Presentation on theme: "FI 1153 Tax Law and Financial Planning Update for the Real Estate Professional 2014 Chris Bird Chris Bird Seminars, Inc."— Presentation transcript:
FI 1153 Tax Law and Financial Planning Update for the Real Estate Professional 2014 Chris Bird Chris Bird Seminars, Inc
Meet Your Instructor Chris Bird Chris Bird Seminars, Inc. Over 30 years in the financial business IRS agent for 16 years Frequent expert speaker on accounting, financial planning, wealth building, residential property ownership, and tax strategies for real estate and financial industries CRS Certified Instructor/Certified Financial Planner Licensed Illinois Real Estate Broker-Hertz Farm Management
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First and Foremost You are not here to become accountants You are not here to become tax pros You should follow-up with your accountants if you learn something I teach you that may impact you Please tell your clients that they HAVE to take these issues up with their tax pros Hire a good taxpro-use Quicken or Quickbooks
And the Health Care Bill ramifications that Impact 2013 and later years
Affordable Care Act of 2010 changes that may impact you In 2013 and later years, additional hospital insurance tax on high income taxpayers-9/10 of 1% of earned income In 2013 and later years, additional tax on unearned income-3.8%-the big dog. Both of the above only impact taxpayers with income over certain threshholds Single>$200,000 AGI, MFJ>$250,000 AGI
Choice of Entity Proprietorship General Partnership Limited Partnership C Corporation S Corporation Limited Liability Company
Why is the S-Corporation the Entity of Choice by so Many? Example: The taxable income generated by your S-corporation business is estimated to be $100,000 for 2014 before you pay yourself. You take a $50,000 salary. Only that amount is hit with the 15.3 percent federal Social Security and Medicare tax, which amounts to $7,650. You can withdraw the remaining corporate cash flow in the form of distributions to yourself that will not be subject to SE taxes (this will be added to your personal income on which you will pay tax at your current tax bracket).
Why is the S-Corporation the Entity of Choice by so Many? If you operate the same business as an LLC or sole proprietorship (assuming one owner) where each member is subject to SE taxes, you owe SE tax on your entire $100,000 profit, for a total of $14,130 ($100,000 .9235 = $92,350 15.3%). Operating as an S- corporation could save you thousands ($14,130 — $7,650 = $6,480).
Why is the S-Corporation the Entity of Choice by so Many? Remember: You must be able to show that a $50,000 salary is reasonable. If the IRS thinks it’s too low, it may try to reclassify all or part of your purported cash distributions as disguised wages. Future tax bills look to possibly remove this tax break.
Common Red Flags for IRS Radar Making too much money Failing to report all income Taking too large charitable deductions Claiming rental losses Deducting business, meals, travel, and entertainment Deducting a HOBBY LOSS And others
IRS Dirty Dozen 2014 Identity Theft Telephone Scams Phishing Inflated Refunds Return Preparer Fraud Hiding Income Offshore And others
Tax Write-Offs for the Self-Employed
How Long to Keep Records IF… …THEN the period of limitations is: 1.You owe additional tax and situations (2), (3), and (4) below do not apply to you …3 years 2.You do not report income that you should report, and it is more than 25% of the gross income shown on the return …6 years 3.You file a fraudulent income tax return…no limit 4.You do not file a return…no limit
EXPENSES OF SELF-EMPLOYED PROFESSIONALS
Business Expenses You are allowed to deduct those business expenses which are “ordinary and necessary.” Those expenses which are helpful, needed, appropriate, customary, usual, or normal have been generally accepted as business expenses. Ask yourself: does this expense help me in the production of income? Is it needed? Is it an appropriate expense?
Advertising/Promotion Expenses Expenses paid by a self-employed individual to promote himself/herself or a property are deductible. They may include: Auto graphics Name riders Digital photography Fact sheets or property flyers
Advertising/Promotion Expenses Business cards Personal advertising Giveaways such as those used in farming, e.g. pens, pencils, calendars, potholders, etc. Literally, anything spent on advertising/promoting of the business
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Client Expense An expense category to catch a lot of money you spend on clients, like: – Having their yard cut before a showing – Home warranties you pay for – Inspections you pay for – Miscellaneous repairs you pay for and are not reimbursed – Whatever else you spend on a client, other than entertainment
Vehicle Expenses You have a choice of either deducting the actual operating costs of your car when used for business or using a flat IRS allowance based on the business mileage traveled during the year. For tax purposes, the miles you drive your car are classified in one of three categories: Personal Commuting Business
Vehicle Expenses Recordkeeping to appropriately classify the miles driven in a given tax year is the responsibility of the taxpayer.
Vehicle Expenses IRS Publication 463 – Sampling. You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.
Business vs. Personal Once we have determined how many miles we have driven in a year and how many of those miles are either commuting or personal, we know that the balance must have been business. Now we are able to select one of two methods to determine our business expense deduction on Schedule C or other business tax return.
