Category Archives: Tax

Taxes and Cost Segregation

Could a cost segregation study save your company taxes?

cost segregationIf your business has acquired, constructed or substantially improved a building recently, consider a cost segregation study. One of these studies can enable you to identify building costs that are properly allocable to tangible personal property rather than real property. And this may allow you to accelerate depreciation deductions, reducing taxes and boosting cash flow.

Overlooked opportunities
IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Often, businesses will depreciate structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building.

Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, companies allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be part of a building may in fact be personal property.

Examples include:

  • Removable wall and floor coverings,
  • Detachable partitions,
  • Awnings and canopies,
  • Window treatments,
  • Signage, and
  • Decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.

A study in action
Let’s say you acquired a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you’re entitled to claim $123,050 (2.461 percent of $5 million) in depreciation deductions the first year.

A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461 percent, plus $1 million × 20 percent).

Impact of tax law changes
Bear in mind that tax law changes may occur this year that could significantly affect current depreciation and expensing rules. This in turn could alter the outcome and importance of a cost segregation study. Contact our firm for the latest details before you begin.

On the other hand, any forthcoming tax law changes likely won’t affect your ability to claim deductions you may have missed in previous tax years.

Worthy effort
As you might suspect, a cost segregation study will entail some effort in analyzing your building’s structural components and making your case to the IRS. But you’ll likely find it a worthy effort.

A look-back study may also deliver benefits
If your business invested in depreciable buildings or improvements in previous years, it may not be too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions in qualifying previous tax years.

To claim these tax benefits, we can help you file Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction on your current year’s return. There will be no need to amend previous years’ returns.

The best advice we can offer is, “don’t go it alone.” Contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner, at tconstantine@cp-advisors.com or 216-831-7171. He can help you make sure you are not missing any of the tax benefits available to you.

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Tax Calendar Update

2017 Q2 tax calendar: Key deadlines for businesses and other employers

20171Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

Need more information?  Contact James Komos, CPA, partner in Ciuni & Panichi, Inc.’s tax department at 216.831.7171 or jkomos@cp-advisors.com.

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Safe Harbor Deduction

© 2017

Know the IRS Tax Rules on Claiming Hobby Losses

Will you pay tax on a business or hobby?

By Silvia McClellan, CPA, Tax Department Senior Accountant

silvia-mcclellan-highres-6Are you launching a “side business”? Perhaps you hope to turn your love of writing or photography into a paying gig. Or maybe you’d like to sell some of that beer you’re brewing in the garage. If, like many start-up business owners, you’re operating at a loss, it’s critical to understand the IRS’s tax “hobby loss” rules.

Business losses are fully deductible, but hobby losses aren’t. Deductions for hobby expenses generally can’t exceed your gross receipts (if any) from the activity. Also, you must claim hobby losses as itemized deductions, which may further reduce their tax benefits.

What’s a hobby?
“Hobby” is a bit of a misnomer. You’ll find the rules in Internal Revenue Code Section 183, entitled “Activities not engaged in for profit.” The key to distinguishing between deductible and nondeductible losses is whether you engage in an activity with a profit motive. The IRS can’t read your mind, of course, so it analyzes objective factors, including the following, to decide whether an activity is engaged in for profit:

  • Whether you treat it like a business, keep accurate records and use those records to improve its performance,
  • your expertise and that of your advisors,
  • the time and effort you (or your employees) expend in carrying on the activity,
  • whether you expect to profit from the appreciation of assets used in the activity,
  • your success in carrying on other similar or dissimilar activities,
  • your history of income or loss with respect to the activity and whether its performance is improving at a reasonable rate, and
  • the amount of occasional profits, if any.

The IRS also considers whether you have other substantial sources of income from which you’re deducting losses (thus making it more likely the activity isn’t engaged in for profit) and elements of personal pleasure or recreation (the less enjoyable the activity, the more likely you have a profit motive).

No single factor determines the outcome. An activity is presumed to be for profit if it’s been profitable in at least three of the last five tax years (although the IRS can attempt to prove that it hasn’t been).

