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When Cancellation of Debt (COD) Income Can Be Tax-Free
Written by Coach Janelle CPA on January 26, 2023
Sometimes debts can pile up beyond a borrower’s ability to repay, especially if we are heading into a recession. But lenders are sometimes willing to cancel (forgive) debts that are owed by financially challenged borrowers. While a debt cancellation can help a beleaguered borrower survive, it can also trigger negative tax consequences. Or it can be a tax-free event.
Use In-Kind RMDs to Avoid Selling Retirement Account Assets
Written by Coach Janelle CPA on January 19, 2023
Are you 72 or older? If so, you must take a required minimum distribution (RMD) from your traditional IRA, SEP-IRA, or SIMPLE IRA by the end of the year. If you turn 72 this year, you can wait until April 1 of next year to take your first RMD—but you’ll also have to take your second RMD by the end of that year.
Section 1031 Exchanges vs. Qualified Opportunity Zone Funds
Written by Coach Janelle CPA on January 13, 2023
Have you sold, or are you planning to sell, commercial or rental property? To avoid immediately paying capital gains tax on your profit, you have options: 1. Defer the capital gains tax using a Section 1031 exchange; 2. Defer the capital gains tax using a qualified opportunity zone fund
All small-business owners with one to 49 employees should have a medical plan for their business. Sure, it’s true that with 49 or fewer employees, the tax law does not require you to have a plan, but you should. When you have 49 or fewer employees, most medical plan tax rules are straightforward. Here are six opportunities for you to consi...
Last-Minute Year-End Tax Strategies for Your Stock Portfolio
Written by Coach Janelle CPA on December 7, 2022
When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2022 income taxes. The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies...
Last-Minute Year-End General Business Income Tax Deductions
Written by Coach Janelle CPA on November 30, 2022
The purpose of this letter is to get the IRS to owe you money. Of course, the IRS will not likely cut you a check for this money (although, in the right circumstances, that will happen), but you’ll realize the cash when you pay less in taxes. Here are six powerful business tax deduction strategies you can easily understand and implement before the end of 2022.
Is Airbnb Rental Income Subject to Self-Employment Tax
Written by Coach Janelle CPA on February 3, 2023
Do you owe self-employment tax on Airbnb rental income?
That’s a good question.
In Chief Counsel Advice (CCA) 202151005, the IRS opined on this issue.
But before we get to what the IRS said, understand that the CCA’s conclusions cannot be cited as precedent or authority by others, such as you or your tax professional.
Even so, we always consider what the CCA says as semi-useful information, so here’s some analysis that goes beyond what the IRS came up with.
The Exact Question
To be specific, the CCA asks whether net income from renting out living quarters is excluded from self-employment income under Section 1402(a)(1) when you’re not classified as a real estate dealer. If excluded under IRC Section 1402(a)(1), you don’t owe self-employment tax on your net rental income. Needless to say, that’s the outcome you want to see, and I’m here to help. The taxpayer addressed in this CCA was an individual who owned and rented out a furnished beachfront vacation property via an online rental marketplace (such as Airbnb or VRBO). The taxpayer provided kitchen items, linens, daily maid service, Wi-Fi, access to the beach, recreational equipment, and prepaid vouchers for rideshare services between the rental property and a nearby business district.
The CCA’s Conclusions
According to the CCA, when you’re not a real estate dealer, net rental income from renting out living quarters is considered rental from real estate and is therefore excluded from self-employment income—as long as you don’t provide services to rental occupants. The self-employment income exclusion for net rental income collected by a non-dealer is a statutory provision. The statute itself doesn’t say anything about providing services. But IRS regulations state that providing services to renters can potentially cause you to lose the exclusion from self-employment income.
According to the CCA, you must include the net rental income in calculating your net self-employment income—which could cause you to owe the dreaded self-employment tax (ugh!)—if you provide services to renters and the services:
1. are not clearly required to maintain the living quarters in a condition for occupancy and
2. are so substantial that compensation for the services constitutes a material portion of the rent.
So, according to the CCA, determining whether providing services to renters will trigger exposure to the self-employment tax is the big issue for folks who rent out living quarters. The CCA’s anti-taxpayer conclusion rests on the giant assumption that the services provided by the taxpayer were above and beyond what was required. But were they? Probably not!
The Customarily Issue
According to IRS regulations, services are generally considered above and beyond the norm only if they exceed the services that are customarily provided to renters of living quarters. Therefore, services that simply maintain a vacation rental property in a condition that is customary for rental occupancy should not be considered above and beyond and therefore should not trigger exposure to the self-employment tax. In assessing whether services provided to renters are above and beyond what’s customary, circumstances obviously matter. In the real world of vacation rentals in expensive resort areas, renters customarily expect and receive lots of services that might be considered above and beyond in other circumstances.
For instance, in resort areas, renters customarily expect and receive cable service; Wi-Fi access; periodic housekeeping services, including changing bedding and towels; repair of failed appliances; replacement of burned-out lightbulbs; replacement of dead smoke alarm batteries; access to recreational equipment such as bicycles, kayaks, beach chairs, umbrellas, and coolers; and so forth and so on. That’s a lot of services!
Why are lots of services provided in expensive resort areas? Because rental charges in expensive resort areas are—wait for it—expensive! The cost may be $2,000 or more per week or $5,000 or more per month, or even higher during peak periods—maybe much higher! So, rental amounts that could be attributed to the provision of all the aforementioned services would almost always be a small fraction of the overall rental charges.
