Depreciation

Barry Dolowich for the Monterey Herald writes: Question:  I am planning to sell a rental property for about $500,000. I purchased the property 25 years ago at a cost of $150,000 (allocated $100,000 to the building and $50,000 to land). The building has long been fully depreciated. I have been told that I have to report a gain of $450,000. It doesn’t seem fair. Is this true?

Answer:  Depreciation represents a deduction for the reasonable allowance for the exhaustion, wear-and-tear of property used in a trade or business, or of property held for the production of income. Depreciation is not allowable for property used for personal purposes, such as a residence or a car used solely for pleasure. Land is not depreciable.

Throughout the past 25 years, you have been taking advantage of the building’s depreciation deduction on your individual tax return. The depreciation deduction has been used to offset your rental income. However, as the building was being depreciated, your tax basis in the building has been reduced by the same amount.

Your accountant is correct in his calculation. Here is why:

Original cost basis of land and building: $150,000.

Less accumulated depreciation of building: 100,000.

Tax basis of land and building at time of sale: $50,000.

Your gain on the sale is $450,000, the difference between the sales price of $500,000 and your tax basis of $50,000. I understand your dismay about having to pay tax on a $450,000 gain rather than the $350,000 ($500,000 selling price less the original cost of $150,000) you expected. Once again, you have already received the tax benefit of the depreciation throughout the years, and now you have to pay for that benefit! Believe it or not, you are actually ahead of the IRS. In your case, you have deducted depreciation against income taxed at high ordinary tax rates, but you will be paying tax now at a lower capital gain rate. SNIP, the article continues @ The Monterey Herald, click here to continue reading...

All Business Costs Are Fully Deductible Right? Why Your Website Costs May Not Be

American Tax Service writes: As a business owner, it is easy to fall into the assumption that all of the costs related to your website are fully tax-deductible, but in reality that is not always the case. Whether speaking of web design, website consulting services, or website software—many costs must be deducted in increments over multiple years as a capital expense. Below are 3 factors to take into consideration in regards to taxes and website expenses.

What Is The Scope Of Web Design?

If a skilled programmer is hired to code a website from scratch, or drastically modify a template-based website in order to meet your customized needs—then the costs are typically deducted over a 3 year period—as either an incurred or capitalized expenses

This is common with e-commerce website, m-commerce websites, and websites with highly specialized features—such as 3D graphics. Template-based web sites with little to no modification or additional coding (even if completed by a web designer) are typically capitalized and deducted in increments over their lifetime.

Is There A Contract?

Oftentimes website software and design is an ongoing work in progress, that is not delivered all at once. On top of that, a website that is complete and fully functional today, is likely to require many modifications and tweaks as both a business grows—and online marketing and website trends change.

For this reason, many website designers do not charge a flat rate—but instead individual fees for each delivered element of a website or website software. This is not to say that the initial website design for a new website will not have a flat fee, but that web design expenses are ongoing.

According to J. Ellis, web designer in Traverse City, MI, “Many customers want to start with a flat fee for the initial investment, knowing that they can pay for updates when and if the need arises.”   In instances where ongoing web design services are required, the expenses are typically capitalized and deducted over the next three tax years.

Was The Web Design Part Of The Start-Up Expenses?

The first year a business is in operation, there are a multitude of expenses incurred related to getting the business up and running. This means that website design may fall into this category. As far as taxes go, start-up expenses referred to costs incurred before the business is fully operational.

The 2010 Small Business Act allows many businesses to deduct as much as $10,000 in start-up costs. If applicable, website design costs associated with website design can be included as part of this first year taxed as action. Keep in mind that it may be more advantageous to include other start-up expenses with this deduction. Otherwise, web design costs must be capitalized and deducted in increments over the next 15 years.

The 3 questions above are designed to help small business owners understand how complex tax related deductions can be. This is why many business owners turn to H&R Block online tax filing at tax time.

Intuit and Uber Partner to Simplify Filing Taxes for On-demand Economy Workers

Intuit and Uber are joining forces to make it easier for workers in the on-demand economy to file taxes and manage their finances throughout the year. 

