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Year-end Donation Time is Here!

Tomorrow is Thanksgiving, the beginning of Giving Season and that annual scurry to make charitable tax deductions before year-end. Non-profit organizations typically receive a large percentage of their donations in November and December. So now is a great time to remember four important facts about charitable tax deductions, before you write that check or click “Donate” on that website.

 

Whatever charity your heart tells you to support, you also expect to save some tax money. But how can be sure that your donation is deductible? Just in time for Giving Season, here are answers to four common questions about charitable donations – Which, Who, What, and How:

 

Which Donations are Deductible?

You can only deduct donations to qualified charities that meet IRS non-profit status requirements. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted on the IRS’ “Exempt Organizations Select Check” tool.

 

Who Can Take a Deduction?

Under current tax law, donations to qualified charities can only be deducted by taxpayers who itemize their deductions using IRS Schedule A. Donation deductions could be limited if your adjusted gross income exceeds a specified amount, based on your filing status.

 

What Documentation is Needed?

You must maintain a bank record or other written communication from the charity. Documentation must contain the name of the organization, the date of the donation and the amount. Donations of $250 or more must be acknowledged in writing by the charity stating the date and amount of the donation. Your deduction could be reduced by the value of anything you received in return, such as the cost of a fundraising dinner.

 

How about Property Donations?

Donations don’t have to be monetary. You can also donate items such as clothing, household goods, vehicles, stock, or real estate. Property donations are subject to more reporting rules than monetary donations. Donated vehicles valued at more than $500 and donated real property and other items valued over $5,000 are subject to even more rules and documentation requirements.

 

Want more information? Consult a qualified tax professional or check out the IRS website at here.

 

Too Late to Reduce or Avoid 2017 Tax Penalties?

All year, you’ve been meaning to check whether your tax withholding and estimated payments will cover your tax liability. But 2017 has been super busy. It’s mid-November, and you’re just getting around to it. Is it too late to reduce or avoid tax penalties if you owe? Maybe not…

 

To avoid a penalty for 2017, tax withholdings or estimates must total 90% of your 2017 tax liability, or 100% of your 2016 tax liability, whichever is lower. Wage earners usually have taxes withheld from their pay throughout the year. Self-employed individuals and wage earners with a side gig need to make estimated tax payments.

 

Since 2010, the IRS has seen an increase in the number of taxpayers assessed underpayment penalties and interest, up 40% from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That can really add up!

 

Here are four ways to avoid being one of those statistics:

 

  1. Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2017 refund.

 

  1. Pay estimated tax for 2017 if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due in advance of the fourth quarter payment deadline on January 16, 2018, will stop the clock on 2017 interest accruals.

 

  1. Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.

 

  1. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired.

 

Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. To raise awareness, the IRS recently launched a new “Pay as You Go, So You Don’t Owe” web page, with tips and resources designed to help taxpayers. Portions of the site focus on self-employed taxpayers, including those with side gigs. The sharing economy page explains tax withholding and estimated tax payments to reduce or avoid tax penalties.

Tax Scam Calls Still Happening

It’s still happening. It happened to me just last week. I came home to a voicemail telling me that four warrants are out for my arrest and I need to pay up or turn myself in. Of course, the caller conveniently provided a callback number. The caller also sounded automated. Who would fall for that? You might be surprised…

 

Hundreds of unsuspecting taxpayers are still being defrauded of thousands of dollars. Otherwise, the scam callers would stop. It wouldn’t be worth their time. Taxpayers should not take the bait and fall for this trick. But it can be really intimidating to get a threatening call about what is already a scary topic – your taxes.

 

Four tips to help taxpayers avoid getting scared enough to become a scam victim:

 

  1. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.

 

  1. The real IRS will not:
  • Call to demand immediate payment
  • Call someone who owes taxes without first sending a bill in the mail
  • Demand tax payment without allowing the taxpayer to appeal the amount owed
  • Require a taxpayer to pay in a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in law enforcement to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit

 

  1. Special circumstances when the IRS will come to a home or business include:
  • When a taxpayer has an overdue tax bill
  • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
  • To tour a business as part of an audit
  • As part of a criminal investigation

 

  1. IRS Revenue Agents who may conduct a visit to a taxpayers home or business carry two forms of official identification that have serial numbers. Taxpayers can check both IDs. Revenue Agents conducting audits may call taxpayers to set up appointments, after having first notified them by mail. By the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.

 

Have you been called or visited by someone impersonating the IRS? Don’t be scared or intimidated. Hang up the phone and visit IRS.gov for information about how to detect and report tax scams.

 

Taxes and Rental Property

If you got to the beach this summer, you probably noticed those huge vacation homes lining the shore line. Owners rent them out for the season, or by the week or month. Some property owners rent houses or apartments year-round. Others rent out an extra bedroom or their basement for extra money.

