Author Archives: c12734001

Business or Hobby

If you derive income from any activity where you are not an employee, from occasional dog sitting to playing guitar for tips at your local coffee shop, then the IRS requires you to classify the activity as either a hobby or a business on your tax returns. Importantly, this decision must be based on IRS rules governing what constitutes a business, not on how you personally view the activity. If you are unsure how those rules apply to you, a qualified tax advisor can help.

 

If your project is reported as a business, you may be able to deduct almost all expenses related to the project, even if those expenses result in a net loss some years. However, your net business income (profit) will be subject to self-employment tax. Meanwhile, hobby income is exempt from self-employment tax, but the Tax Cuts and Jobs Act (TCJA) eliminated most deductions for hobby-related expenses. Generally, if an endeavor involves very little expense and accounts for a small percentage of your annual income, it is probably best to report it as a hobby. In many other cases, you may be surprised to learn that you can, or even must, call your favorite hobby a business—and that doing so has significant tax advantages. This is because business expenses are fully deductible but expenses related to your hobby are only deductible up to the amount of income you earned on the hobby.

 

IRS guidelines say that “The feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit.”  IRS says to consider the following nine activities to determine whether an activity is a hobby or a business.

1) Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.

2) Whether the time and effort you put into the activity indicate you intend to make it profitable.

3) Whether you depend on income from the activity for your livelihood.

4) Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).

5) Whether you change your methods of operation in an attempt to improve profitability.

6) Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.

7) Whether you were successful in making a profit in similar activities in the past.

8) Whether the activity makes a profit in some years and how much profit it makes.

9) Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

(note: These 9 steps are from:  https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses)

 

The rule of thumb is your business can be considered a business rather than a hobby if you make a profit for at least 3 out of every 5 years of operation. If the profit was just a few dollars that would be good enough for the IRS to call it a business.

 

 

Tips to consider on Estimated Tax Payments

The IRS states that federal taxes must be paid on a “pay as you go” basis, not just at the end of the tax year. This means that if you receive significant income that is not subject to withholding, it is likely necessary for you to make estimated tax payments throughout the year. In addition to those who officially classify themselves as self-employed, many people who participate in the “gig” and/or “sharing” economy must also make these payments.

 

For example, if you drive for a rideshare service, rent out a spare room to travelers, or work for a few hours a week as a freelance dog walker, your income from those activities may be taxable. Because you don’t have an employer who withholds tax from paychecks, you must essentially handle the withholding yourself by making an estimated tax payment each quarter.

 

However, if you receive both employee income subject to withholding and additional, “side gig” income, you may be able to avoid making estimated tax payments by increasing the amount withheld from your regular paychecks. A qualified tax advisor can help you determine how much tax you are likely to owe, and whether it is more advantageous to adjust your withholding or make estimated payments.  A qualified tax advisor may also be able to give you steps you can do to significantly reduce the amount of income tax you pay. I regularly find steps taxpayers can take to reduce their taxable income. However, these steps usually need to be worked during the tax year rather at the last minute. The sooner you do tax planning to learn the most effective tax reduction strategies for your situation the better results and higher the return on the investment to learn the steps you should be working now.

 

Estimated tax payments are due to the IRS quarterly.  The two remaining estimated payment due dates for 2019 are:

1) September 16, 2019

2) January 15, 2020

 

Any missed quarterly payments will result in penalties and interest. The interest rate for underpayments by individual taxpayers for the 2019 tax year is 6 percent.

Actual Vehicle Expense Deduction vs Standard Mileage Deduction

If you use your car, van or truck for business purposes, you may be able to claim a vehicle expense deduction on your tax return. You may either use the standard mileage rate or report the actual expenses associated with business uses of the vehicle. Actual expenses include gas, repairs, insurance and depreciation. Each expense must be prorated based on how much you use the vehicle for business rather than personal purposes, so extensive record keeping is required.

Claiming the standard mileage rate, on the other hand, requires only tracking the number of miles you drive for business purposes throughout the year. Simply multiply your yearly mileage total by the standard rate, which will be 58 cents per mile for 2019.

As a broad rule, the standard rate may yield a larger deduction for fuel-efficient and older vehicles, whereas deducting actual expenses may be advantageous for many newer vehicles. However, in order to be able to choose the method that gives you the largest possible deduction each year, you must use the standard rate for the first year that the vehicle is used for business.

IRS Private Debt Collectors

The IRS began a program a few years ago where they assign certain cases of overdue tax debts to private debt collectors. If this happens to you the IRS will give you (and your tax representative) written notice that your account is being transferred to the private collection agencies.