 

Independent contractors face unique challenges at tax time because they do not have income tax withheld throughout the year. Additionally, they are responsible for tracking and reporting their own business expenses. That can make it difficult to separate ‘real income’ from revenue & expenses that should be part of their tax filings. For an Uber partner at tax time, that can mean factoring in a year’s worth of gross fares, mileage, tolls, gas payments and other expenses. To simplify this process, Intuit and Uber are partnering to offer:

• A free version of the new QuickBooks Online Self-Employed software, enabling Uber driver partners to easily enter and categorize the data they receive from Uber. 
• The ability to seamlessly send their data from QuickBooks Online Self-Employed into TurboTax Online, speeding the process of completing year-end taxes.

"Uber is giving hundreds of thousands of individuals a new and exciting way to earn income and many will encounter a new set of tax obligations. We’ve set out to empower people working in the on-demand economy by giving them easy to use tools for managing business revenue and expenses," said Alex Chriss, vice president and general managers of Self-Employed Solutions at Intuit. "By partnering with Uber, we’re able to offer a tailor-made solution that simplifies tax time, and provides clear visibility into their income throughout the year." 

"Uber has grown significantly this past year, which means we've also seen growth in the number of driver partners utilizing the Uber platform, many of whom are new to self-employed business requirements. Our relationship with Intuit will help our partners to manage their business finances and be prepared every time they need to pay taxes," said David Richter, vice president of Strategic Initiatives at Uber. 

In addition to the free version of QuickBooks Online Self-Employed, Uber driver partners will have the option of connecting additional bank and credit card accounts to benefit from the full feature set of the product all year round. Key features include:

• Connect accounts: Import supported bank and credit card accounts to easily track income and expenses with no data entry required.
• Categorize by click: Mark a transaction as "business" by simply clicking a button, or swiping a finger across a mobile app, letting entrepreneurs instantly categorize IRS Schedule C deductions.
• Stack up savings: Track deductions all year round to help entrepreneurs save time and money.
• Simplify taxes: Calculate estimated quarterly and year-end taxes so there are no surprises in April.
• Count on security: Be confident that bank-grade encryption protects information, helping to keep it safe and secure.

Since launching in beta in the fall of 2014, QuickBooks Online Self-Employed has helped entrepreneurs track over $50 million in business expenses, helping them save money on their taxes and simplify their financial lives. 

For more information about QuickBooks Online Self-Employed please visit https://selfemployed.intuit.com/oa.

Can Tax Form 1099-K Derail Your eCommerce Taxes?

Mark Faggiano for TaxJar writes: Ever since they first landed in mailboxes almost three years ago, tax form 1099-K has been a source of confusion for online sellers.
Today we want to clear up what form 1099-K actually is, who gets it, and what online sellers need to do with it when it arrives.

What is Form 1099-K?

The form 1099-K, for “Payment Card and Third Party Network Transactions” is the form sent to online sellers and federal taxing authorities by 3^rd-party entities that handle their payments.
In layman’s terms? If you earn income and are paid through a payment processor like PayPal, Amazon, or Etsy in the last taxable year, then that company is required to report that you made that income and let you and the IRS know about it.
The 1099-K is a federal form, so this information is not reported to the individual state’s departments of revenue.
Additionally, if you have an agreement with a credit card processor like Visa or MasterCard, you’ll receive a 1099-K if you process over $600 in income that year through that source. (This does not typically apply to most sellers reading this article!)

Why Form 1099-K?

The need for this form came about in 2008 as part of the Housing Assistance Tax Act. Lawmakers added a proviso requiring 3^rd party payment processor reporting because research had shown that online sellers were not paying income tax on all income. (This may be true of some sellers, but can be very galling to online sellers who take great pains to be in compliance!)
Form 1099-K started arriving in mailboxes in January of 2012, so this will be the 4th year that some online sellers have had to deal with the form.

Who Receives Form 1099-K?

