Tax Relief for Those Affected By Natural Disasters
With hurricanes, tornadoes, floods, wildfires, and other natural disasters affecting so many people throughout the US this year, many have been left wondering how they're going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is some relief for tax payers--but only if you meet certain conditions.
Recovery efforts after natural disasters can be costly. For instance, when Hurricane Irene struck last month causing widespread flooding, many homeowners were not covered because most standard insurance policies do not cover flood damage.
Tax Relief for Homeowners
Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone AND these four conditions are met:
1. The loss was caused by a sudden, unexplained, or unusual event
2. The damages were not covered by insurance
3. Your losses were sufficient to overcome reductions required by the IRS
4. You must itemize
Tax Relief for Individuals and Business Owners
The Internal Revenue Service (IRS) is also providing tax relief to individual and business taxpayers impacted by Hurricane Irene that are located in federally declared disaster zones. The measures postpone certain tax filing and payment deadlines until October 31, 2011 and includes corporations and businesses that previously obtained an extension until September 15, 2011 to file their 2010 returns. Individuals and businesses that received a similar extension have until October 17 to file their 2010 returns. Also included are estimated tax payments for the third quarter of 2011, which would normally be due September 15. Please call our office if you need help figuring out when your tax payments are due.
Tax Relief Tips
The IRS also states that you have two options when it comes to deducting casualty losses on your tax returns. You can deduct the losses in the year in which they occurred or claim them for the prior year's return. So if you were affected by Hurricane Irene this year you can claim your losses on your 2011 tax return or amend your 2010 tax return and deduct your losses. If you choose to deduct losses on your 2010 tax return, then you have one year from the date the tax return was due to file it.
Confused about whether you qualify for tax relief after a recent natural disaster? Give us a call. We'll help you figure out the best way to handle casualty losses related to Hurricane Irene and other natural disasters.
Living Trusts 101
A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Further, you can actually be the trustee of your own living trust, keeping full control over all property legally owned by the trust.
There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you're alive, rather than one that is created upon your death under the terms of your will.
All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.
Do I need a living trust?
In many cases, the whole process takes only a few weeks and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.
Is it expensive to create a living trust?
Is a trust document ever made public, like a will?
Does a trust protect property from creditors?
After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.
On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.
Do I need a trust if I'm young and healthy?
Can a living trust save taxes?
If you're wondering whether you need a living trust give us a call and we'll help you figure out the answer.
Hobby or Business? Why It Matters
Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.
Definition of a Hobby vs a Business
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.
The tax considerations are different for each activity so it's important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.
Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.
Is Your Hobby Actually a Business?
If you're not sure whether you're running a business or simply enjoying a hobby, here are some of the factors you should consider:
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby. (It should be noted that this list is not all-inclusive.)
Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.
What Are Allowable Hobby Deductions?
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.
Give us a call if you're not sure whether your hobby is actually a business and we'll help you figure it out.
Late Filing Penalties for S-Corp, Partnership Returns
Penalties for S-Corps, Partnerships, and Fiduciaries failing to file returns have been steadily rising, but starting in tax year 2010 penalties for S-Corp, Partnership, and Fiduciary filing late returns increased to $195.
The IRS states that for returns on which no tax is due, the penalty is $195 for each month or part of a month (up to 12 months) the return is late multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due. The penalty may also be charged if the return does not show all the information required.
For example, if a S-Corporation fails to file its 2010 return (including a Schedule K-1 to each shareholder) on time the penalty could be as much as $2,340 per shareholder per year ($195 per shareholder for the maximum of 12 months).
These failure-to-file penalties do not include tax that is due or penalties for tax that is due, but not paid on time. Add in the fact that the penalty isn't tax deductible on your tax returns the following year and you've got yourself a double whammy.
If the partnership or S-corporation can show that the failure to file on time was due to "reasonable cause", the IRS might provide relief. Be advised however, that if the partnership or S-corporation has established a pattern of failing to file in the past, it's unlikely that the IRS will be sympathetic.
Why take a chance? If you need assistance filing your S-Corp, Partnership, or Fiduciary return, call us today.
Advantages of Keeping Good Records
You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return less, well, taxing.
