reinvestment Act of 2009 was chocked full of many tax relief items to individual taxpayers and small businesses.  While the specifics of the Act were subjected to many last minute changes in both the House and Senate, the outcome reflects Congress’ attempt to give targeted tax benefits to the middle and lower class Americans.  At the same time, it seeks to boost economic recovery by allowing small businesses certain tax breaks.  In the first of three blog posts, we will start with some of the tax breaks for individuals, specifically related to education and work credits.

Higher Education

 

The American opportunity tax credit is a temporary increase and expansion of the Hope scholarship credit (for tax years beginning in 2009 and 2010). It increases the maximum credit per student from $1,800 to $2,500 and extends its availability from the first two years of post secondary education to four years.  Nonrefundable under the prior law, the credit now becomes 40% refundable. 

The phase out range is increased to $80,000 to $90,000 for single filers and joint filers range is increased to $160,000 to $180,000.  Expenses for course materials, such as textbooks, are added to the definition of qualified tuition and related expenses eligible for the credit.

Section 529 Plan Expenditure Expansion

 

For 2009 and 2010, the costs of computers and related technology qualify as higher education expenses for purposes of the rules governing distributions from a 529 qualified tuition plan, as long as the beneficiary of the plan is enrolled at an eligible educational institution.  Internet access charges are also covered, as well as software, so long as it’s not for sports, games, or hobbies (unless the software is predominantly educational in nature).

 

Making Work Pay Credit

 

Intended to partially offset an employee’s portion of FICA and Medicare payroll taxes, this temporary credit is 6.2% of earned income up to a total credit of $400 for individuals and $800 for joint filers.  It is retroactive to the beginning of 2009 and is set to expire at the end of 2010.  It begins phasing out at a rate of 2% of modified adjusted gross income above $75,000 for individuals and $150,000 for joint filers. (See the March 25, 2009 Kiesling newsletter for additional information.)

 

Child Tax Credit and Other Items

 

The act extends for 2009 and 2010 the lower ($3,000) income threshold for refundability of the section 24 child credit, meaning more of it is refundable to low-income taxpayers. Other items directly benefiting less-affluent taxpayers or those in financial distress include a temporary increase in the earned income tax credit for 2009 and 2010, a one-time $250 payment to persons on fixed income not eligible for the making work pay credit and a temporary exclusion of $2,400 of unemployment benefits from taxable income in 2009. 

 

Next week in Part 2 of 3, we will discuss the homebuyers credit, new car sales tax deduction and energy credits.  For additional information, please talk with Brent McClure at Kiesling Associates.

Home, Home on the Range

The Housing and Economic Recovery Act of 2008 signed by the President at the end of July gives first-time homebuyers a temporary refundable credit equal to 10 percent of the purchase price of a home, up to $7,500 ($3,750 for married individuals filing separately). The credit begins to phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The credit is effective for homes purchased on or after April 9, 2008 and before July 1, 2009.  Unlike other credits, however, the first-time homebuyer credit must be repaid in equal installments over 15 years, essentially making it an interest-free loan from the government for most qualifying  homeowners.

The new credit phases out for married couples filing jointly with modified AGI between $150,000 and $170,000 and for single taxpayers with modified AGI between $75,000 and $95,000.

A person is considered a “first-time homebuyer” if he or she (or spouse) had no ownership interest in a principal residence during the three-year period before the new home is purchased.

Unlike any other individual federal tax credit, taxpayers must repay the first-time homebuyer credit.  They will have 15 years to repay the credit, interest free.  Repayments start two years after the year in which the residence is purchased. Payments must be made in equal installments over those 15 years.

If a taxpayer sells or no longer uses the home as his or her principal residence before repaying the credit, the unpaid balance becomes due in the year in which the residence is sold or no longer used as the taxpayer’s principal residence. However, the amount of recaptured credit may not exceed the amount of gain from the sale of the residence to an unrelated person.

“Purchase” as used in the new law occurs when title closes.  In addition, homebuyers claiming the credit may not acquire the property from certain related persons and they must satisfy certain basis rules.

For more information about the First-Time Homebuyer Tax Credit and what steps you should implement to take advantage of the credit, contact Brent McClure at (515) 223-0159 or email at bmcclure@kiesling.com.

