Transcript American Tax Relief Act of 2012

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.
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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
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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 Scorporation 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
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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
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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…
1. You owe additional tax and situations
(2), (3), and (4) below do not apply to
you
2. You do not report income that you
should report, and it is more than 25%
of the gross income shown on the
return
…THEN the
period of
limitations is:
…3 years
…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:
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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:
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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.
F.
Vehicle Expenses
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
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Cost
Less IRC 179 Deduction
Balance
50% Bonus (New Vehicle)
Balance
Regular Depreciation (20%)
Amounts in red figures equals
$60,000
(25,000)
$35,000
17,500
17,500
$3,500
$46,000
• In 2012/2013, if HSUV purchased used
Cost
Bus Use
Basis
IRC 179
Basis
Reg Dep
Total
$60,000
100%
$60,000
$25,000
$35,000
$ 7,000
$32,000
Full Size Pick-up Truck Write-off New or
Used
(with bed length of at least 6 feet)
Cost
Business Use
Basis
Total =
$60,000
100%
$60,000
$60,000
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 8892% 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:
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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
Year
IRA
SIMPLE
401(k)
Deferred
Contribution
SEP
2014
5,500
12,000
17,500
52,000
Percent of
Profit
20/25
Retirement Plan Contributions
• Catch Up Provisions-The Geezer Rule
– IRA or ROTH IRA
– SIMPLE
– 401(k)
$1,000
$2,500
$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
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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
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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 Rule62
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
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Health Savings Accounts
• How much can be contributed to an HSA in calendar
year 2014?
– Individual Coverage-$3,300
– Family Coverage-$6,550
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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
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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
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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
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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
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