 

Renting out a residence, such as a summer vacation home, when you are not using it, or a portion of your home, you may be eligible to deduct expenses against the rental income. You might even be able to deduct expenses in excess of the rental income and claim a loss that can offset other income. Sounds great; as long as you qualify based on the tax rules and limits.

 

Four rental property tax rules and limits that you need to know:

 

  1. Rental Days Personal Days

You cannot claim a tax loss on a rental property for the year if you use it personally for 14 days, or 10 percent of days the home is rented out, whichever is greater. In that case, you can only deduct rental expenses up to the amount of rental income. Exception — a day spent making repairs or improvements do not count as a personal day if you have the records to back it up.

 

  1. Deductible Expenses

In general, income from a rental property is taxable. Deductions from that income can be taken for expenses related to the rental, such as mortgage interest, property taxes, insurance, repairs, and utilities. If you are renting out your basement or some other portion of your home, expenses related to the rental portion can be allocated to offset rental income. Direct rental expenses, such as painting or repairing the rented portion, can be 100% deducted.

 

  1. At-Risk and Passive Activity Limits

The deductible portion of losses from rental real estate activity may be limited under two sets of rules: at-risk rules and passive activity limits. These rules apply if you are not at risk of loss for a property placed in service after 1986 that is operated as a passive activity. In most cases, real estate rental activities are considered to be passive. There are exceptions, but these rules can limit deductible losses.

 

  1. Depreciation

The cost of income-producing property can be deducted yearly by depreciating the property. The amount of depreciation deduction is determined by basis in the property used as a rental, the recovery period established by IRS rules, and the depreciation method used. Depreciation reduces the property’s basis for figuring gain or loss upon sale or exchange.

 

So if you plan to rent out your vacation property or your basement, you need to know the rules and limitations. Get more details about the tax rules and limits for your rental property from the IRS at https://www.irs.gov/pub/irs-pdf/p527.pdf

The Facts about Home Office Deductions

New tax clients ask me all the time about taking a home office deduction. It’s is a popular idea, but it doesn’t work for everyone, even if you have your own business. Lots of rules and your exact circumstances dictate what you can do. It can be pretty confusing.

So let’s “un-confuse” it: When can you take a deduction and how much?

When can you take a home office deduction?

1. Exclusive and Regular Use: Space used for a home office must be used exclusively and regularly for business operations. No non-business activity can be conducted in the home office. That means no personal items in the home office.

2. Principal Place of Business: Your home must be used to substantially and regularly conduct your business. It’s okay if you also carry on business at another location, but your primary activities must be in your home office.

3. Employees: Wage earners may be able to deduct a home office if #1 and #2 apply AND it’s for the employer’s convenience, such as teleworking to reduce the employer’s real estate footprint.

What home expenses can be deducted?

4. Indirect Expenses: Expenses for keeping up and running the entire home, such as insurance, utilities, and general repairs are deductible based on the Business Use Percentage. A percentage of mortgage interest and real estate taxes can also be deducted.

5. Business Use Percentage: The business percentage equals the area of the home used for business divided by the total area. The most common method to calculate the percentage is dividing the square footage used exclusively for business by total square footage. Shared spaces, like hallways, cannot be included in office space.

6. Direct Expenses: Expenses that benefit only the area exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.

7. Unrelated Expenses: Expenses for the part of the home not used for business, such as lawn care or painting a room not used for business, are not deductible.

8. Simplified Option: A standard deduction is allowed of $5 per square foot used exclusively for business, limited to 300 square feet.

Qualifying for a home office deduction can really help reduce your tax liability, especially for business owners. The basic rules are outlined above. More rules are more on the IRS website. Check them out here.

Reputation is a Fragile Asset

Back in June, I blogged about the risks of Inappropriate Tone at the Top, and what leaders can do to promote an ethical culture. Making it clear that unethical conduct will not be tolerated helps to avoid the costs of lawsuits, fraud, and decisions that are not in the best interest of the organization. I was reminded of that blog when I read the news reports about Kobe Steel, in the New York Times article, Kobe Steel’s Falsified Data Is Another Blow to Japan’s Reputation,  and heard about it on NPR.

For decades, Kobe Steel, Volvo, Wells Fargo, and other companies built and sustained reputations for quality, reliability, value – the attributes that made their brands. Having a great reputation generally results in having a larger market share. A great reputation could also mean commanding a higher price than competitors. Why not? Clients and customers are willing to pay a premium for that reliability and quality.

It is difficult to imagine why the leader of any organization would take risks with a long-established, stellar reputation and completely blow it up. On top of all the greed and hubris, another reason must be that those leaders do not recognize that a good reputation is a valuable asset. A good reputation is also an incredibly fragile asset, as evidenced by the Kobe Steel example. What was built over decades can evaporate in a day, or less.

