This post by Chuck McCumber
Tax Tips from Tim Nelson, CPA.
I sat with Tim Nelson today (of Evans Nelson and Company CPAs) and discussed
many of the recent changes of both federal and state taxes that directly affect
individuals and business owners. We covered a number of topics, and thus this
article will likely jump around – much like our conversation.
Consumer Energy Tax Credits (http://www.energy.gov/taxbreaks.htm)
The Consumer Energy Tax Credits (many of which were up to 30% of the purchase
cost of energy efficient products and renewable energy systems) expired at the end
of 2010 and while new credits were passed, they were at lower levels (10 %).
Overhaul of the Tax Code
The Taxpayer Advocate Service (an independent organization within the IRS)
is calling for a major overhaul of the tax code, a task which is being debated by
legislators. The last time this happened was in 1986 (and resulted in the current tax
system we are using). That overhaul took approximately 2 years to complete, and
any current tax code overhaul would likely take at least that long.
There have been recent talks about levying a tax on services at the state level. The
state revenue increase would be enough to lower the tax on goods. However, many
of the professional service lobbies oppose such a tax on services and thus Tim
considers it unlikely that such a proposal will get out of committee.
Equipment and Start Up Expenses:
Section 179 of the Tax Code allows you to elect to expense certain business
equipment all within the first year. However a business’ ability to do so is contingent
upon their profitability – you can’t expense if you’re not profitable.
However, the Economic Stimulus act of 2008 added a 50 percent depreciation
allowance for qualifying purchases which is not contingent upon profitability. In
fact there is a 100 percent allowance for certain types of furniture, equipment,
The total amount of start-up costs that can be expensed has been increased. These
costs included the cost of professional services, including attorneys, accountants,
Secretary of State costs, business licenses, and tangible items like business supplies,
stationary, and business cards.
Estate Taxes and Gift Tax exclusion
Estate taxes have gone through some major fluctuations over the last three tax
years. In 2009, there was an exemption of 3.5M after which a 45% tax was levied on
the rest of the estate.
In 2010 the estate tax had been allowed to sunset and congress, dealing with
healthcare, did not reinstate the tax. Thus there was the option of either the in-line
$5M exemption with a 35% estate tax rate, or a $0 exemption with a 0% tax rate.
For 2011, the exemption is back to $5M with a 35% tax rate.
Tim highlighted the fact that the recession has creates some great gift tax planning
opportunities. With values being depressed, and with the gift tax exclusion
increasing, many people now have the opportunity to transfer assets either directly
to downstream heirs or indirectly into irrevocable trusts.
Further, one can gift property (especially real estate) at a much lower value and
have it appreciate on the recipient’s end.
Small Business Health Care Tax Credit (http://www.irs.gov/newsroom/article/0,,id=220839,00.html)
The federal government is encouraging small businesses to provide health
insurance for their employees. Small business employers who are paying their
employees an average of $50k or less per year can get a credit (up to 35% of the
premiums paid) for providing health insurance for their employees.
Additionally, businesses are being encouraged to hire – if a business hires for a
new job (or an under very certain conditions hires for an existing position) they
can receive a credit for the payroll taxes for the employee for a period of time, and
if they are still employed a year later they receive another $1k for each additional
person on the payroll.
No More Golf Carts
Tim laughingly lamented the end of the Golf Cart Credit which was a tax credit based
on the purchase of electric cars. However, the criteria for the eligible vehicle were
such that golf cart companies soon realized those who purchase their golf carts
could legitimately claim tax credits. Some of the credits, when calculated, would
equal the cost of the golf cart.
Not surprisingly, that tax incentive was not continued in 2011.
Home Office Deductions (http://www.irs.gov/businesses/small/article/0,,id=204169,00.html)
One place where many individuals make mistakes is in the use of home offices. For
employees, the use of home as a place of work must be for the convenience of the
employer (there must be a statement in writing to that effect). Additionally, for
employees and business owners alike, the space itself must be used exclusively for
work. Tim has battled with IRS agents before over the exclusion of specific areas
of a home office because of the existence of personal items within those areas (like
family photos, etc). Thus it’s important that one fully understands the rules of home
office deductions before attempting to deduct expenses for the business use of one’s
General expense deductions
In general, Tim sees the most mistakes when it comes to documenting the expenses
within a business, especially for car mileage and business trips. Expenses must be
ordinary, necessary, and reasonable.
Business in a down economy
While Tim and I agreed that it’s hard out there for businesses, he sees the silver
lining. “It’s also one of the best times,” said Tim, “because when the economy is
down it stirs people to be more creative, entrepreneurial.” Tim has seen a huge
uptick in the number of new businesses approaching him for accounting assistance.
Evans Nelson and Company CPAs is located at 50 Continental Drive, Reno, NV
89509. Tim Nelson can be reached at 775-825-6008 and found at his website