Tax Reform: Changes to Depreciation Affect Businesses

Experienced Small Business Accountant - Business taxpayers can generally depreciate tangible property except land, including buildings, machinery, vehicles, furniture and equipment.

Changes to depreciation and how they will affect businesses may include:

·         Businesses can immediately expense more under the new law; taxpayers may elect to expense the cost of any property and deduct it in the year the property is placed in service.

·         Maximum deduction increased from $500,000 to $1 million.

·         The phase-out threshold increased from $2 million to $2.5 million.

·         The new law allows taxpayers to elect to include improvements made to nonresidential property. The improvements must have been made after the date the property was first placed in service.

These improvements include:

·         Any improvement to a building’s interior

·         Roofs

·         Heating and air conditioning systems

·         Fire protection systems

·         Alarm and security systems

Improvements that do not qualify:

·         Enlargement of the building

·         Service to elevators or escalators

·         Internal structural framework of the building

These changes apply to property placed in service in taxable years beginning after December 31, 2017.

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.

Amare Berhie, Senior Accountant     

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com        

(651) 300-4777

Report foreign bank and financial accounts each April

International Taxes –In a global economy, many people in the United States have foreign financial accounts. The law requires owners of foreign financial accounts to report their accounts to the U.S Treasury Department, even if the accounts don’t generate any taxable income. Account owners need to report accounts by the April due date following the calendar year that they own a foreign financial account.

The U.S. government requires individuals to report foreign financial accounts because foreign financial institutions may not be subject to the same reporting requirements as domestic ones.

Who needs to report

Since 1970, the Bank Secrecy Act requires U.S. persons who own a foreign bank account, brokerage account, mutual fund, unit trust or other financial account to file a Report of Foreign Bank and Financial Accounts (FBAR) if they have:

1.   Financial interest in, signature authority or other authority over one or more accounts in a foreign country, and

2.   The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

A U.S. person is a citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, limited liability company, estate or trust.

A foreign country includes any area outside the United States or outside these U.S. territories and possessions:

·         Northern Mariana Islands,

·         District of Columbia,

·         American Samoa,

·         Guam,

·         Puerto Rico,

·         United States Virgin Islands,

·         Trust Territories of the Pacific Islands and

·         Indian lands, as defined in the Indian Gaming Regulatory Act.

How to report

Those required to report their foreign accounts should file the FBAR electronically using the BSA E-Filing System. The FBAR is due April 15. If April 15 falls on a Saturday, Sunday or legal holiday, the FBAR is due the next business day. Taxpayers don’t file the FBAR with individual, business, trust or estate tax returns.

Jointly-owned accounts. If two people jointly keep a foreign financial account or if several people each own a partial interest in an account, then each person has a financial interest in that account. Each person must report the entire value of the account on an FBAR.

Spouses. Spouses don’t need to file separate FBARs if they complete and sign Form 114a, Record of Authorization to Electronically File FBARs, and:

1.   All reportable financial accounts are jointly owned with the filing spouse, and

2.   The filing spouse reports the jointly-owned accounts on a timely-filed FBAR.

Otherwise, both spouses must file separate FBARs, and each spouse must report the entire value of the jointly-owned accounts.

The e-filing system will not allow both spouses’ signatures on the same electronic form. Spouses need to complete Form 114a to designate which one will file the FBAR. The Form 114a is not submitted with the FBAR, it should be kept with other financial and tax records.

Children. Generally, a child is responsible for filing their own FBAR. If a child can’t file their own FBAR for any reason, such as age, the child's parent or guardian must file it for them. If the child can’t sign their FBAR, a parent or guardian must sign it.

Accounts not reported on FBAR

Individuals don’t report individual retirement accounts and tax-qualified retirement plans described in Internal Revenue Code Sections 401(a), 403(a) or 403(b) on the FBAR. The FBAR instructions list other exceptions.

How to figure the greatest account value of foreign financial accounts

Those filing the FBAR need to reasonably figure and report the greatest value of currency or non-monetary assets in their accounts during the calendar year. They may rely on their periodic account statements if the statements fairly show the greatest account value during the year.

Filers figure the greatest value in the currency of the account, then they convert that value into U.S. dollars using the exchange rate on the last day of the calendar year. They may use another valid exchange rate and give the source of the rate if there’s no Treasury Financial Management Service rate available. For example, someone would typically value an account located in Japan in yen. They would figure the greatest value of the account in yen and then convert it into U.S. dollars.

The IRS FBAR Reference Guide has other examples of how to report account value. The Financial Crimes Enforcement Network (FinCEN) website has steps for Reporting Maximum Account Value.

Comparison of Form 8938 and FBAR requirements

Certain U.S. taxpayers file Form 8938, Statement of Specified Foreign Financial Assets, as part of their tax return, but these accounts often need to be reported on the FBAR, too. Unlike the FBAR, taxpayers file Form 8938 with their income tax returns.

Filing Form 8938 doesn’t relieve taxpayers of the separate requirement to file the FBAR. Depending on a taxpayer’s situation, they may need to file Form 8938 or the FBAR or both forms, and they may need to report certain foreign accounts on both forms. Taxpayers can find a comparison of Form 8938 and FBAR requirements on IRS.gov.