Form 1099-K is only sent to sellers (and the IRS) when that seller has processed over $20,000 in sales volume and 200 transactions with that processor.
For example, if you are a small seller who made 200 sales and $20,000 but collected some of that money through Amazon and some through PayPal, then neither Amazon nor PayPal is required to send you (and the IRS) a 1099-K.
The good news is that form 1099-K is not sent by payment processors to individual states departments of revenue. But keep reading for why sales tax matters, especially to online sellers who collect large amounts of sales tax.

What Should eCommerce Sellers Do with Form 1099-K?

Form 1099-K is informational only, meaning that you don’t have to do anything further with it – like attaching it with your income taxes – once it arrives.
What you should do is match it with your own financial records, ensuring that the payment processor reported your income correctly. Keep in mind that they report gross sales only, so it’s your job to enumerate deductions such as fees, refunds, supplies, postage, etc.

1099-K and the Individual States

While form 1099-K is only required to be sent to the IRS, we have heard rumors from online sellers that the IRS allows state departments of revenue to view their 1099-K database. From there, presumably, these states could then investigate whether an in-state seller is remitting applicable sales tax. At TaxJar we are very serious about proving rumors. That said, collecting and remitting sales tax is the law in the vast majority of states where an online seller has nexus, so it is important to investigate your compliance whether you receive a 1099-K or not.

Cautions about Form 1099-K

If you receive a form 1099-K, keep these warnings in mind:

1. The 1099-K only shows your gross sales – Fees that the payment processor charged you are not taken out of this number, and neither are refunds and returns. If you collected shipping revenue though, that amount is included in the gross sales reported on the 1099-K. Because of this, it’s very important that you keep track of your business expenses or else the IRS will have you on the hook for paying income tax on the total amount of gross sales reported on the 1099-K.
2. Form 1099-K shows sales tax collected as part of your gross sales – Payment processors are not required to keep track of how much of your “gross sales” was actually sales tax that you are required to remit right back to state and local authorities. It’s up to you to use a service like TaxJar to track these amounts, or your income will end up over-reported to the IRS.
3. Even if you don’t receive a form 1099-K, your income is still taxable – When form 1099-K first arrived on the scene, some online sellers confused this with a new method of tax reporting for online sellers. But the 1099-K’s true intent was to keep tabs on high-volume eCommerce sellers, not replace the way they report income. So even if you don’t receive a 1099-K from a payment processor, we’re afraid you still owe income taxes.
4. The IRS will match your 1099-K income with the income you report – Starting in the fall of 2012, eCommerce sellers began receiving “1099-k match letters” from the IRS regarding a discrepancy between numbers reported on the 1099-K and seller’s income tax returns. Thought a relatively small number of these letters were sent it, it’s important to make sure that your reported gross income is the same or higher than the amount reported on the 1099-K. And if it isn’t, you need to show proof of why.

As with anything tax related, we can’t stress enough the value of a good eCommerce accountant.

How about Your 1099-K Experiences?

I’m curious. Have you ever had any 1099-K related problems? Did a payment processor report the wrong amount? Did you get a 1099-K match letter last year?  Let us know in the comments as we prepare for tax season.

Visit TaxJar, click here.

 

Tax planning tips for high-income earners

Llana Polyak for CNBC writes:  Accountants and financial advisors may be breathing a sigh of relief that there were no major new tax-law changes this year, but that doesn't mean they're happy about the higher taxes their clients are paying now compared to just a few years ago.

"Some clients whose situation did not change at all paid $6,000 or more in 2013 vs. 2012," said Jim Holtzman, a CPA and certified financial planner with Legend Financial Advisors.

Holtzman and other tax advisors expect more of the same, which is why they are being especially aggressive about managing the income-tax liability for their clients. There is less emphasis on estate taxes because the exemption—$5.43 million per person—is so high now.

But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly.

High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.

Even professionals' heads are spinning. "It's become so complicated," said CPA Lyle Benson of L.K. Benson & Co., who is also a CFP. "I have a little cheat sheet of all the different taxes at the different levels that I keep by the phone and refer to when I'm talking to clients."

Take a multiyear approach

Tax planning is better done looking out three or five years, noted Katherine Dean, managing director of wealth planning with Wells Fargo Private Bank. "If you see some sort of trend coming up—will there be an increase in income or a reduction in income—you can tailor your deductions or deferrals," she said.

