By Stephen Morris, CPA
March is here and that means spring is right around the corner! Often, households use this time to throw out old items, straighten out the garage, and get things in order for the rest of the year.
But what about from a business perspective? What is an old habit from a business perspective that you can “toss”?
If you are a small business that does not keep an adequate, accurate set of books, now is the time to throw out that old habit and do it before you get too far away from the beginning of the year.
Getting your books caught up is a lot easier to do the closer you are to the beginning of the calendar year (assuming your tax year is based on the calendar year).
Keeping an accurate set of books year-round is essential to understanding the key drivers of your business, determining whether you are profitable, and making improvements. Plus, it makes tax time a lot easier!
We work with small businesses all the time who utilize us to make the migration from back-of-the-envelope accounting to a set of clean, accurate books. We can easily get you where you need to be!
If you would like to learn more about our experienced team of advisors, click here
What We’re Up To & What’s Ahead
By Stephen Morris, CPA
Here is an update on what we’ve been working on since our last newsletter:
1. Taxation – As you can imagine, we are in full ‘tax-mode’. With S-Corp and Partnership returns due March 15th, and Corporate and Individual returns due April 15, we are working diligently with our clients to get returns completed on time and maximize their tax reduction strategies.
2. Real Estate – Our real estate investment arm recently purchased a site in the coveted Los Feliz area of Los Angeles. We are currently in the permitting and planning stage to build several units on the site. What We’re Up To & What’s Ahead By Stephen Morris, CPA Page 2 MFA Spotlight
3. Human Resources – We assisted one of our clients in recruiting a new employee when a previous employee suddenly resigned. Within days, we were able to find, interview, and hire the new employee, who is excelling at the position!
What’s Ahead: Here are some upcoming projects that we will be working on in the coming months:
4. Other real estate ventures – We are actively looking for development deals in the Los Angeles area. We have strengthened our team, with daily monitoring and tracking of properties both on and off market. This allows us to put offers on properties within a day of properties going to market.
5. We have increased our social media footprint and will continue to add more content to our pages, with many helpful tips and tricks for both this tax season and beyond. Please check out our social media sites here:
Section 179 Expense
By Robert Ames, CPA
A taxpayer generally must capitalize the cost of property used in a trade or business or held to produce income and recover such cost over time through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under MACRS (modified accelerated cost recovery), which determines depreciation for different types of property based on an assigned applicable depreciation method, recovery period, and convention.
A taxpayer could elect under IRC section 179 to deduct (or “expense”) the cost of qualifying property, rather than to recover such costs through depreciation deductions, subject to limitations.
The Tax Cut Jobs Act (TCJA) increases the maximum amount a taxpayer may expense for the cost of qualifying property placed in service in the taxable year under IRC section 179 to $1,000,000, and increases the phaseout threshold amount to $2,500,000 for taxable years beginning after 2017. The $1,000,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,500,000. The $1,000,000 and $2,500,000 amounts, as well as the $25,000 sport utility vehicle limitation, are indexed for inflation for taxable years beginning after 2018. The values are $1,020,000, $2,550,000 and $25,500 respectively in 2019.
The TCJA expanded the definition of IRC section 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.
The TCJA also expanded the definition of qualified real property eligible for IRC section 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date the property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
If you made a purchase of property used in your trade or business and want to know more about a Section 179 deduction, get in touch with us!
Schedule E – Rental Property
By Robert Ames, CPA
Schedule E of Form 1040 is used generally to report real estate rental income and expense. Depreciation and amortization relating to Schedule E generally requires Form 4562, which may also involve an election to expense under Section 179.
If the real estate rental activity combines services to the point of being a hotel/motel rather than an apartment building or single rental residence, then such rental activities are reported as business income on Schedule C of Form 1040. Similarly, business rentals of equipment, cars, and other personal property are generally reported on Schedule C as business income.
In general, rental losses may be limited under the passive loss rules. However, there is an exception that applies frequently which allows actively managed rental losses to be deducted to the extent of $25,000 despite the general passive loss limitations. There is also an exception to the passive loss rules for real estate professionals. Rental income may also be subject to the 3.8% net investment income tax when rental income is basically a passive activity. (See Form 8960.)
Payments under a rental agreement which also give the tenant an option to buy are generally considered as rental income, prior to any actual exercise of an option to buy.
Security deposits are generally not income, although forfeitures of such deposits constitute income. “Security deposits used as a final payment of rent are considered advance rent. Include it in income when you receive it,” warns the IRS. (“Tips on Rental Real Estate Income, Deductions and Recordkeeping,” IRS.gov.)
Lease cancellation payments are rental income to the owner.
Services by the tenant; e.g., painting the property in lieu of some rent, translate into rental income. (“Tips on Rental Real Estate Income, Deductions and Recordkeeping,” IRS.gov.)
A common rental scenario is when a former home is converted to rental. In this situation, the basis for depreciating the realty is the lower of fair market value or adjusted basis on the date of the conversion. Any prior depreciation (which could arise, for example, in situations where the taxpayer used part of the home as a business office) would reduce the adjusted basis. Land is not depreciable, so if the taxpayer provides a lump-sum purchase price, then the tax professional will need to reasonably allocate a portion to the residence/structural and land components. This can be done by calculating the percentages based on the assessed values for real estate purposes and applying them to the total purchase price/value. Sales of similar property on or about the same date of the conversion may be helpful in estimating the fair market value.
If you have a rental property and have questions on how to account for this income (and any deductions) on your tax return, get in touch with us!