Save Taxes With a Cost Segregation Study If You Own Your Office Space

by The MDTAXES Network | May 3, 2023 | 2023 May news

This year’s most interesting tax season observation has to do with a strategy available for people who own real estate that helps them save more taxes in the early years. As the price of real estate continues to increase, more business property owners are having Cost Segregation Studies completed.

According to our friends at MS Consultants (www.costsegs.com), Cost Segregation is a process approved by the IRS that accelerates the depreciation you can claim on business real estate you own.

A Cost Segregation study allows real estate owners to break down the capitalized costs of their buildings and identify those building costs that can be depreciated over much shorter periods of time than the 39 years generally assigned to non-residential real estate. Non-structural elements of buildings such as doors, cabinets, and carpeting, and even walkways and other “land improvements” can be depreciated over 5 to 15 years. It makes sense logically: your carpet isn’t going to last for 39 years, why should you depreciate its cost over that period of time?

To make Cost Seg studies even more valuable, the IRS still allows for “bonus depreciation” which provides real estate owners with the opportunity to claim substantial first-year deductions based on the cost of those assets determined to have a life of 20 years of less. If you own real estate including the office space for your practice, completing a Cost Seg study could lead to thousands of dollars in tax deferments. This, in turn, could equate to a substantial influx in available cash thanks to the associated decrease in your current-year tax liability. An engineering-based study conducted by a specialty firm such as MS Consultants provides a clear set of documentation in the case of an audit.

Let’s look at an example where you purchase a building for your practice that costs $1.5M with $500k of that cost assigned to the value of the land which isn’t depreciable. Without a Cost Seg study, you would claim depreciation of $25,641 ($1M / 39 years) annually on the non-land cost basis of $1M.

What happens if you obtain a Cost Seg study for the new building, and the analysis supports that the fixtures and other non-structural elements are worth $170k and the land improvements are worth $50k? In this example, you would write off most of the total cost of $220k ($170k + $50k) in the first year with the remainder during the following 5 to 15 years, while your annual deprecation on the remaining building cost decreases to $20k ($780k / 39 years) per year going forward.

The money the Cost Seg study puts in your pocket is the extra depreciation you would save up front multiplied by your marginal tax rate – about $80k in this example. The real value of the Cost Seg study, however, is the compounded returns you can earn on that $80k by purchasing more real estate, paying down debt, or making other investments. Remember, you do pay back the upfront depreciation claimed over the remaining 39-year life of the building by taking a smaller depreciation deduction each of the subsequent years. In this example, the depreciation deduction falls by $5,641 annually; from $25,641 without a Cost Seg study to $20k after the study.

To learn more about Cost Seg studies, please visit MS Consultants at www.costsegs.com or email Jeff Hiatt of MS Consultants at: jdh@costsegstudies.com.

I-Bond Update: Interest Rates Dip to 4.3% for the Next Six Months

by The MDTAXES Network | May 3, 2023 | 2023 May news

We first wrote about I-Bonds in an article included with our November 2021 Newsletter

I-bonds are a great place to park some extra money if you are worried about the short-term prospects for the stock market and are nervous that increasing interest rates will cause bond funds to decline in value too.

Even at an interest rate of 4.3%, purchasing these US government bonds by setting up an account at www.treasurydirect.gov can still make sense.  Here are the basics:

• Maximum purchase each calendar year: $10,000 in electronic I bonds + $5,000 in paper I bonds (which can be purchased using your federal tax overpayment if you have one)
• Can cash in after 1 year. (But if you cash before 5 years, you lose 3 months of interest.)
• Interest is compounded semi-annually.

More info about I-Bonds is available at: https://www.treasurydirect.gov/savings-bonds/i-bonds/.

IRS Warns Business Owners to be Careful of ERC Promoters

by The MDTAXES Network | May 3, 2023 | 2023 May news

From IRS News – IR-2023-49

In a further warning to people and businesses, the Internal Revenue Service added widely circulating promoter claims involving Employee Retention Credits as a new entry in the annual Dirty Dozen list of tax scams.

For the start of the annual Dirty Dozen list of tax scams, the IRS spotlighted Employee Retention Credits following blatant attempts by promoters to con ineligible people to claim the credit. Renewing several earlier alerts, the IRS highlighted schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits, also known as ERCs. These promotions can be based on inaccurate information related to eligibility for and computation of the credit.

