CPA Blog

AMT Tax – Most Hated Tax in New York City

AMTThe AMT, also known as the alternative minimum tax, is one of the most hated taxes in the United States and for good reason. For those individuals above a certain threshold of taxable income, or corporations, trusts, and estates, the AMT creates a higher tax burden beyond that imposed on those that fall under the threshold.

The alternative minimum tax was first originated with the thought that those individuals and corporations in the higher tax bracket were able to find and utilize large tax breaks that the middle class could not. It was decided that the AMT would ensure that those with the highest incomes would pay a minimum tax rate regardless of the tax breaks and loopholes they may have available to them.

The current AMT was enacted in 1982 and is applied to all taxable income when an individual or entity’s taxable income falls above a pre-determined level. In 2013, that level was tied to inflation, or CPI rates.

As it stands now, the alternative minimum tax rates are 26 and 28%, and to determine whether or not you are subject to regular tax rates or the AMT rates, you would be required to calculate your taxes twice. This can become problematic as the AMT does not allow the same deductions as the regular tax does, so your adjusted income levels will be different.

The bottom line is you will be required to pay the higher of the two rates. It can become quite complicated to determine if you are subject to the AMT as well as what deductions are allowed and which are not. Often, the best course of action is to contact a qualified tax accountant to walk you through the process.

The AMT is hated for good reason. It’s complicated and some would say creates a separate class of citizens that is being penalized for their financial success.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Midtown West near Central Park) and West 32nd Street (Broadway, near Empire State Building). Our firm works with all types of businesses and high net worth individuals. If you are searching for a new accountant who is focused on minimizing your taxes legally, call us at 212-631-8320 and ask for Mark.

Corporate Inversions – Why This Loophole Needs Fixing

A corporate inversion, simply put, is a method corporations use to reduce their tax responsibilities. While this loophole may present a sound tax solution for the corporation in question, it has a direct impact on tax revenue collected by the United States government, as well as on competition between companies.

Corp InversionsA corporate inversion takes place when a U.S. corporation renounces it’s citizenship by merging with a smaller company in a foreign country. This country typically has a more favorable corporate tax structure as well as tax rules that allow the U.S. corporation to reduce its tax burden.

Once the corporation merges with the foreign entity, it declares the new country as its place of residency. At that point, the United States can no longer impose or collect taxes on the corporation for future or past income. While this may be a positive situation for the company, it does has a negative effect as it reduces tax revenue for the U.S. as well as creates an atmosphere of unbalanced competition between corporations that have transacted an inversion and those that have not.

Over the last decade, corporate migration has increased to the point that now only one-tenth of total tax revenues collected come from corporations. That’s down from one-third in the 1950s. In fact, in the past ten years, a total of 47 U.S. corporations have performed corporate inversions and changed their legal residences to countries outside of the United States.

While it stands to reason that a corporation should do all it can to reduce its tax burden, and it could even argue that doing so is its fiduciary responsibility to its shareholders, this particular tax loophole is stripping tax revenues from the U.S. government at an unsustainable rate.

In addition it is also pitting the corporations that have made an inversion against the corporations that have not creating a toxic business environment which is why this is one loophole that needs to be fixed.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Garment District) and West 32nd Street (Broadway, near Empire State Building). Our firm works with all types of small businesses and high net worth individuals. If you are searching for a new accountant to minimize your tax obligations, call us at 212-631-8320 and ask for Mark.

Defined Benefit Plan – Small Businesses

Def Benefit PlanSimply put, a defined benefit plan is a pension plan that uses a formula to promise a predetermined monthly benefit to an employee at their retirement. However, the specifics that go into a defined benefit plan are less simple, and it is important for all involved to understand the ramifications of the plan before it is entered into.

The Formula for Defined Benefit Plans
Most plans use a formula that includes the employee’s earnings, years of employment, and age at retirement. As of 2014, the IRS caps this type of retirement benefit at $210,000.

The final salary plan takes into consideration the employee’s number of years worked and then multiplies that by the current salary at the time of retirement, and then finally, multiplies it by an accrual rate. The accrued amount is then available to the employee as either monthly payments or a lump sum.

Types of Defined Benefit Plans
Defined benefit plans can be either funded or unfunded. An unfunded plan means that the company does not set aside any assets to ensure benefits can be paid when the plan goes into effect. This is known as a Pay-as-you-go plan. In the United States, these plans are only allowed in the public sector.

The second type of plan is a funded plan. In this case, the employer, and sometimes the employee make contributions to the plan, so future benefit obligations can be met. These contributions are then examined by an actuary at certain intervals to ensure that the contribution level, as well as the investment of the contributions, will equal or surpass the benefit obligations.

Disadvantage and Advantages of Defined Benefit Plans
The disadvantage of the defined benefit plan is that it is less portable than other pension plans. The advantage, however, is that most plans will pay the benefit to the employee as an annuity, so there is less chance that the employee will out live their retirement benefits.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Garment District near 5th Avenue) and West 32nd Street (Broadway, near Empire State Building). Our firm works with all types of businesses and high net worth individuals. If you are searching for a new accountant, call us at 212-631-8320 and ask for Mark.