Records help you document the deductions you've claimed on your return. You'll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents - such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property - should be kept longer.
In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:
Good record-keeping throughout the year saves you time and effort at tax time. For more information on what kinds of records you should keep, call our office.
Do You Qualify for the Earned Income Tax Credit?
Millions of Americans forfeit critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for low-to-moderate-income individuals who work. Taxpayers who qualify and claim the credit could owe less federal tax, owe no tax, or even receive a refund.
The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. Additionally, you must be a US citizen, have a valid social security card, and file a tax return to claim the credit.
General requirements: If you were employed for at least part of 2011 and are at least age 25, but under age 65, and are not a dependent of anyone else you may be eligible for the EITC based on these general requirements:
Tax Year 2011 Maximum Credit
Investment income must be $3,150 or less for the year.
If you think you qualify for the EITC but aren't sure, call our office today.
College Tax Credit - It's Not Too Late!
It's not too late to take advantage of the American Opportunity Tax Credit, a credit that helps parents and college students offset the cost of college. This tax credit is part of the American Recovery and Reinvestment Act of 2009 and is available through December 31, 2012. It can be claimed by eligible taxpayers for college expenses paid until 2012.
Here are six important facts about the American Opportunity Tax Credit:
If you would like more information about the American Opportunity Tax Credit please call us. We're more than happy to help.
Classes or Types? When To Use Them in QuickBooks
QuickBooks' standard reports are critical to understanding your company's past, present, and future. But the program also offers innovative tools that can make them significantly more insightful and comprehensive.
QuickBooks offers two simple conventions that let you identify related data: classes and types. Classes are used in transactions. Types are assigned to individual customers, vendors, and jobs.
For example, you might use classes to separate transactions that relate to different departments, locations, or types of business. A construction company might want to track classes using New Construction, Remodel, and Overhead. Your customer types might help you isolate groups by characteristics like Industry or Geographical Location.
First, make sure that QuickBooks is set up to use classes. Go to Edit | Preferences | Accounting | Company Preferences. Make sure that Use class tracking is checked. If you want to be prompted for a class designation in transactions, check that box, too. QuickBooks already contains a Type field in customer, vendor, and job records.
It's easy to build lists of options for both. To define classes, go to Lists | Class List. In the bottom left corner of the screen, click on Class, then select New from the menu. You'll see this:
Tip: If your class list grows lengthy and you want to tidy it up, you can make classes that you're not currently using inactive by checking the box in this window. It will remain in your QuickBooks records and can be reactivated again.
Putting Classes to Work
Now you can use classes in transactions. Open a blank invoice and select a customer. The Class field will be next to the customer name. If the entire invoice will be assigned to the same class, click the drop-down list and select it. You can also assign separate classes to individual line items:
QuickBooks comes with two reports specially designed for tracking class-based transactions: Profit & Loss by Class and Balance Sheet by Class (both can be found in the Reports menu, under Company & Financial). Of course, you can filter other reports to include a class column. You can also create a QuickReport for individual classes. Go to Lists | Class List and select a report or graph.
Figure 3: You can filter by class in QuickBooks reports.
A Simpler Assignment
Customer, vendor, and job types are a bit less complicated. Job types are especially useful; you can track, for example, profitability and time spent on individual projects. Customer and vendor types can produce output for things like targeted mailings and reports.
Creating types is very similar to creating classes. Go to Lists | Customer & Vendor Profile Lists, and select the type you want to work with. You'll follow the same instructions here as you did for classes. Types do not appear on transactions; they're designed for your own internal use, and they're stored in records.
Asset Allocation Adjustments
Health Spending Checkup
If your plan doesn't allow unspent money to be carried over, then you may want to incur discretionary medical, dental, or optical costs prior to year-end. If you do not participate in such a plan, find out if one is available at your company. Also find out if you are eligible for a Health Savings Account.
Review Budget vs. Actuals
Estimate Your 2011 Tax Liability
Tax Due Dates for October 2011
Note: September due dates were extended into October for areas impacted by Hurricane Irene. See article "Tax Relief for Those Affected By Natural Disasters" in this newsletter.
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