“The aggressive marketing of these credits is deeply troubling and a major concern for the IRS,” said IRS Commissioner Danny Werfel. “Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. There are very specific guidelines around these pandemic-era credits; they are not available to just anyone. People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes.”

The IRS is stepping up enforcement action involving these ERC claims, and people considering filing for these claims – only valid during the pandemic for a limited group of businesses – should be aware they are ultimately responsible for the accuracy of the information on their tax return. The IRS Small Business/Self-Employed division has trained auditors examining these types of claims, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims for credits.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

Beware of ERC promotions

While many eligible employers claimed and have already received the ERC, some third parties continue to widely advertise their services targeting taxpayers who may not be eligible for the ERC. Unfortunately, these advertisements, along with the increased prevalence of websites touting how easy it is to qualify for the ERC, lend an air of legitimacy to abusive claims for refund.

Tax professionals have reported receiving undue pressure from clients to participate and claim the ERC, even when the tax professional believes the client is not entitled to the credit. The IRS encourages the tax professional community to continue to advise clients not to file ERC claims when the tax professional believes they do not qualify.

Third party promoters of the ERC often don’t accurately explain eligibility for and computation of the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances. For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but these third-party promoters fail to explain this limitation. In addition, some third parties do not inform employers that they cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program loan forgiveness.

Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

The IRS reminds all taxpayers that the willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties.

Properly claiming the ERC

Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:

• Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

You can read the full text of this IRS news release here.

Preferable Mortgage Terms with the Berkshire Bank Doctor Program

by The MDTAXES Network | May 3, 2023 | 2023 May news

Our friends at Berkshire Bank have launched a loan program for doctors recently with great rates!

The Doctor Loan Program is designed for healthcare professionals who are purchasing their Primary Residence. Practicing doctors must be out of residency/internship/fellowship less than 10 years. All Borrowers and Co-Borrowers must occupy the home and only one is required to be a medical or dental professional. This program requires the client to have a Berkshire Bank checking account and set up auto pay of their mortgage payment. Eligible properties include single family, condominiums, and PUDs.

TERMS:

Various terms and plans available. No PMI. Closing available 90 days before employment starts. Seller contribution allowed. Escrow waivers not allowed. Minimum FICO score of 700 to qualify. Maximum debt to income ratio 45%. 100% loan to value (LTV) up to $1,000,000. 95% LTV to $1,250,000. 90% LTV to $2,000,000. Reserve Requirements: Reserves are required and the range from 2-6 months of your monthly mortgage payment

PROFESSIONS:

• MD, DO, DDS, DMD, Resident, Fellows, DVM, DPM

STRENGTHS:

• Product Eligibility: 30 Year Fixed, 15 Year Fixed, as well as the 5/6, 7/6 and 10/6 ARM Products
• 1099 Independent Contractor for less than 12 months allowed
• Future Employment: Projected Income is acceptable for qualifying purposes when a borrower is scheduled to start a new job within 90 days of loan closing.

INTERESTED?  LEARN MORE BY CONTACTING:

Stephen J. Morrison
Senior Mortgage Loan Officer, NMLS: 697238
Berkshire Bank
1 Van De Graaff Drive, Burlington, MA 01803
Direct 781-640-6798
smorrison@berkshirebank.com

Click here to set up an appointment with Steve

Virtual Currency Tax Considerations

by The MDTAXES Network | May 3, 2023 | 2023 May news

Over the past few years, we have seen a significant increase in clients trading virtual currencies such as cryptocurrencies.

Investopedia defines virtual currencies as follows:

“A virtual currency is a digital representation of value only available in electronic form. It is stored and transacted through designated software, mobile, or computer applications. Transactions involving virtual currencies occur through secure, dedicated networks or over the Internet. They are issued by private parties or groups of developers and are mostly unregulated.  Virtual currencies are a subset of digital currencies and include other types of digital currencies such as cryptocurrencies and tokens issued by private organizations.”

Although taxpayers invest in and trade cryptocurrencies similarly to traditional securities, there are differences taxpayers need to be aware of when trading virtual currencies.