IRS Optional Mileage Rates Commencing on January 1, 2014, the standard mileage rate is 56 cents per mile. The new number for the following year is usually announced by the IRS in December. In addition to the standard cents per mile allowance, you can deduct the business parking, tolls, AND the business percentage of the vehicle interest expense on the loan, if applicable.
Actual Costs For example: Business miles driven:18,000 Total miles driven:24,000 Business percentage:75% Examples of actual expenses are licenses, taxes, car washes, repairs, insurance, interest, oil and lube, fuel costs, depreciation etc.
Cost Recovery or Depreciation In addition to those actual expenses incurred in operating your business car, you may add to your expenses a deduction for cost recovery or depreciation. If you use your car more than 50% for business usage then you are allowed to use the MACRS (Modified Accelerated Cost Recovery System).
Automobile/SUV/Pickup Trucks $3,160 maximum if purchased used and used 100% (Automobile) $11,160 maximum if purchased BSN and used 100% (Automobile) Much larger deduction if SUV with GVWR over 6,000 pounds Even larger deduction if full-sized P/U Truck with a bed length of 6 feet or larger
Regular car or small SUV Total first year deduction in 2012/2013 is $3,160 if used, $11,160 if BSN
The SUV write-off Vehicle must have a GVWR>6,000 lbs. Cannot ever use standard mileage rate on same vehicle Deduction is HUGE if purchased in 2012 or 2013
Cadillac Escalade (and many like it) Cost $60,000 B/U 100% Bus Base $46,000 BonDep/179 $46,000 Totally written off, if purchased new in 2012/2013
Calculation of Heavy SUV Deduction Cost$60,000 Less IRC 179 Deduction (25,000) Balance$35,000 50% Bonus (New Vehicle) 17,500 Balance 17,500 Regular Depreciation (20%) $3,500 Amounts in red figures equals $46,000
In 2012/2013, if HSUV purchased used Cost$60,000 Bus Use 100% Basis$60,000 IRC 179$25,000 Basis$35,000 Reg Dep $ 7,000 Total $32,000
Cost$60,000 Business Use 100% Basis$60,000 Total=$60,000 Full Size Pick-up Truck Write-off New or Used (with bed length of at least 6 feet)
Note about the previous slides on vehicles The 100% business use calculation that I used is to keep the calculation simple. 100% business use is almost impossible to attain, and if you use it and get audited, it will be a red flag for the IRS. I personally use in the 88- 92% range each year.
Depreciation and IRC 179 Deductions Most items of equipment that are purchased by a Realtor for use in business are depreciable over a period of 5 years OR The Realtor has the choice of claiming the entire purchase price in the year of purchase under IRC 179 Which way to go? It’s a tax rate issue
Home Office A home office deduction may include real estate taxes, insurance, mortgage interest, utility costs, etc. In addition, depreciation may be included. There is a New IRS Safe harbor Home Office deduction for 2013 and later years. I will explain.
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Home Office To calculate that portion of the above mentioned expenses which would be for business, a business percentage must be determined. This is figured by dividing the area used for the home office by the total area of the home. If the rooms of the home are about the same size then the number of rooms may be used to determine a percentage.
Home Office The expenses which would be deductible under the home office rules would be shown on the appropriate lines of Schedule C. You may operate your business from your home; however, in order to deduct your expenses associated with your home office you must be able to prove that you use the home area designated as your home office exclusively for business and on a regular basis. You must meet the “substantial use” test
Travel, Meals, and Entertainment Business trip expenses while away from home are deductible. These would include: Transportation Hotel and lodging Meal costs (50%) Tips and baggage charges Taxis and or bus fares Telephone Cleaning and laundry
Travel, Meals, and Entertainment You must meet the “away from home overnight” test in order for these costs to be deductible. Lavish or extravagant or personal expenses while on vacation are not allowed. Only 50% of the cost of meals and entertainment may be deducted. Receipted bills are required if the expense is $75 or more. Reciprocal meals are not deductible. That is when taxpayers trade off buying lunch for each other.
Business Gifts Deductions for gifts to business customers and clients are limited to $25 per person. You and your spouse are treated as one person. A partnership for this rule is also considered one person. Question-when is a gift more business promotion/advertising (100% deductible) than a gift ($25 per person limitation)
Business Gifts Exceptions to the $25 limitation would be advertising items which costs less than $4, i.e. potholders, pens, pencils, etc., or incidental costs of wrapping, insuring or mailing the gift. Theater or sporting event tickets where you accompany your customer or client are entertainment, not gifts. If you do not accompany them, you may elect to treat the tickets either as gifts subject to the $25 limitation or as entertainment subject to the 50% limitation.
Communications Those expenses associated with business communications may are deductible. This would include long distance business calls from home. Phone cards, cell-phone costs (not personal portion), voice mailbox, texting charges etc., are deductible to the extent of the business usage. Business lines, 800 lines, internet access etc are included in this category.
Hiring Your Family Members Hiring your family members (spouse and children) as employees of your real estate business can provide you with significant tax benefits.