In the context of expensive resort area vacation rentals, it’s hard to imagine what services would be so above and beyond the norm that the property owner’s net rental income would be exposed to the self-employment tax. It shouldn’t matter if the services are provided directly by the owner of the property (unlikely) or indirectly by a rental management agency and included as part of the fee paid by the owner of the property (likely).
The Substantiality Issue
In assessing whether services provided to renters are above and beyond the norm, substantiality also matters. A Tax Court decision addressed a situation where the taxpayer rented out trailer park spaces and furnished laundry services to tenants. The laundry services were clearly provided for the convenience of the tenants and not to maintain the trailer park spaces in a condition for rental occupancy. Tenants were not separately billed for the laundry services, and they were not separately paid for.
The Tax Court concluded that any portion of the rental payments that was attributable to the laundry services was not substantial enough to trigger exposure to the self-employment tax. Accordingly, the Tax Court opined that all of the trailer park owner’s net rental income was excluded from self-employment income.
As stated above, in the context of the rental of expensive vacation properties, any portion of rental charges that could be attributed to the provision of services would likely be insubstantial in relation to the overall rental charges. If so, according to the Tax Court, the provision of such services would not expose the property owner to the self-employment tax.
All good things must come to an end. On December 31, 2022, one of the best tax deductions ever for businesses will end: 100 PERCENT BONUS DEPRECIATION.
Since late 2017, businesses have used bonus depreciation to deduct 100 percent of the cost of most types of property other than real property. But starting in 2023, bonus depreciation is scheduled to decline 20 percent each year until it reaches zero in 2027.
For example, if you purchase $100,000 in equipment for your business and place it in service in 2022, you can deduct $100,000 using 100 percent bonus depreciation. If you wait until 2023, you’ll be able to deduct only $80,000 (80 percent).
Does this mean you should rush out and purchase business property before 2022 ends to take advantage of the 100 percent bonus depreciation? Not necessarily. For many businesses, an alternative is not going away: IRC Section 179 expensing. Both IRC SECTION 179 EXPENSING and BONUS DEPRECIATION allow business owners to deduct in one year the cost of most types of tangible personal property, plus off-the-shelf computer software.
Both can be used for new and used property acquired by purchase from an unrelated party. Both also can be used to deduct various non-structural improvements to non-residential buildings after they are placed in service. Moreover, the two deductions aren’t mutually exclusive. You can apply Section 179 expensing to qualifying property up to the annual limit and then claim bonus depreciation for any remaining basis. Starting in 2023, when bonus depreciation will be less than 100 percent, any basis left after applying Section 179 and bonus depreciation will be deducted with regular depreciation over several years.
Generally, there is no great need to purchase and place the property in service by the end of 2022 to take advantage of 100 percent bonus depreciation. But there can be exceptions.
For example, if you own a rental property and want to make substantial landscaping or other land improvements, you’ll get a larger one-year depreciation deduction using 100 percent bonus depreciation in 2022 than if you wait until 2023, when the bonus will be only 80 percent.
If you had W-2 employees in 2020 and/or 2021, you need to look at the Employee Retention Credit (ERC). As you likely know, it’s not too late to file for the ERC. And now is a good time to get this done. You can qualify for 2020 credits of up to $5,000 per employee and 2021 credits of up to $7,000 per employee for each of the first three quarters. That’s a possibility of $26,000 per employee.
One of our clients—let’s call him John—had 10 employees during 2020 and 2021. He qualified for $260,000 of tax credits (think cash). You could be like John.
You claim and adjust the ERC using IRS Form 941-X, which you can file anytime on or before March 15, 2024, if you file your taxes as a partnership or an S corporation, or April 15, 2024, if you file on Schedule C of your Form 1040 or as a C corporation.
You have three ways to qualify for the ERC:
Significant Decline In Gross Receipts
Here, you compare the gross receipts quarter by quarter to those in 2019. To trigger any ERC under this test, you need a drop of more than 50 percent in 2020 and a drop of more than 20 percent in 2021.
Government Order That Causes More Than A Nominal Effect
Here, your best bet is to use the safe harbor for nominal effect. This requires looking at either your 2019 quarterly receipts or your 2019 quarterly hours worked by employees and seeing that the 2020 or 2021 shutdown order would have affected the 2019 figures by more than 10 percent.
Government Order That Causes Modification To Your Business
Here, you also have a safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
The ERC can help all businesses that qualify, even those businesses that did not suffer during the COVID-19 pandemic.
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Buying an Electric Vehicle? Know These Tax Law Changes
Written by Coach Janelle CPA on November 21, 2022
There’s good and bad news if you’re in the market for an electric or plug-in hybrid electric vehicle. The good news is that the newly enacted Inflation Reduction Act includes a wholly revamped tax credit for electric vehicles that starts in 2023 and continues through 2032.
The IRS noticed that average gas prices across the United States exceeded $5.00 a gallon and took action. Small businesses that qualify to use and do use the standard mileage rate can deduct 62.5 cents per business mile from July 1 through Decem...
Self-Employment Taxes for Partners and LLC Members
Written by Coach Janelle CPA on August 20, 2022
Does a member of a limited liability company (LLC) or a partner in a partnership have to pay self-employment taxes on the member’s or partner’s share of the entity’s income? Incredibly, the answer is not alw...
Here’s a question I received from one of my clients: “I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her about $12,000 this year. Do I pay her through payroll checks and file a...