1. Investing in virtual currencies and selling the virtual currency at a later date will result in capital gain or loss treatment for taxes. If the currency is held for more than twelve months the gain or loss will be taxed as a long-term capital gain or loss, and if held twelve months or less the gain or loss will be taxed as a short-term capital gain or loss.
2. Wash sale rules (selling an investment for a loss and buying an identical security within 30 days before or after the sale date) do not apply to virtual currencies. Wash sale rules apply to stocks and securities. IRS Notice 2014-21 states that virtual currencies are treated as property for tax purposes.  Being defined as property and not as stocks or securities, virtual currencies such as crypto are not subject to wash sale rules.
3. Because virtual currencies are not considered a stock or a security, taxpayers cannot claim a capital loss due to “worthlessness” for significant declines in value of the virtual currency. Taxpayers can only claim a capital loss at the time of sale or disposition of the virtual currency.
4. Cryptocurrency received for work performed for a company is considered ordinary income and treated as wages or self-employment income. The crypto income is valued in dollars based upon the crypto’s fair market value on the date the virtual currency is received.
5. If you use your cryptocurrency to buy an item, that transaction will result in a reportable sale of your crypto.
6. Although some brokerage firms track their investors’ crypto transactions and issue a 1099-B at year end to report the transactions, such reporting is not currently required. Whether or not you receive a 1099-B, the crypto sales are still required to be reported on your tax return.  Therefore, taxpayers will need to track the purchases and sales of crypto transactions on their own in the case that they will not be receiving a 1099-B from the investment firms they are trading through.

Change to 529 College Plans Starting in 2024

by The MDTAXES Network | May 3, 2023 | 2023 May news

Beginning in 2024, excess funds held in a 529 college savings plan will be eligible to be rolled over to a Roth IRA.

For families who funded 529 college savings plans for their children and did not fully exhaust the accounts while utilizing the funds for qualified education expenses, there is a new alternative for the remaining funds.  Prior to the coming rule change, if withdrawals are made from the 529 plan that are not used for qualified education expenses, taxpayers are assessed income taxes plus a 10% penalty on the earnings portion of the distribution from the plan.  However, beginning in 2024 taxpayers will be allowed to “take a tax-free distribution in the form of a Roth Conversion” made via a trustee-to-trustee transfer for the portion of the invested funds remaining in the 529 plan.

This new law change comes with a few requirements that taxpayers need to be aware of:

• There is a $35,000 lifetime cap on the total amount of transfers.
• The beneficiary’s 529 plan must have been open for at least 15 years. (With regard to the qualifying 15-year period, it is not yet clear how the 15-year period will be determined when 529 plan funds have been rolled over from one beneficiary to another beneficiary.  Will the 15-year period begin with the original beneficiary or re-set with the second beneficiary who was the recipient of the transferred 529 plan funds?)
• 529 plan contributions (and associated earnings) made in the prior five years are not eligible to be rolled over.
• Each year the maximum allowed transfer from the 529 plan to a Roth IRA is capped at the annual Roth IRA contribution limit and subject to Roth contribution rules (such as meeting the earned income requirement and the phase-out for higher income earners).
• The transfer must be to the beneficiary’s Roth IRA and not to the parent’s Roth IRA.

With proper planning and a familiarity with these qualifying rules, this new taxpayer friendly rule will allow the accumulated earnings on unused 529 plans to continue to grow tax free for your child or other beneficiary over his or her lifetime.

New for Amended Tax Returns

by The MDTAXES Network | May 3, 2023 | 2023 May news

Federal amended tax returns filed electronically for tax years 2021 or later can now opt for direct deposit of requested refunds.  Previously, refunds for federal amended tax returns were only sent by paper checks.  The IRS estimates that this change will speed up the turnaround time for anticipated amended tax return refunds.

Quick Link to “Where’s My Refund?”

by The MDTAXES Network | May 3, 2023 | 2023 May news

For taxpayers waiting on their federal income tax refund, the IRS link below can provide an update on the status of the tax refund:  https://www.irs.gov/refunds

For taxpayers looking to get an update on the status of a federal amended tax return, the IRS link below can provide that information:  https://www.irs.gov/filing/wheres-my-amended-return