What if you incorporate?
There’s a common misconception that the hobby loss rules apply only to individuals. While the rules don’t apply to C corporations, operating an activity through a flow-through entity such as an S corporation, limited liability company or partnership won’t shield you from the hobby loss rules. In fact, doing so can lead to unexpected — and unwelcome — tax consequences.

Consider the recent case of Estate of Stuller v. U.S. The Stullers operated a horse-breeding farm through an S corporation. They owned the land used by the farm and received rental income from the S corporation. In a decision that was upheld on appeal, a federal district court ruled that the Stullers didn’t have a profit motive and, therefore, couldn’t deduct the S corporation’s substantial losses against their income from other sources. Even though the ruling meant that the Stullers received no tax benefit from the S corporation’s rental expenses, they were still required to report the rental income on their individual tax returns.

Treat it like a business
The best way to increase the chances that the IRS will treat an activity as a business is to conduct it in a businesslike manner. Create a business plan and budget, consult advisors and keep good records.  For sound business and tax advice for your business, contact Silvia McClellan, CPA, at Ciuni & Panichi, Inc., 216-831-7171 or smcclellan@cp-advisors.com.

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© 2016

June Tax Tips – Affordable Care Act

employeesHow many employees does your business have for ACA purposes?

It seems like a simple question:  How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number
Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.
Under the law, an ALE:

  • Is subject to the employer shared responsibility provisions with their potential penalties, and
  • must comply with certain information reporting requirements.

Calculating full-timers
A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers
If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help
Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.

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Run a business on the side?  The tax implications.

© 2016

Run a Side Business? The Tax Implications

Make sure it’s no hobby

side businessIf you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar tax risk:  Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS.

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure some pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

For example, if you haven’t earned a profit from your business in three out of five consecutive years, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. If a profit can be proven within this period, the burden falls on the IRS. In either case, the agency uses nine nonexclusive factors to determine whether the activity is a business or a hobby — including management expertise and time and effort dedicated.

If your enterprise is redefined as a hobby, there are many business deductions and credits that you won’t be eligible to claim. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.

Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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© 2016

A Good Tax Season for Ohio’s Small Business Owners

Ohio Tax Cuts

By David M. Reape, CPA, Ciuni & Panichi, Inc. Principal

David Reape HighRes-08Small business owners will reap the benefits of several Ohio tax cuts on their 2015 individual tax returns. The 2015 personal income tax rates were decreased 6.3 percent across the board as part of the budget bill passed this past summer. The top tax bracket, for example, decreased from 5.333 percent to 4.997 percent. This is especially good news, because most small business owners pay business income taxes on their individual tax return. These cuts free dollars that can help small business owners implement growth strategies such as increased marketing or staffing. Overall it makes the annual ritual of filing your taxes a little easier.

Again for 2015, 75 percent of the first $250,000 of business income will be excluded from your Ohio taxable income calculation. Business income includes income from pass through entities such as S-corporations, partnerships, and LLCs along with income reported on Schedules C, E, or F of your Federal 1040s. An important change for this year is in addition to the business income deduction, the remaining taxable business income will now be subject to a maximum tax rate of three percent! This rate change has the potential to save an Ohio business owner about $6,000 of tax on $500,000 of business income before the business deduction. Looking forward, it even gets better for 2016 and beyond. Next year, the deduction percentage for the first $250,000 of income increases from 75 to 100 percent.

Another new twist for this year is what business income is subject to the adjustment. Prior to 2015, only Ohio sourced income was eligible for the small business deduction. Beginning in 2015, business income from any state is eligible for the deduction. This means potential tax savings for anyone filing an Ohio income tax return containing income from any business regardless of its source. Also the business income calculation has been simplified this year. Prior to 2015, we had to adjust business income for certain federal adjustments such as one half of the self-employment tax, the self-insured health insurance deduction, and certain retirement contributions. Those federal adjustments are no longer considered when determining business income for purposes of the business deduction and new three percent tax rate. This results in more of the business owner’s income being eligible to the new three percent tax rate.

These are good changes for Ohio’s small businesses. As always, please feel free to reach out to a tax representative at Ciuni & Panichi, Inc. for any questions regarding your tax situation.

