In prior years the IRS's position was that significant amounts spent on tangible property should be capitalized rather than treated as a repair and expensed. The theory was that as a property deteriorated, even through normal wear and tear, costs to bring the property back to its ordinarily efficient operating condition were to be capitalized as an improvement to the property. The new regulations allow taxpayers to expense amounts that are considered costs for repairs and maintenance. Only costs that result in a "Betterment", "Adaption" for a new use, or a "Restoration" are required to be capitalized. Additional information regarding the tangible property regulations can be found on the FAQs page in the Tangible Property Regulations section of our website.
Operating leases and capital leases are subject to different tax regulations. An operating lease is effectively a rental transaction because the transactions does not transfer ownership or equity interests to the lessee for a nominal amount and the term does not exceed the expected life of the property. Rental payments under an operating lease are expensed as paid. A capital lease is a financing arrangement to purchase the leased property. Assets acquired under a capital lease are treated as if the lessor has transferred title to the lessee and therefore, are subject to capitalization rules, depreciation and may even be eligible for section 179. If you have any questions about this, please contact us.
Whether you should lease or purchase your equipment depends on many factors and your specific circumstances.
Advantages of a lease:
- Low down payment and monthly payments.
- Small repair bills since the equipment is under warranty.
- Convenience, you walk out with equipment with no hassles.
Disadvantages of a lease:
- You'll pay more over time.
- If you continue to lease, payments will be endless.
- If you use the equipment more than expected, you pay extra.
- The damages will cost you when you return the equipment.
- Contract "surprises" leases often have hidden costs in the lease, especially at the termination of a lease.
If you would like us to assist you with an analysis of leasing vs. buying equipment, please contact our office.
In order to be able to deduct the direct expenses for a vehicle, the vehicle should be in the company's name or the IRS could disallow the related deductions upon audit. As long as business use exceeds 50%, we recommend you buy vehicles in the company's name. If the vehicle is in your personal name and you use it for business, then you can still get a deduction. The company can reimburse you for its use of the vehicle, either at the standard mileage rate or based on actual expenses. This reimbursement is a deduction for the company and is not counted as income to you.
If you purchase real estate, the ownership should remain with the individual(s), partnership or Limited Liability Company rather than a corporation. The tax consequences of selling real estate out of a Corporation can be significant. Further, if you currently own real estate in a corporation, now may be the time to transfer ownership out of the corporation to another more favorable entity while appraised values are lower than in previous years and your company's corporate tax rates may be lower, as well, due to the current economy.
If you plan to construct, purchase or upgrade your commercial building or rental property, contact us to discuss a "cost segregation" study. The purpose of a cost segregation study is to segregate costs related to buildings into categories of equipment, with an emphasis on identifying property where the shorter 5, 7 and 15 year accelerated methods can be used, rather than the normal 39 year straight-line depreciation allowed for "buildings". Normally, the extra costs of the study are easily paid for by tax savings in the first few years after the property or upgrades are placed in service. However, a cost segregation study may not be beneficial for everyone depending on the specific facts and circumstances for Company and its owners, such as: cost of the property or upgrade, type of activity involved (passive or active), how long the company plans to hold on to the property, etc. If you would like additional information regarding cost segregation studies and whether you would benefit from such a study, please feel free to contact us.
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The like-kind exchange provisions are one of the few exceptions where gain on a transaction can go unrecognized and not be taxed. Tax savings of 20-25% are normal. In a like-kind exchange, property held for business or investment purposes is exchanged for "like-kind" property. For example: If you plan to sell a piece a real property and then buy another, consider a like-kind exchange. Like-kind exchanges are complex and have specific requirements to accomplish the tax deferral. Please feel free to contact us if you would like additional information.
Consider paying your child justifiable compensation for work performed in your business sufficient to utilize your child's standard deduction and/or lower 10% tax bracket. If your child is under age 18, no return or income taxes are due (social security taxes do apply) if you pay W-2 wages up to: a) $6,300, if your child has NO unearned income, or b) $1,050, if the child has ANY unearned income (i.e. interest or dividends). The Tax
Court has allowed deductions for amounts paid to children as young as 7 years old for tasks such as cleanup chores, message taking and filing. Of course, the amount paid must be reasonable relative to the work done.
Also, you should keep records of hours worked, but the records do not have to be complex. The payments should be made by check. For younger children not yet in college, consider paying your child a justifiable wage so that he/she has earned income in order to set up a Section 529 Plan. The entire compensation amount can be contributed to the plan. The contributions will grow tax free and can be withdrawn tax free for college. When all is said and done, this is a way of deducting amounts you are saving for your child's college education and at the same time using a tax-free method of earning income on the amounts saved. For children who are in college or soon will be, pay your child a justifiable wage and let him/her pay their own college costs. As noted above, if this is your child's only earned income, the standard deduction may reduce the taxable amount of compensation to zero. What remains taxable will be at low rates. If you have any questions or would like to discuss your specific situation, please feel free to contact us.