Watch out for scam phone calls from those who pretend to claim to collect for the IRS.

There are currently only four contractors authorized for collection which are listed below

  • CBE
    P.O. Box 2217
    Waterloo, IA 50704
    1-800-910-5837

 

  • ConServe
    P.O. Box 307
    Fairport, NY 14450-0307
    1-844-853-4875

 

  • Performant
    P.O. Box 9045
    Pleasanton CA 94566-9045
    1-844-807-9367

 

  • Pioneer
    PO Box 500
    Horseheads, NY 14845
    1-800-448-3531

Do not pay the private collection agency directly.

It says on the IRS website: “Private collection agencies will not ask for payment on a prepaid debit, iTunes or gift card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.“

 

IRS will not assign accounts to private collection agencies involving taxpayers who are:

  • Deceased
  • Under the age of 18
  • In designated combat zones
  • Victims of tax-related identity theft
  • Currently under examination, litigation, criminal investigation or levy
  • Subject to pending or active offers in compromise
  • Subject to an installment agreement
  • Subject to a right of appeal
  • Classified as innocent spouse cases
  • In presidentially declared disaster areas and requesting relief from collection

20% Qualified Business Income Deduction

The 2017 Tax Cuts and Jobs Act (TCJA) created a 20% federal tax deduction for many self-employed taxpayers and small business owners (i.e., not wage earners but those with business income).  This is called the Qualified Business Income (QBI) deduction which applies to income derived from “pass-through entities”—businesses whose earnings are reported on individual owners’ tax returns rather than corporate returns. If you are a sole proprietor, partner, LLC owner, or shareholder in an S corporation, you may be eligible to claim the deduction.

 

The IRS defines QBI as “the net amount of income, gain, deduction and loss from any qualified trade or business including income from partnerships, S corporations, and certain trusts.” QBI is reduced for typical deductions for a business (self- employment tax, self-employment health insurance, deductions for retirement plans, etc..). QBI does NOT include capital gains or losses or dividends. Rental real estate enterprises are treated as a trade or business for QBI deduction purposes.

 

If you qualify, you may be able to deduct a portion of your business earnings from your adjusted gross income (AGI) on your tax forms. Because the QBI deduction reduces your taxable income, it may result in significant tax savings.

 

If your income is less than $315,00 (MFJ) or $157,500 (all other taxpayers) then you may be eligible for the full 20% tax deduction on your qualified business income. The deduction is still available for incomes above that but gradually reduce with income and phase out completely at QBI over $415,000 (MJF) and $207,500 (all other taxpayers). The 20% QBI deduction is available whether you itemize deductions on Schedule A or take the standard deduction.

 

At the high-income levels above the thresholds the nature of the business matters. If your business is NOT one of the following fields you may still be eligible for the deduction even above the high-income thresholds: health, law, accounting, actuarial science performing arts, consulting, athletics, financial services, investing and investment management, trading.

 

This is a great tax savings for those who are start/operate a small business this year. There are many other tax incentives for small business owners. If you an employee/wage earner now is a good time from a tax reduction point of view to consider a side small business to see if it works for you.

Tax Deduction for Student Loan Interest

If you have student loans, you may be able to deduct up to $2,500 per year in loan interest on your federal tax forms. Because this deduction is classified as an adjustment to your gross income, you do NOT have to itemize deductions in order to claim it.

For any loan on which you paid $600 or more in interest during the year, you should receive a Form 1098-E from the loan issuer to help you prepare your federal return.

The student loan interest deduction is phased out for individual taxpayers with a modified adjusted gross income above $65,000 (or $135,000 for joint filers). Additional IRS rules may affect whether your loans qualify for the deduction.

Home Energy Tax Credits

If you purchased alternative energy equipment for your home in 2018 or plan to purchase it for 2019, you may be eligible for a tax credit of up to 30% of the cost of materials and installation. The equipment that qualifies for the “residential renewable energy tax credit” includes:

  • Solar panels (i.e., photovoltaics)
  • Solar-powered water heaters for the home. (solar heaters used for hot tubs or swimming pools do not qualify for the tax credit)
  • Wind turbines that generate up to 100 kilowatts of electricity.
  • Geothermal heat pumps that meet federal Energy Star guidelines.
  • Fuel cells that rely on a renewable resource (usually hydrogen) that generates at least 0.5kilowatts of power.

Any of the above must be used to provide power for you home to qualify for the tax credit. If you ended up owing no tax for 2018, you may be able to carry any surplus energy tax credit over to future years. You claim the energy credits by filing form 5695 with your tax return.