Ciuni & Panichi, Inc.’s Tax Compliance and Consulting members have advised hundreds of business owners on their tax issues and more. To learn how you could benefit from their advice contact David Reape, CPA, Principal, at 216-765-6944 or dreape@cp-advisors.com.

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Your Business May Benefit from these Important Tax Extensions

IRS Extends Affordable Care Act Reporting Deadlines

Your Business May Benefit from these Important Tax Extensions

TJCby Anthony J. Constantine, CPA, Partner, Ciuni & Panichi, Inc.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended, and in a few cases made permanent, many favorable tax provisions for capital intensive businesses, real estate companies, and construction contractors.

The obvious change that we are thankful for is the now permanently enhanced Section 179 expensing.  This provision allows a trade or business to immediately expense up to $500,000 of equipment per year.  There are a couple limitations, most notably you must have taxable income and you are limited if you have over $2,000,000 in acquisitions during the year.  This provision has been extended each December for the past few years making planning an expensive gamble.  Now the provision is permanent. CFO’s can look ahead and plan capital expenditures more prudently.

Over the past fifteen years, in addition to Section 179, taxpayers have been able to take advantage of a provision under Section 168(k) known as bonus depreciation that allows taxpayers to immediately expense a portion of their capital purchases in the first year.  The IRS extended the provision at 50 percent through 2017, 40 percent in 2018, and 30 percent in 2019.  The provision goes away in 2020.  Bonus depreciation is different from Sec 179 expensing in that:

  • No taxable income limitation
  • Not limited to tangible personal property
  • No investment limitation
  • Original use must begin with the taxpayer

Real estate lessors and lessees will benefit from the bonus depreciation available for property improvements considered Qualified Tenant Improvements.  Under the provision the depreciable life for property improvements are reduced to 15 years, much more favorable than the previous 39 years.  In order to be considered “qualifying” the improvement must meet the following criteria:

  • Made under or pursuant to a lease (related party leases do not count)
  • Made to a building that has been in service for at least three years
  • Does not include enlargements, elevators, escalators, and internal structural framework

The PATH Act modified the definition of qualifying improvement for purposes of bonus depreciation, effective for tax years beginning in 2016.  The modified category, Qualified Improvement Property, expands the property eligible for bonus depreciation.  Now these new rules provide that any improvement to an interior portion of a building which is nonresidential real property and placed in service after the date the building was first placed in service will qualify for bonus depreciation.  Exceptions include enlargements, elevators/escalators, and internal structural framework.

Basically, the provision allows for bonus depreciation on any interior improvement (subject to a few restrictions).  This means that even if the property doesn’t qualify for a 15 year life, it still may be eligible for bonus depreciation if purchased and placed in service in 2016 or later.

Example:  A manufacturer decides to renovate the interior of his plant.  The renovations will qualify for bonus depreciation as long as they are interior improvements that are not enlargements, elevators/escalators, and internal structural framework.  The remaining basis will be depreciated over 39 years.

Tax rules are complicated.  Your CPA is your best resource to take full advantage of tax benefits impacting your business.  Ciuni & Panichi, Inc. welcomes the opportunity to help your business prosper.  To learn more, contact Tony Constantine, CPA, Partner in the Real Estate and Construction Group at 216-765-6925 or tconstantine@cp-advisors.com.

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© 2015

November Tax Tips

Gearing up for the ACA’s information reporting requirements

ACAStarting in 2016, applicable large employers (ALEs) under the Affordable Care Act (ACA) will have to file Forms 1094-C and 1095-C to provide information to the IRS and plan participants regarding their health care benefits for the previous year. Both the forms and their instructions are now available for ALEs to study and begin preparations for required filings. In addition, organizations that expect to file Forms 1094 and 1095 electronically can peruse two final IRS publications setting out specifications for using the new ACA Information Returns system.
Keep in mind that ALEs are employers with 50 or more full-time employees or the equivalent. And even ALEs exempt from the ACA’s shared-responsibility (or “play or pay”) provision for 2015 (that is, ALEs with 50 to 99 full-timers or the equivalent who meet certain eligibility requirements) are still subject to the information reporting requirements in relation to their 2015 health care benefits.