For example, if your income is high this year and you expect it to increase in coming years because your career is on a roll, it's better to accelerate deductions when you can to offset some of those higher earnings through higher charitable contributions, prepayment of state income tax or selling securities at a loss.

Another option is to postpone some of that income, perhaps by maxing out 401(k) plan contributions or moving out the sale date of stock options into a year when you have less income.

"You want to ask yourself, 'Do I pull the lever [on deductions or income] now, or will I be in a better position to take advantage of them later on?'" Dean said. SNIP.  The article continues at CNBC, click here to continue reading...

Digital First : Unleashed vs Dear Comparison: Inventory for Xero, QuickBooks

Margaret Carey for Digital First writes: Sometimes a business needs a more advanced inventory to track stock and sales. Unfortunately, few online accounting programs have anything more than the basics.

QuickBooks Online (QBO) and Saasu include a basic inventory, Xero promises each year an inventory module is on the way, and Reckon One also has no inventory.

The best option is to find an add-on program that will integrate with your accounting program. Xero has the most options (15 when I counted) although some were specific to certain industries. QBO has just three add-on inventory programs, one of which (Unleashed) is still in beta.

I road-tested two of the add-on inventory products that could be integrated into both Xero and QBO – Dear and Unleashed. Although Unleashed is still in beta for QBO it should be available within the next couple of months.

CIN7 also integrates to both but was not reviewed. I had issues accessing a trial version and it is not directly comparable with the other two. CIN7 is a lot more expensive and is probably best suited to a larger organisations with more complex requirements.

I focused on the financial aspects of the total solution including the integration to the accounting software and reviewed the logistics functionality. SNIP, the article continues @ Digital First, click here to continue reading....

Are You Self-Employed? Eastside Tax Expert Answers Common Tax Questions

John Scholte for The Eastsider writes: Freedom. That’s what comes with being self-employed. You can make your own schedule and be your own boss. But it can quickly complicate your taxes. Where do you get the forms you need? How do you know what deductions you should take? And when should you seek some professional tax help? Read on… and avoid surprises this tax season!

How does being self-employed affect my taxes?

If you’re self-employed, or even just freelance on the side, be prepared to pay self-employment tax in addition to federal and state income tax. You are considered self-employed, and are required to file forms Schedule C and Schedule SE, if you earned $400 or more (from all sources) from self-employment in 2014.

What is self-employment tax and why do I owe so much?

Self-employment tax is your share of Social Security and Medicare taxes you owe when you work for yourself. It is entirely separate from–and in addition to–federal and state income tax. Normally, when you work as an employee, your employer pays ½ of this tax for you, and withholds the other ½ from your paycheck, so it gets paid regularly without you noticing. When you work for yourself, there is no employer to withhold these taxes or pick up half the tab, so you become responsible for paying the entire amount, which totals 15.3% of your self-employed income after expenses. The problem: you could owe zero income tax, but still owe a hefty chunk in self-employment tax, due to the low threshold ($400).

How Can I Reduce Self-Employment Tax?

Only ordinary and necessary business expenses taken against your self-employment income on your Schedule C will reduce your self-employment tax. Other income tax deductions you might take, such as student loan interest, mortgage interest, property tax, etc., do not reduce the amount of self-employment tax you owe. This is why it pays to keep good records of your expenses and to work with a tax professional who specializes in self-employed individuals.

Aren’t estimated payments optional?

Nope. The tax code states that taxes must be paid throughout the year as income is earned, not just every April 15th. When you’re self-employed, you are required to track your income, calculate your tax, and make quarterly estimated payments. If you owe more than $1000 in tax on April 15th, you might get hit with a penalty for not paying enough estimated tax, which is literally adding insult to financial injury. Avoid this by keeping tabs on your income, and work with a tax professional to make sure you’re paying enough per quarter.

I’m a renter. Can I still take the home office deduction?

Yes, the home office deduction is available to renters provided all the required conditions are met. Talk with a tax professional to see if you qualify. And be sure to ask about the California renter’s credit, which is a nice bonus from the state to qualified renters.