Under current laws (which change regularly), credits for home renewable energy equipment will be reduced and phased out as follows:

2018: tax credit = 30% the cost of the system

2019: tax credit = 30% the cost of the system

2020: tax credit = 26% the cost of the system

2021: tax credit = 22% the cos of the system

2022: tax credit = 10% the cost of the system

 

If you decide to take advantage of this tax credit I recommend you get multiple quotes from contractors, compare the equipment options to makes sure it is apples to apples. I also recommend you stay from or be very cautious about deals that are no money down. They are just loans in advance that you pay over a long period of time. The contracts will not allow you to return the equipment if you sell your home (you have to pay it off or require the home buyer to continue with it).  I do not recommend you borrow to get a tax credit. I don’t think the benefit is worth the downside of borrowing money.

 

I continue to be very interested in these for my own home but am still very cautious. Many years ago I used to have a geothermal system that ran off well water and had well repair costs caused by the return system. At the time the technology was relatively new and I could only find a few companies that could maintain the system, so I went back to traditional systems when it came time to replace the 2 in my house. Today there are more companies that service them (competition brings down rates) and the closed loop geothermal systems I think are more energy efficient. However, you need to stay in your home for a lot of years to save enough to justify the extra cost. When I looked at the solar panels a while ago for my home I did not see a big enough savings to justify the cost. I also noticed that the solar systems are least efficient in the winter (due to less sun exposure) when my power expenses were the highest and were most efficient during the times of year when my power expenses were not as high. So they did not save me as much money as I thought was needed to justify the expense. The tax credits are very nice but you need to balance that savings with the additional cost, the time you plan to stay in your home and savings per year from the equipment cost. If you find it is advantageous for your situation then the sooner you do it the more you will benefit from the tax credit  which is being reduced in future years.   

April 1 to May 31 Quarterly Estimated Tax Payments are Due June 17

Quarterly estimated tax payments for the April 1 – May 31 quarter of the year are due to the IRS on June 15th.  However, because the due date this year falls on a Saturday the payment will be considered on time if you make it on the next day that’s not a Saturday, Sunday, or legal holiday which is Monday June 17.  This is a reminder that this means they are due tomorrow !!!!

For payments made using IRS Direct Pay, you can make payments until 8PM EST, and for payments using a credit or debit card, payments can be made up to midnight on the due date.

Tax Filing Deadline for Overseas filers is June 17, 2019

Gentle reminder that  If you are a U.S Citizen living abroad or a Green Card Holder living abroad or in active military service and have not filed your taxes yet, the deadline is coming up on June 17th, 2019.

The extension is for the date to file, not to pay. Any interest on the taxes owed will be calculated from the regular due date of the return, April 15th, 2019.

Tax Tip for Education

A big tax benefit of the 2017 Tax Cuts and Jobs Act (TCJA) was to expanded eligibility for 529 savings plans. The 529 education savings plan was previously limited to only post-secondary education (i.e., college). However, the TCJA expanded it so that it can now be used for Kindergarten through Grade 12 education (public, private, or religious schools).

 

529 tax free investment growth: If you put money in a 529 account for education, the withdrawal of earnings are federal tax-free if used for qualified educational expenses. Qualified educational expenses include tuition, fees, housing, meals and books. Many states offer a full or partial tax deduction for 529 plan contributions.

 

529 State Income tax benefits: 30 states offer a state income tax credit or deduction. The amount varies by state. For example, in New York you can deduct from your computed state income up to $10,000 per year (married filing joint, $5,000 per year individual). The full amount you can contribute will grow tax free but only up to $10,000 per year can be deducted for state income tax calculations. In Maryland you can deduct up to $2,500 of contributions per beneficiary ($5,000 for 2 beneficiaries, $7,500 for 3 beneficiaries, and so on).

 

529 Max contribution limits: in 2019 a contribution for child’s future education is considered a gift for tax purposes. You can contribute up to $15,00 per individual. You can contribute $15,000 and your spouse can contribute up to $15,000 to that same individual.

 

Here is an IRS link and a state of Md link where you can read more about it.

https://www.irs.gov/newsroom/529-plans-questions-and-answers

https://maryland529.com/college-savings-plans-of-maryland/maryland-college-investment-plan

More and more college students are graduating with significant college debt. Start saving now to avoid that snare and start investigating ways to do college debt free. Below is a link that will start with you some good ideas on how to do college deft free:

https://www.daveramsey.com/blog/pay-for-college-without-student-loans