What are you doing with yours?

I was excited this week that the federal tax rebates were starting to hit everyone's bank account.  Even though my last two digits of my social security number would have gotten me a rebate this week, I owed the IRS this year (reluctanctly) and therefore did not direct deposit any refund.  So I will have to wait for the paper version sometime in May or June. 

I was watching our local news the other night, and it surprised me what the majority of people are planning on doing with their rebate. Over 58% of the respondents were going to pay bills with the money, 24% were going to save it, and only 14% were going to buy something fun.  I thought "typical, conservative Iowans."  My grandmother, who went through the great depression, came to mind. She would have saved it.

One of my good friends, on the other hand. has plans for his.  Seeing that he and his wife will be getting back $1,500 (they have one child), he has his eye on a flat-screen TV and a new driver.  Isn't that what we are SUPPOSED to do with the windfall?  It is an economic stimulus rebate, right? Isn't it considered "free money" to do what I want with?  Yeah, that's it!  I can buy whatever I want - expensive dinner, new electronics, summer vacation, etc.  Oh the possibilities!!  So what stores do I hit and in what order?  This is great! 

Wait a minute . . .

Then how come I feel like my only options are to pay off my credit card debt or save it? 

Thanks grandma.

What's the address for Mastercard?

Economic Stimulus Act of 2008

On February 7^th, 2008, both the Senate and the House of Representatives passed the Economic Stimulus Act of 2008. President Bush is expected to sign the Act on February 13th. While the highlight of the Act is the receipt of rebate checks by eligible individuals in 2008, businesses also benefit.     

New Rebate

Eligible individuals will receive a basic rebate equal to the greater of:

1)      Net income tax liability up to a maximum of $600 ($1,200 for a joint return); or

2)      $300 ($600 for a joint return) if either

a)      The taxpayer’s qualified income is at least $3,000; or

b)      Net income tax liability is at least $1 and gross income is greater than the sum of

                                                              i.      Applicable standard deduction amount and

                                                            ii.      One personal exemption (two personal exemptions for a joint return)

In general, qualified income is earned income, veteran’s disability payments, and social security benefits. There will be an additional $300 per-child (under the age of 17) credit amount. The amount of the rebate (both the basic and the child’s amount) phases out at a rate of 5% of adjusted gross income (AGI) above $75,000 for individuals ($150,000 for joint returns). The rebate will not be available if an individual’s tax return does not include valid identification numbers, such as social security numbers.

Asset Expense Election

For tax years beginning in 2008, the Act increases the section 179 expensing election limit to $250,000, and boosts the overall investment limit from $510,000 to $800,000. A business that places in service in a taxable year beginning in 2008 depreciable tangible personal property, including off-the-shelf software, used in the active trade or business may elect the section 179 expensing election. The $250,000 maximum amount that can be expensed is reduced dollar-for-dollar if qualifying property in excess of $800,000 is placed in service in a taxable year beginning in 2008. For taxable years beginning in 2009 and thereafter, the prior limitation amounts under section 179 continue to apply. 

Bonus Depreciation

For both the regular tax and the alternative minimum tax (AMT), the Act generally permits a bonus first-year depreciation deduction of 50% of the adjusted basis of qualified property acquired and placed in service after December 31, 2007 and before January 1, 2009. In general, property eligible for bonus depreciation consists of:

1)      Tangible property with a recovery period not exceeding 20 years;

2)      Purchased computer software;

3)      Water utility property; and

4)      Qualified leasehold improvement property.

This portion of the Act mirrors the section 168(k) bonus depreciation placed in effect for qualified property placed in service after 9/11. 

If you have any questions about this Act please contact Brent McClure at Kiesling Associates.

Education Credits and Deductions

With April 15^th   just around the corner, it is time to start thinking about ways to provide tax savings for you and your family. Educational tax savings is one area to consider as tax savings can occur by means of an educational expense deduction or educational credits, and is often forgotten by those taxpayers paying for education related expenses. 

 

For taxpayers who paid qualified tuition and related expenses in 2007 for post high school education for themselves, a spouse, and/or dependents, either a $2,000 or $4,000 deduction may be available. The size of the deduction or credit depends on the taxpayer's income level.  This tax deduction has not currently been extended for the 2008 tax year.