I do not pretend to know what motivated the leaders of Kobe Steel, Volvo, or other companies to squander their stellar reputations. I do, however, offer five questions to ask before using sub-standard materials, lying about test results, enrolling customers in unrequested programs/services, or engaging in other compromising behavior:

1. Would I be 100% comfortable if my actions or decisions were disclosed in the news?

2. Is meeting profit goals more important than meeting customer/client needs?

3. Is my product or service safe enough for my parent/child/spouse to use it?

4. Do I want to risk all of the time and effort I’ve invested in building my organization?

5. Is my organization protected from prosecution or other claims of negligence or malfeasance, if necessary?

Answers to these and other questions are completely subjective, of course. But these are valuable questions to reflect on in order to uphold your organization’s reputation. Treat your good reputation as the incredibly fragile asset it is. Don’t blow up in a day what took years to build.

 

 

Fraud and Cyber Risk

Last week, I attended a cyber risk workshop offered by the local chapter of the Institute of Internal Auditors. One of the presenter’s slides listed data breaches that occurred so far in 2017, including Equifax, the Securities and Exchange Commission, and Home Depot. It’s pretty scary, especially when you think about what the cyber criminals are after – your money.

 

Fraud has existed for a long, long time. Technology gives criminals new opportunities to perpetrate bigger frauds more quickly than ever before. Organizations fight back by adding more technology skills to their fraud prevention and investigation teams. According to the Association of Certified Fraud Examiners’ (ACFE’s) In-house Fraud Investigation Teams: 2017 Benchmarking Report, building forensics and cybersecurity expertise is a big focus.

 

Of the nearly 1,500 anti-fraud professionals who responded to the global survey:

 

  • 43% say their organization is seeking or expecting to add expertise in digital forensics to its fraud investigation team.
  • 36% say their fraud team has cybersecurity skills, while 37% are looking to add those skills.
  • Only 16% teams investigate data breach incidents frequently and 27% investigate them occasionally, indicating a possible lack of expertise.

Responding organizations cited that their fraud investigations were related to:

  • Employee embezzlement (40%)
  • Frauds committed by customers (40%)
  • Frauds committed by vendors or contractors (32%)
  • Human resources issues (30%)

IT security professionals often think that their organizations have the controls needed to prevent cyber threats that can lead to fraud. That is not enough! Everyone connected to your systems needs to understand and follow security practices and know why they are important.

 

Clarify your organization’s fraud controls and each person’s role to protect data and funds by:

 

  • Documenting responsibilities for security and secure work practices. Security is part of everyone’s job.
  • Training everyone about security and why it is important. People tend to follow procedures that they understand.
  • Implement incident detection to locate and shut down attacks that can become data breaches.

 

Fighting fraud requires that organizations ensure they have adequate technology skills on their fraud prevention and investigation teams. Recent reports – as well as recent events — tell us that many organizations still need to beef up their cyber teams to protect our money from fraud.

Your New Worker: Employee or Contractor?

When your organization needs more help, you might be too busy and stressed to think about all the details. Worker classification — employee or a contractor — takes a back seat to more immediate concerns, like the worker’s start date and assignments. In reality, how your workers are classified should be your first consideration because it impacts your cost.

 

What is Worker Classification?

 

Workers can be employees or independent contractors. Determining worker classification comes down to the amount of control over the worker and the work in three categories:

 

  1. Behavioral: Do you control what the worker does and how the job is done? For example, who determines work hours and how the work will get done? If you set work hours and procedures, your worker is an employee.

 

  1. Financial: Do you provide the infrastructure for the worker to perform the job, such as a work space, computer, and other tools? Your worker is an employee.

 

  1. Relationship: Is the work permanent or temporary? Are employee-type benefits provided? Permanent workers who receive employer-provided benefits are employees. Temporary workers could be employees or independent contractors, depending on your level of control under #1 and #2.

 

How Does Worker Classification Impact Cost?

 

Costs can be higher when workers are classified as employees vs. classifying them as contractors. Employee wages are subject to employment taxes, the employer portion of social security taxes and all federal and state unemployment taxes. Employees may also get employer-provided benefits, such as insurance. An independent contractor is responsible for paying all of her or his social security taxes and benefits. Compare the total cost of each worker classification to know how your decision will impact your bottom line.

 

What If a Worker is Misclassified?
Even if the costs are higher, workers whose job duties are controlled by the organization must be classified as employees. No choice. Organizations that misclassify employees as independent contractors to save on employment taxes may be held liable for unpaid employment taxes, plus interest and penalties. Making a worker classification error, accidentally or intentionally, can get pretty expensive.

 

The IRS has more helpful details at http://bit.ly/2h9qlho. Still have questions? Consult a qualified tax professional.