Hiring Your Family Members The wages that you pay to your children under 18 are not subject to Social Security (FICA) and Federal Unemployment Taxes. In 2014 each person, as a single taxpayer, is allowed a standard deduction of $6,200 against earned income. Therefore, you may pay up to $6,200 of tax deductible (to you) wages before your child must pay any tax on that income.
Hiring Your Family Members One of the primary benefits of hiring children is that you pay them deductible salaries instead of giving them non-deductible allowances. The employment must be a bona fide employer/employee relationship and the wages paid must be reasonable in relation to the services rendered.
Hiring Your Family Members You may further increase your tax deductions by having your child contribute the maximum amount of $5,500 to an IRA.
Hiring Your Family Members There are many business-related jobs family members can perform which you may pay for and deduct the cost thereof. For example, opening your business mail, writing checks, filling invoices, organizing client lists and customer files, cleaning your business office or business car, assisting in obtaining comparables, stuffing envelopes, etc.
The IRC 105 Medical Reimbursement Plan For those of us in the room that are paying dearly for medical insurance, the question and tax issue of getting the best deduction for these costs is of pivotal importance.
The IRC 105 Medical Reimbursement Plan The basics of the IRC 105 medical plan: This is not a government insurance plan—in fact, I wish it were. It is merely an IRS approved method of getting the biggest tax savings that you can, if you are eligible and you are willing to “jump through the hoops” in terms of paperwork.
The IRC 105 Medical Reimbursement Plan The three basic requirements for using this technique are: – 1.You must be married. Sorry singles, but I did not write this law. – 2.You must be paying your own health insurance. – 3.You must be self-employed.
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The IRC 105 Medical Reimbursement Plan In order to qualify, the self-employed individual must hire their spouse as an employee and pay wages commensurate with the work performed. By doing so, the employer spouse can be covered under the health insurance of the employee spouse and the entire amount of health insurance premiums plus out-of-pocket unreimbursed medical expenses are deductible as business expenses on the business tax return.
Retirement Plan Contributions Retirement plan contribution limits YearIRASIMPLE401(k) Deferred Contribution SEP Percent of Profit 20145,50012,00017,50052,00020/25
Retirement Plan Contributions Catch Up Provisions-The Geezer Rule – IRA or ROTH IRA $1,000 – SIMPLE$2,500 – 401(k)$5,500
Critical Retirement Planning Strategies The 401(k) series: ( called the Solo, uni K, or safe harbor 401(k)) A good way to increase retirement plan contributions on lower levels of profit (or S-corporation salaries) Must be started by end of first year; you can’t wait until the following year to set up like a SEP IRA Only problem is that if a self-employed person is not maximizing contributions to their current retirement plan, they won’t do it to the 401(k) either You can borrow from a 401(k), not a SEP IRA or IRA
The 401(k) series Solo (k) or Safe Harbor 401(k) (for 2014) Profit$50,000$80,000$220,000 Cont:$17,500$17,500$17,500 +25% 12,500 20,000 34,500* =401(k)$30,000$37,500$52,000 If 50+$35,500$43,000$57,500 vs SEP$10-12K$16-20K$52,000
Retirement Plan Contributions Roth individual / solo / safe harbor 401(k): Not subject to income limits of Roth IRA Not tax deductible, but distributions are generally tax-free 401(k) loans available
Consider Purchasing Real Estate Investment Property Interest Rates IDEAL Formula Build a Net Worth Create Mail Box Income It is a natural for Realtors CRS 204, APPS, and other useful tools Real Estate Professional Rule- 62
Health Savings Accounts Requires 2 components – A qualified high deductible health insurance plan With an established insurance company – An individual tax savings or investment account With a local bank, or in the alternative, with the insurance company To pay for routine medical expenses/and or to provide savings for the future 63
Health Savings Accounts How much can be contributed to an HSA in calendar year 2014? – Individual Coverage-$3,300 – Family Coverage-$6,550 64
529 College Savings Plans What is a 529 Plan? – It is an education savings plan operated by a state or educational institution designed to help families set aside funds for college costs – 529 Plans are usually categorized as either prepaid or savings, or some element of both – Every state now has at least one 529 plan available – www.savingforcollege.com www.savingforcollege.com 65
What is so great about 529 Plans? 1. Unsurpassed income tax breaks 2. You (the donor) stay in control of the account 3. Hands off easy way to save for college 4. Everyone is eligible to take advantage of a 529 Plan 5. Amounts donor can contribute are substantial 66
The Real Estate IRA Advantages – Income tax deferral or tax free (ROTH) – Investing in what you know – Investing in what you can control Disadvantages – Federal tax rates are not that bad right now – No tax write-offs – Complexity – Prohibited transaction 67
The Real Estate IRA Key Players, referred to as Special Asset Trustees – Equity Trust – New Direction IRA, Inc (a sponsor here) – Fiserve – Pensco – Sterling Trust – Chicago Trust Administration – Entrust