Extended due date for filing the FBAR

Those who didn’t meet the April 15 due date must file by Oct. 15, the automatically extended due date for the FBAR. They don’t need to request the extension. If they don’t have all their information to file by the extended due date, they should file as complete a return as possible and amend the report when they have more information.

Amending an FBAR

Those who used the BSA E-Filing system to file their original FBAR but later need to change it, must complete a new FBAR and check the “Amend” box in Item 1. They’ll need to give their Prior Report BSA Identifier. Filers receive this identifier by email or secure message from the BSA E-Filing System when they file. For those who don’t know their identifier, they should enter 00000000000000 in the Prior Report BSA Identifier field.

Filing late FBARs

If a person learns that they should have filed an FBAR for a previous year, they should electronically file the late FBAR as soon as possible. The BSA E-Filing System allows them to enter the calendar year they’re reporting, including past years. It also offers them an option to explain the reason for the late filing or show if it’s part of an IRS compliance program.

Penalties for failure to file an FBAR

Individuals who don’t file an FBAR when required may be subject to civil and criminal penalties. The largest civil penalty for a willful violation of the FBAR requirements is the greater of $124,588 or 50 percent of the balance in the account at the time of the violation. Non-willful violations can result in a penalty as high as $12,459 for each violation. Criminal violations of FBAR rules can result in a fine and/or five years in prison. The government adjusts the penalty amounts annually for inflation. The penalties section of the IRS FBAR Reference Guide has more details about penalties.

The IRS will not penalize those individuals who properly report foreign financial account on a late-filed FBAR, and the IRS finds they have reasonable cause for late filing.

Recordkeeping

Generally, individuals filing an FBAR should keep records of accounts that need reporting for five years from the due date of the report. They should keep the:

·         Name on each account,

·         Account number or other designation,

·         Name and address of the foreign bank or other person who keeps the account,

·         Type of account, and

·         Greatest value of each account during the reporting period.

They should also keep copies of their filed FBARs. However, officers or employees who file an FBAR to report control over an employer’s foreign financial account don’t need to personally keep records on their employer’s accounts.

FBAR help

For help completing the FBAR, call 651-300-4777. Taxpayers can also email questions to abatax81@gmail.com. If you would like to discuss how these affects your particular situation, and any planning moves you should consider in light of them, please give me a call.

Amare Berhie, Senior Accountant  

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com     

(651) 300-4777

New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act

Experienced Small Business Accountant - The Tax Cuts and Jobs Act, signed Dec. 22, 2017, changed some laws regarding depreciation deductions.

Businesses can immediately expense more under the new law

A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

The new law also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

·         Qualified improvement property, which means any improvement to a building’s interior. Improvements do not qualify if they are attributable to:

o   the enlargement of the building,

o   any elevator or escalator or

o   the internal structural framework of the building.

·         Roofs, HVAC, fire protection systems, alarm systems and security systems.

These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.

Temporary 100 percent expensing for certain business assets (first-year bonus depreciation)

The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent. Special rules apply for longer production period property and certain aircraft.

The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply:

·         The taxpayer didn’t use the property at any time before acquiring it.

·         The taxpayer didn’t acquire the property from a related party.

·         The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.

·         The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.

·         The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.

Also, the cost of the used qualified property eligible for bonus depreciation doesn’t include any carryover basis of the property, for example in a like-kind exchange or involuntary conversion.

The new law added qualified film, television and live theatrical productions as types of qualified property that are eligible for 100 percent bonus depreciation. This provision applies to property acquired and placed in service after Sept. 27, 2017.

Under the new law, certain types of property are not eligible for bonus depreciation. One such exclusion from qualified property is for property primarily used in the trade or business of the furnishing or sale of:

·         Electrical energy, water or sewage disposal services,

·         Gas or steam through a local distribution system or

·         Transportation of gas or steam by pipeline.

This exclusion applies if the rates for the furnishing or sale have to be approved by a federal, state or local government agency, a public service or public utility commission, or an electric cooperative.

The new law also adds an exclusion for any property used in a trade or business that has floor-plan financing. Floor-plan financing is secured by motor vehicle inventory that a business sells or leases to retail customers.

Changes to depreciation limitations on luxury automobiles and personal use property

The new law changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

·         $10,000 for the first year,

·         $16,000 for the second year,

·         $9,600 for the third year, and

·         $5,760 for each later taxable year in the recovery period.

If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction is:

·         $18,000 for the first year,

·         $16,000 for the second year,

·         $9,600 for the third year, and

·         $5,760 for each later taxable year in the recovery period.

The new law also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after Dec. 31, 2017.

Changes to treatment of certain farm property

The new law shortens the recovery period for machinery and equipment used in a farming business from seven to five years. This excludes grain bins, cotton ginning assets, fences or other land improvements. The original use of the property must occur after Dec. 31, 2017. This recovery period is effective for property placed in service after Dec. 31, 2017.