If your company is considered an ALE, please contact us for assistance in navigating the ACA’s complex requirements for avoiding penalties and properly reporting benefits. If you’re not an ALE, we can still help you understand how the ACA affects your small business and determine whether you qualify for a tax credit for providing coverage.

Selling rather than trading in business vehicles can save tax

car2Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.

If you trade a vehicle in on a new one, the un-depreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.

For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.

For more ideas on how to maximize your vehicle-related deductions, contact the tax experts at Ciuni & Panichi, Inc.  James Komos at jkomos@cp-advisors.com or 216.831.7171.

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© 2015

Are You Taking a Tax Deduction for Mileage?

Make Sure to Get All the Tax Deduction You Deserve

CarThe tax expert at Ciuni & Panichi have another tip for your 2014 tax return.

You probably know that miles driven for business purposes can be deductible. But did you know that you might also be able to deduct miles driven for other purposes? The rates vary depending on the purpose and the year.

The following is a sample of what you can deduct:

  • Business: 56 cents (2014), 57.5 cents (2015)
  • Medical: 23.5 cents (2014), 23 cents (2015)
  • Moving: 23.5 cents (2014), 23 cents (2015)
  • Charitable: 14 cents (2014 and 2015)

However the rules surrounding the various mileage deductions are complex.  Some are subject to floors and some require you to meet specific tests in order to qualify. There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.  So make sure to talk to an expert and get all the mileage you’re entitled to.

If you drove potentially eligible miles in 2014 but can’t deduct them because you didn’t track them, then start tracking your miles now so you can potentially take advantage of the deduction when you file your 2015 return next year.

Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com.  He can help ensure you deduct all the mileage you’re entitled to on your 2014 tax return, but not more.  No one wants to risk back taxes and penalties later.

 Use These Three Credits on Your 2014 Return

Save on Your Taxes by Accelerating Deductions

© 2015

Use These Three Tax Credits on Your 2014 Return

Tax extenders for businesses

calcThe Tax Increase Prevention Act of 2014 (TIPA) extended through Dec. 31, 2014, a wide variety of tax breaks, including many tax credits which are particularly valuable because they reduce taxes dollar-for-dollar.  Here are three credits that your business may benefit from when you file your 2014 returns:

  1. 1. The research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, can be complicated to calculate, but the tax savings also can be substantial.
  2. The Work Opportunity credit. This credit is available if you have hired from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.  This can lead to big savings on your tax bill.
  3. The Sec. 45L energy-efficient new home credit. An eligible construction contractor can claim a credit for each qualified new energy efficient home that the contractor built and that was acquired by a person from the contractor for use as a residence during 2014. The credit equals either $1,000 or $2,000 per unit depending on the projected level of fuel consumption.

Wondering if you qualify for any of these tax credits? Or what other breaks extended by TIPA could reduce your 2014 tax bill? Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com for more information.

The tax experts at Ciuni & Panichi have been assisting organizations like yours for over 40 years, and we look forward to helping your company in the future.

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© 2015

Reduce Your 2014 Tax Bill with a New Car

Buying a business vehicle before the end of the year may reduce your tax bill.

CarIf you’re looking to reduce your 2014 tax bill, you may want to consider purchasing a business vehicle before the end of the year.  Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to expense, rather than depreciate over a period of years, some or all of the vehicle’s cost.

The normal Sec. 179 expensing limit generally applies to vehicles weighing more than 14,000 pounds.  The limit for 2014 is $25,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $200,000.  These amounts have dropped significantly from their 2013 levels.  But Congress may still revive higher Sec. 179 amounts for 2014, so watch for updates before you file.

Even when the normal Sec. 179 expensing limit is higher, a $25,000 limit applies to SUVs weighing more than 6,000 pounds but no more than 14,000 pounds.  Vehicles weighing 6,000 pounds or less are subject to the passenger automobile limits.  For 2014, the depreciation limit is $3,160.

Many additional rules and limits apply to these breaks.  So if you’re considering a business vehicle purchase, contact the experts in our tax department or Jim Komos at 216.831.7171 or jkomos@cp-advisors.com to learn what tax benefits you might enjoy if you make the purchase by Dec. 31.  Ciuni & Panichi, Inc. can help you start planning now.

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© 2014