Can I deduct my car expenses as a freelancer?

Absolutely! Under the right circumstances, auto expenses are deductible, either by using the standard mileage rate or a percentage of actual expenses. You need to keep track of your business mileage in either case. There are mileage tracking apps available to make keeping the required log much easier.

I never got a 1099 from one of my freelance gigs. Do I still have to report it?

If you earned over $400 from self-employment in 2014, you must report all income, whether you received a 1099 or not. Suppose you did some work, got paid, and never received a 1099 for any number of reasons–but the company you did the work for reported the expense of paying you on their tax return. The mismatch in the IRS computers would potentially generate a letter from the IRS asking you about unreported income, which is not good news.

I paid someone for help on one of my projects this year. What do I do?

It’s a business expense. If you pay any individual $600 or more during the year, you need to issue them a 1099-MISC. You can then deduct the amount paid as a business expense, which in turn reduces your self-employment tax. 

7 SIGNS YOUR BUSINESS IS READY FOR CLOUD CRM

YourCRMHereo writes: Over time, customer relationship management (CRM) tools have continued to develop.  Today, some of the best CRM programs are cloud-based.  As cloud-based applications, these are affordable CRM solutions for small businesses.  For those businesses that have not transitioned to cloud CRM, here are seven signs that it is time to invest in a cloud CRM program.

There Is Too Much Information

In today’s digital age, the issue most people and companies have is not a lack of information.  This era has been called the Information Age, where people have access to more information about others than they have ever seen before.  What sales-based organizations need in this age is a way to process this information, which a good cloud CRM tool provides.  A well-designed application will let sales teams sift, sort and use the data they gather in a wide variety of ways.  Good software, implementation, and training enables sales teams to close more business in less time with automation, reminders, and reporting.

Desks are Covered with Post-It Notes

In order to reduce initial expenses, many small companies start out using common software applications and Post-It notes.  Spreadsheets, Microsoft Word Documents and Post-It memos are fine for burgeoning startups, but there is a time when businesses must transition to a more efficient method of organization.  A cloud CRM tool consolidates all of these documents, including invoices, external communications and internal notes, into one digital location.

Reducing Overhead

As the economy continues to slowly recover, companies must still find ways to reduce their overhead expenses.  Transitioning to a cloud-based CRM system is one way to significantly reduce costs.  With cloud-based CRM tools, companies do not have to pay large sums for software licenses.  Instead, they pay a nominal monthly fee, which is much lower than an expensive license.  Because competition for cloud business customers is fierce, the monthly cost will remain low for the foreseeable future.

Going Mobile

Some established companies already have a CRM program they use, but it is not cloud-based.  Thanks to the proliferation of cloud-based services and CRM software developers, there are now many cloud CRM programs available.  Every company should be able to find one that meets its specific needs and offers mobility that a non-cloud CRM tool does not offer.  Any company that is suddenly growing in a mobile direction should consider transitioning all its programs to the cloud, including its CRM application.

Gathering Sensitive Data

Regularly on the news there are stories of companies that have been hacked, and their customers’ data has been compromised.  Businesses are responsible for adequately protecting the information they collect about customers.  Many small companies, though, cannot afford the digital security precautions required.  This responsibility can be safely outsourced in an affordable way to a cloud CRM service provider.

No IT Department

Many companies find themselves in need of a CRM program but do not have an IT department.  Businesses that cannot afford to maintain their own servers, update computer programs and sort out compatibility issues will find a practical CRM solution in the cloud.  Cloud-based CRM tools are affordable and free businesses from the hassles of maintaining a software application.

Growth Spurts

Businesses must be able to capitalize on sudden growth.  With traditional methods of managing customers, this can be difficult.  It takes time to update programs and adjust operations.  Cloud CRM programs, however, are scalable and can help companies quickly adapt to the new demands.  With the cloud, businesses are able to grow without sacrificing the flexibility they require.

Businesses that are experiencing any of these symptoms should consider transitioning to a cloud CRM tool.  Providing greater reliability, flexibility and convenience than other solutions, there is little reason to delay the move to a cloud-based CRM application such as Microsoft CRM Online.