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Setting up and maintaining a simplified employee pension (SEP) is probably easier than you think. The sooner you get started saving, the more secure your retirement will be, plus your business can gain tax advantages right away.
The SEP is a stripped-down retirement plan mainly intended for self-employed individuals (including sole proprietors, partners, and LLC members), as well as small corporate employers.
If you’re self-employed, you can make an annual deductible contribution of up to 20 percent of self-employment income to a SEP account. For this purpose, self-employment income generally equals the net profit shown on your Schedule C, E, or F, minus the deduction for 50 percent of self-employment tax from page one of Form 1040.
If you’re employed by an S or C corporation, the company must establish the SEP on your behalf. The corporation can then make a deductible contribution of up to 25 percent of your salary to your SEP account.
For 2014, the maximum possible contribution to any participant’s SEP account is $52,000 (up from $51,000 in 2013).
The Advantages and Disadvantages
Advantages: You can establish a SEP at just about any brokerage firm or financial institution. Simply fill out Form 5305-SEP, which takes only a few minutes. It doesn’t get any easier than this. Even better, you can establish a SEP as late as the extended due date of the federal income tax return for the year the initial deductible contribution will be made.
Here’s an example, assuming you are a sole proprietor. You extend your 2013 individual tax return as long as possible, to October 15, 2014. You have until that date to establish your 2013 SEP and make the initial contribution. You can then deduct that contribution on your 2013 return. Contributions for later years can also be deferred until the extended tax return due date.
If you run your business as a calendar-year corporation, you can extend the 2014 corporate return to as late as September 15, 2015. The corporation has until that date to establish the SEP and make the initial contribution. The company can then deduct that amount on its 2014 Form 1120. Contributions for later years can also be deferred until the extended due date for the corporate return.
If you have a large amount of self-employment income or salary, a SEP allows you to make generous annual deductible contributions to the account, as much as $52,000 for 2014 (up from $51,000 in 2013). However, you always have the flexibility to contribute less than the tax-law maximum, or nothing at all, if cash is tight in your business.
Once your SEP is up and running, there are very few administrative details to worry about.
Employees Eligible for SEP Inclusion are Those Who Have:
Reached age 21.
Worked at least three of the last five years immediately preceding the current year.
Earned at least $550 in compensation from your company in the year for which contributions are made (unchanged from 2013).
Nonresident alien employees having no U.S. source income from your firm.
Employees covered by collective bargaining, if retirement benefits were the subject of good faith bargaining.
The government doesn’t currently require any annual filings for SEPs, as it does for some other types of retirement plans.
Disadvantages: Depending on your age and income, you might be allowed to make larger annual deductible contributions to a personal retirement account with a different plan, such as a 401(k), a SIMPLE-IRA, or a defined benefit pension plan.
If your business has employees, contributions — which are fully deductible to you — are generally required for those who have worked for you during at least three of the past five years (see right-hand box for exceptions). Also, since all contributions to employee SEP accounts vest immediately, an employee can quit at any time without losing any of his or her SEP money. That’s great for the employee. But if you have more than a few trusted staff members, you may want to consider a different retirement plan option.
Another potential drawback is that borrowing from a SEP account is prohibited. In contrast, borrowing is allowed under most other types of retirement plans (with the exception of SIMPLE IRAs), assuming the plan document permits loans.
Conclusion: If you want maximum simplicity from a tax-favored retirement plan, a SEP may be the best choice. Of course, that is, assuming you don’t mind covering your employees. A SEP is your only choice if you want to make a deductible contribution for last year, even though no plan was actually in existence at the end of last year. Contact your tax adviser to learn more about SEPs or to hear about other retirement plan alternatives for your business.
Great article on Forbes today about 11 questions to ask when hiring a tax preparer and I agree on the 11 questions you should ask your tax preparer or potential tax preparer and we got your answers and we’ve added an additional question and answer.
- Do you have a valid PTIN? Yes, we do and you can check for valid PTIN on the PTIN Directory
- What is your tax background? Check out our qualifications
- Have you prepared a tax return before for my type of situation? If we have never done your type of tax return or special circumstances, we will tell you up-front that it might be an extra cost or we will need to consultant with a specialist in that area. We do have several resources and other CPA firms we can contact to help with specialized tax returns and if we can’t help you, we will refer you to someone that can.
- Do you know the requirements of the state and localities where I am required to file? We do know Federal Tax Law, California Tax Law and New Mexico Tax Law. Each state has quirky filing requirements and as part of our due diligence, we do research and learn about a specific state law or requirement before filing.
- What records and other documentation do you need from me? We send out a tax list of required documents at the beginning of each year to each of our clients, since every client is different, everyone gets a different list. However for a new client, we send a generic tax planner and then ask questions regarding the answers. We need documentation to verify income and expenses. We will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify.
- How do you determine your fees? Our fees are a flat fee based on the type of return and the complexity of your return.
- Do you review my tax return with me before its filed? Yes, we send you a copy of your tax return for review and amounts owed if any before we file your tax return
- Can you file electronically? We are required by the IRS to file electronically unless you opt out
- Who will sign your return? We do, as a paid tax preparer with a valid PTIN, we are required to sign the electronically filed return
- When will I receive a copy of my tax return? You will receive a copy of your tax return 1 week after the e-file is accepted via email. If you require a hard copy print out, just let us know.