Vacation Home Rentals – Tax Rules

Vaca Home RentalsIf you have ever considered renting out your vacation home, before you do there are several tax rules you will need to keep in mind to help you stay on the right side of the IRS. Luckily, they aren’t too complex, but they will guide you in determining how you want to use your vacation home.

Number of Rental Day’s Per Year
It is important to understand that the number of days you rent your vacation home has a direct impact on how the IRS views the property. For example, if you rent your vacation home for 14 or fewer days, you will not need to report the income on your taxes.

If, however, you decide to rent your home for more than 14 days, you become a landlord, and all rental income will need to be reported. You can also deduct rental expenses, but keep in mind, the expenses will need to be allocated between when the home is used as a rental property and when the home is used for personal vacations.

Finally, if you use the home more than 10% of the number of days it is rented, or more than 14 days for personal use, it is still considered personal property, but you are allowed to take a deduction for rental expenses up to the amount of rental income received; although, losses cannot be taken as a deduction.

The Definition of Personal Use Days
What becomes most important, besides the number of days you rent the home, is the number of personal use days. Even when a family member is occupying the home, instead of yourself, the IRS considers those days personal use, regardless of whether or not the family member is paying rent. This is also true of days you donate the home to a charity auction.

The advantage to keeping your personal days to 14 days or less or 10% of the rental days is that the home is then considered a business. As such, you can deduct expenses and take up to a $25,000 loss each year you rent the property depending on your income. It’s important to know that the days you spend maintaining the property are not included in personal use days.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Midtown West in Garment District) and West 32nd Street (Broadway, near Empire State Building). Our firm works with all types of businesses and high net worth individuals. If you are searching for a new accountant, call us at 212-631-8320 and ask for Mark.

Tax Extenders for Small Business

Tax BreaksTax extenders are a group of fifty tax breaks that apply not only to small businesses but teachers and individuals as well. What you need to be concerned with are those that apply directly to small businesses. While these tax breaks are temporary in nature, they can have a serious impact on how you conduct your business for the next year.

In 2013, these tax breaks actually expired on December 31st, but the United States Congress retroactively extended the tax breaks into 2014. They typically do this at the last moment of the year, or right after the first of the new year, making it difficult for small businesses to plan ahead. These tax breaks are also only renewed for one year meaning they will have need to extend them again before the end of 2014, so they can carry over into 2015.

Currently, the tax extenders for small businesses include such items as a work opportunity tax credit of $1,375, a 15-year straight line cost recovery for qualified leasehold improvements for restaurant and retail establishments of $2,382, and bonus depreciation of $1,492.

Additional tax extenders include:

• Exclusion of 100% of gain on certain types of small business stocks
• A reduction in the S Corporation recognition period for built-in gains tax
• Qualified zone academy bonds
• An employer wage credit for activated military reservists
• A new market tax credit

While not all tax extenders are good policy for the government or businesses, some of the tax breaks do help level the playing field and provide companies a way to define actual business expenses with less effort.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Midtown West near Central Park) and West 32nd Street (Broadway, near Empire State Building).

Home Office – Tax Rules Simplified

There was a time that determining the correct deductions for your home office was complicated and could lead directly to an audit. Luckily, those days are in the past. The IRS no longer considers a home office a red flag, and they have found ways to simplify the process of taking this deduction.

Home Office 2Before 2013, business owners that worked out of their home were required to determine the actual expenses of their home office. This could include items such as utilities, insurance, and mortgage interest. The amount that could be deducted as a business expense was determined by the percentage, of the total square footage of your home, that was used for office space, but in 2013 that all changed.

For taxable years of 2013 and beyond, the IRS has introduced a simplified option. This allows business owners to multiply a prescribed rate by the square footage of the home that is being used as office space to determine the allowable deduction.

This change permits business owners to reduce the need for recordkeeping as actual expenses no longer need to be tracked.

There are two requirements that a business owner needs to meet to be eligible for the home office tax deduction. First, the area of your home that is used for your office must be used exclusively for conducting business. That means a kitchen table is not a home office, but if you have a room in your home that you use for office space exclusively, that would qualify.

Secondly, your home office must be your principal place of business. That doesn’t mean you can’t have an office elsewhere, but you need to be using your home office for meetings with clients, or some other activity that would suggest it is not simply an area that you work in from time-to-time.

If you have a home office, don’t hesitate to take the deduction you are entitled to. With the simplified option to determine your deduction, this is one time the IRS has made it too easy to pass up.

Mark Feinsot, CPA is a New York City CPA Accounting firm with offices on West 57th Street (Midtown West near 5th Avenue) and West 32nd Street (Koreatown).  Call us at 212-631-0320 if you are searching for a new accountant.