Also, property used in a farming business and placed in service after Dec. 31, 2017, is not required to use the 150 percent declining balance method. However, if the property is 15-year or 20-year property, the taxpayer should continue to use the 150 percent declining balance method.

Applicable recovery period for real property

The new law keeps the general recovery periods of 39 years for nonresidential real property and 27.5 years for residential rental property. But, the new law changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period under the new law.

These changes affect property placed in service after Dec. 31, 2017.

Under the new law, a real property trade or business electing out of the interest deduction limit must use the alternative depreciation system to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property. This change applies to taxable years beginning after Dec. 31, 2017.

Use of alternative depreciation system for farming businesses

Farming businesses that elect out of the interest deduction limit must use the alternative depreciation system to depreciate any property with a recovery period of 10 years or more, such as single purpose agricultural or horticultural structures, trees or vines bearing fruit or nuts, farm buildings and certain land improvements. This provision applies to taxable years beginning after Dec. 31, 2017.

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.

Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com   

(651) 300-4777

Who qualifies as a dependent?

Experienced Small Business Accountant - The IRS rules for qualifying dependents cover just about every conceivable situation, from housekeepers to emancipated offspring.

Fortunately, most of us live simpler lives. The basic rules will cover almost everyone. Here’s how it all breaks down.

There are two types of dependents, each subject to different rules:

• A qualifying child
• A qualifying relative

For both types of dependents, you’ll need to answer the following questions to determine if you can claim them.

• Are they a citizen or resident? The person must be a U.S. citizen, a U.S. national, a U.S. resident, or a resident of Canada or Mexico. Many people wonder if they can claim a foreign-exchange student who temporarily lives with them. The answer is maybe, but only if they meet this requirement.
• Are you the only person claiming them as a dependent? You can’t claim someone who takes a personal exemption for himself or claims another dependent on his own tax form.
• Are they filing a joint return? You cannot claim someone who is married and files a joint tax return. Say you support your married teenaged son: If he files a joint return with his spouse, you can’t claim him as a dependent.

Qualifying child

In addition to the qualifications above, to claim an exemption for your child, you must be able to answer "yes" to all the following questions.

• Are they related to you? The child can be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or an offspring of any of them.
• Do they meet the age requirement? Your child must be under age 19 or, if a full-time student, under age 24. There is no age limit if your child is permanently and totally disabled.
• Do they live with you? Your child must live with you for more than half the year, but several exceptions apply.
• Do you financially support them? Your child may have a job, but that job cannot provide more than half of her support.
• Are you the only person claiming them? This requirement commonly applies to children of divorced parents. Here you must use the “tie breaker rules,” which are found in IRS Publication 501. These rules establish income, parentage and residency requirements for claiming a child.

Qualifying relative

Many people provide support to their aging parents. But just because you mail your 78-year-old mother a check every once in a while, doesn’t mean you can claim her as a dependent. Here is a checklist for determining whether your mom (or other relative) qualifies.

• Do they live with you? Your relative must live at your residence all year or be on the list of “relatives who do not live with you” in Publication 501. About 30 types of relatives are on this list.
• Do they make less than $4,050 in 2017? Your relative cannot have a gross income of more than $4,050 in 2017 and be claimed by you as a dependent.
• Do you financially support them? You must provide more than half of your relative’s total support each year.
• Are you the only person claiming them? This means you can’t claim the same person twice, once as a qualifying relative and again as a qualifying child. It also means you can’t claim a relative—say a cousin—if someone else, such as his parents, also claim him.

Frequently asked questions

• Can I claim my child as a dependent if she has a part-time job?
  Yes, if you provide more than half of the child’s support and meet other criteria.
• My son will be filing a tax return for his summer job. Can he take the personal exemption if I claim him as a dependent?
  No. If you claim an exemption for him on your return, he will not be able to take a personal exemption.
• I support my 67-year-old sister-in-law. Is she qualified to be counted as a dependent on my tax return?
  Yes, because sisters-in-law meet the relationship requirement and there is no age limit for qualifying relatives.

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.

Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com   

(651) 300-4777

Is home mortgage and home equity loan interest still deductible under the new law?

Experienced Small Business Accountant -  Under the pre-Act rules, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home, i.e., acquisition debt. For a married taxpayer filing separately, the limit was $500,000. You could also deduct interest on home equity debt, i.e., other debt secured by the qualifying homes. Qualifying home equity debt was limited to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer's equity in the home or homes (the excess of the value of the home over the acquisition debt). The funds obtained via a home equity loan did not have to be used to acquire or improve the homes. So you could use home equity debt to pay for education, travel, health care, etc.

Under the Act, starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). However, for acquisition debt incurred before Dec. 15, 2017, the higher pre-Act limit applies. The higher pre-Act limit also applies to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. This means you can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt in the future and not be subject to the reduced limitation.

And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take this factor into consideration. And if you currently have outstanding home equity debt, be prepared to lose the interest deduction for it, starting in 2018. (You will still be able to deduct it on your 2017 tax return, filed in 2018.)

Lastly, both of these changes last for eight years, through 2025. In 2026, the pre-Act rules are scheduled to come back into effect. So beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.

Amare Berhie, Senior Accountant     

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com        

(651) 300-4777