Two educational credits which provide taxpayer benefit are the Hope Credit and the Lifetime Learning Credit. The Hope credit is for student expenses dealing with tuition and related expenses from a post secondary school.  The student has to be in the first two years of post secondary education to qualify. The maximum per student credit is $1,650 per student for 2007 ($1,800 for 2008).  The Hope credit can be used for multiple family members. With the Lifetime learning credit, a taxpayer can take a maximum credit of $2,000 for qualified tuition and related expenses.  Lifetime learning credits are available to any taxpayer that is not eligible for the Hope credit. With both of these credits there are income level phase outs which begin at $47,000 for single filers and $94,000 for married filling jointly for 2007.  The thresholds increase to $48,000 and $96,000 for 2008, respectively.  Taxpayers are only allowed to take either the deduction or one of the credits per individual for the tax year.  With everybody trying to save money on their tax bills, this is one area which may make a difference.

For more information on this topic, contact Brent McClure at Kiesling Associates.

1099 Filing Requirements

The 1099 filing season is here!

1099 information returns are due by January 31^st.  Two common types of the 1099 are a 1099-MISC and a 1099-DIV.  A 1099-MISC is required for payment for services of at least $600 to individuals and other businesses, excluding corporations.  Common examples of these payments include director fees, payments to a deceased employee’s estate, or attorney fees.  A 1099-DIV is required for all dividend payments of at least $10.  Cooperative patronage distributions are considered a return of margins and not dividends and should follow the 1099-MISC rules.  Payments to stockholders for stock repurchase are not required to be reported on a 1099.

The 1099’s are due to the payee by January 31^st.  If filing the 1099’s using paper copies they are due to the IRS by February 28^th.  If done through electronic means an extension is given until March 31^st.  Those companies filing 250 or more information returns are required to file electronically and others are encouraged to do so.

The IRS requires all 1099’s to be filed with the payee’s taxpayer identification number or social security number.  In cases where the payee has not provided their number, has provided an obviously incorrect number, or the IRS has notified the company of an invalid ID, backup withholding is required at a rate of 28%.

As usual with the IRS, failure to follow the guidelines can result in penalties to the company.  If you have any questions please contact Brent McClure at Kiesling Associates.

Energy Property Credit

As I was looking out my outdated windows, amazed at the amount of rainfall we have gotten here in Des Moines the past few days, I remembered that one of my goals this fall was to replace a few of those outdated windows we have in our home in Beaverdale.  And, low and behold, the IRS has given us a chance to recoup some of the cost of those replacement windows via a tax credit.  For certain energy efficient property placed in service before 2008 (that is, before 1/1/2008), a taxpayer can claim a lifetime nonrefundable credit of up to $500 for making qualified energy saving improvements to their principal residence. 

However, in replacing those windows, only $200 of this credit may be used just for the windows.  The other portion of the $500 can be used for various energy improvements.  Those costs such as the exterior windows, insulation materials or systems that reduce heat loss/gain, exterior doors, and certain metal roofs with special energy efficient coatings are totalled and 10 percent of those costs count towards the credit.  For example, if I purchase $1200 of windows I would have a credit of $120.  If I purchased $3000 of windows, I would max my window portion of the credit at $200.  If I also purchased $1000 of insulation materials, I would tack on an additional $100 to my credit. 

 Residential energy property expenses which meet specific standards are also eligible.  These include:

•  $300 for the cost of energy efficient building property (meeting certain standards) such as an electric heat pump water heater, electric heat pump, geothermal heat pump, central air conditioner, and natural gas, propane or oil water heater


• $150 for natural gas, propane or oil furnace or hot water boiler


• $50 for an advanced main air circulating fan.

Remember, that the lifetime maximum credit is $500 and it expires by the end of 2007! 

Just to let you know my personal situation, I did replace my water heater last year ($300 credit) and purchased some insulation ($200 total - 10% credit would be $20) for a total credit of $320 on my 2006 tax return.  So my maximum credit I can take against the windows (and to max out my lifetime credit) is going to be $180, or $1800 of windows!  I think I can get there!