- How do I find you if I have a question after tax season? That’s easy, just call us, we’re always here.
- What happens if I get audited? If you should happen to get audit, we can represent you before the IRS for any tax return we have preparer.
Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:
- Child support payments;
- Gifts, bequests and inheritances;
- Welfare benefits;
- Damage awards for physical injury or sickness;
- Cash rebates from a dealer or manufacturer for an item you buy; and
- Reimbursements for qualified adoption expenses.
Some income is not taxable except under certain conditions. Examples include:
Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.
All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering, such as the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.
If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.
September is often a time of transition, when people decide to make major life decisions–such as changing jobs. If you’re looking for a new job, then you may be able to claim a tax deduction for some of your job hunting expenses–as long as it’s in your same line of work.
Here are seven things you need to know about deducting these costs:
1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.
2. You can deduct employment and job placement agency fees you pay while looking for a job.
3. You can deduct the cost of preparing and mailing copies of your resume to prospective employers.
4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.
5. You can’t deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.
6. You can’t deduct job search expenses if you’re looking for a job for the first time.
7. You will usually claim job search expenses as a miscellaneous itemized deduction, but can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.
If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.
Note: The rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States. These rules are discussed separately.
To qualify for the moving expense deduction, you must satisfy three requirements.
Under the first requirement, your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.
The second requirement is the “distance test”; your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 12 miles from your former home, your new main job location must be at least 62 miles from that former home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.
The third requirement is the “time test”. If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.
Note: If you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the “distance or time tests”.
What Are “Reasonable” Expenses?
You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sight-seeing, the additional expenses for your side trips are not deductible as moving expenses.
You can deduct the cost of packing, crating and transporting your household goods and personal property, and you may be able to include the cost of storing and insuring these items while in transit. You may also deduct costs of connecting or disconnecting utilities.
Tip: You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home.
Tip: You can deduct the cost of shipping your car and your pets to your new home.
Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. Don’t hesitate to call us if you have any questions about which expenses are deductible.
Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.
Travel Expenses – How to Calculate the Deduction
If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either:
- Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense, or
- The standard mileage rate is 24 cents per mile for miles driven during 2013 (23 cents per mile in 2012).
Tip: If you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.
You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household; however, all of you do not have to travel together.
Member of Your Household
You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee, unless you can claim that person as a dependent.
If you’re still not sure whether your moving expenses are deductible, please give us a call. We’re here to help!
Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.
There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.
Known as the “Master’s exemption”, because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master’s Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.
Tip: If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation–as long as it’s two weeks or less. And, although you can’t take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.
In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a “vacation home” is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.
Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
Example: Let’s say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.
The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario 85% of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E. As for the remaining 15% of expenses, only the owner’s mortgage interest and property taxes are deductible on Schedule A.
Questions about vacation home rental income? Give us a call. We’ll help you figure it out.
AIRBNB Rental Income
Rental income is usually taxable under the Federal tax laws. But there is an exception if you rent out a home that you use as a home and the home is rented less than 15 days during the year. The exception is that rental income and rental expenses are not reported on your return at all. This allows a person to rent out his or her home for a short period of time with no tax consequences.
In addition to renting the home 14 or fewer days during the year, you must use the home for personal purposes more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental price. This is no problem if you are temporarily renting out one spare room in a home that you live in. But for second homes or vacation homes, you need to keep track of your days.
The standard mileage rates for calculating deductible costs for using a car, van, pickup or lightweight “panel” truck is 56.5 cents per mile for business travel.
For other potentially deductible driving-related expenses, the rates are 24 cents per mile for medical purposes or when moving to a new residence (following additional rules), and 14 cents per mile for driving in the service of a charitable organization.
We have reinvented the design part of the business and move it to its own company, awfedesign, separating out the logical from the abstract. Awfedesign will be offering more services and packages for design work: website design, illustrations, art designs, logos, etc. We are also adding more ways to buy domains, emails and hosting packages. Click on the link and check out our new design company.
We here at chaoticcancellation are busy getting your end of year financials in order, reconciling December statements and generally getting caught from the end of the year 2012. We hope that by mid-February, we will be able to start tax preparation and getting your tax returns done early and/or sending your financials to your CPA.
January is our time to get caught up and the Internal Revenue Service has announced that it has revised its opening date for tax season, pushing it out just eight days to January 30, 2013. Normally, the tax season opens on January 22 each year however due to tax legislation, its been pushed out. The statement on the IRS website
The IRS is currently reviewing the details of this week’s tax legislation and assessing what impact it will have on this year’s filing season. The IRS will soon make available additional information on when taxpayers can start filing 2012 tax returns.
What this means is that the IRS will begin accepting tax returns on January 30, 2013. Most taxpayers should be able to file on that date though some taxpayers will have to wait a bit for revised forms. Those include folks claiming residential energy credits, depreciation of property or general business credits.
Mid-February is when we will start processing tax returns for our clients.