Kathleen Hargrove, Author at Whalen & Company, CPAs

Two tax benefits from one donation?

Kathleen Hargrove on September 28, 2016

It’s possible – give appreciated stock instead of cash.

If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.

More tax savings

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.

Tread carefully

Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).

And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.

Prepaid tuition vs. college savings: Which is better?

Kathleen Hargrove on September 21, 2016

Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:

Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred.
Some states offer tax incentives for contributing in the form of deductions or credits.
The plans usually offer high contribution limits, and there are no income limits for contributing.

Prepaid tuition plans

With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Savings plan

This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.

Documentation: The key to business expense deductions

Kathleen Hargrove on September 15, 2016

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records

In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.

The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.“ (TC Memo 2016-158)

Case 2: Documents destroyed

In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to ”undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.“

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared

Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

CLIENT ALERT: Ohio Pays Remaining Recession-Era Debt

Kathleen Hargrove on September 2, 2016

Earlier this week, Ohio paid the remaining $271 million owed on the state’s recession-era debt to the federal government. As a result, employers will now save hundreds of millions in tax penalties in January!

The loan was initially taken to cover benefits to jobless workers. Without sufficient reserves when the recession hit in December 2007, Ohio and many other states were forced to borrow from a federal loan fund to continue paying unemployment compensation.

Ohio businesses have been paying higher federal unemployment taxes since 2012 under a mandatory repayment system. These funds have been used to pay down the loan’s principal while the state has paid interest on the loan. The debt reached $3.4 billion at one point.

Businesses will repay the state through a one-time surcharge of about $50 per employee in 2017. That’s $76 less than the $126 per employee maximum in federal tax penalties they faced if the loan had not been repaid.

We hope this information has been helpful to you. If you think this change could affect you or you have any further questions, please contact your Whalen & Company representative.

Source: http://www.dispatch.com/content/stories/local/2016/08/30/state-pays-off-debt-will-save-businesses-from-addtional-taxes.html

Whalen & Company, CPAs Expands Staff

Kathleen Hargrove on September 2, 2016

WORTHINGTON, Ohio – Whalen & Company, CPAs recently added the following individuals to its team:

Andrea Brocksmith – Client Service Associate

As a member of Whalen’s Accounting Department, Brocksmith performs accounts payable and bookkeeping services for a specialized group of clients.

Larry Havens, CPA, CVA, CGMA – Senior Audit Consultant

Havens brings excellent technical ability and engagement management to Whalen’s Audit Department. He works closely with clients and manages a number of audits and special projects.

Adam Hooser – Client Service Associate

As a member of Whalen’s Assurance Department, Hooser performs various accounting tasks such as bank reconciliations and journal entries. He also assists with audits and reviews.

Cynthia Keith – Client Service Associate

As a member of Whalen’s Simplibooks division, Keith assists clients with their QuickBooks accounting.

Irma Wilhite, CPA, MST – Accounting and Tax Specialist

Wilhite performs various accounting and tax functions for Whalen’s Accounting Department. She works closely with a specialized group of clients and mentors and trains staff on client engagements.

Author: Kathleen Hargrove

News & Tech Tips

Two tax benefits from one donation?

Prepaid tuition vs. college savings: Which is better?

Documentation: The key to business expense deductions

CLIENT ALERT: Ohio Pays Remaining Recession-Era Debt

Whalen & Company, CPAs Expands Staff