I have had a number of visitors to this blog with questions about Section 179 expensing, which is something I posted about briefly last week (December 10). I'll go into a little more detail in this post.
When a business purchases an asset that has a useful life of more than 1 year, the tax code gives the business 3 options for deducting the cost of that asset: depreciation, Section 179 expensing, and bonus depreciation.
Depreciation means the business can deduct a certain amount of the purchase price each year over a number of years set by the tax code for that type of asset. For example, computers are depreciated over 5 years. The number of years is set by the code and has nothing to do with how long you actually intend to use the asset in your business.
Section 179 expensing allows you to write off 100% of the cost of the purchase of an asset in the year of purchase. For 2010 and 2011, a business can write off up to $500,000 of asset purchases. If you purchase more than $2 million of assets during the year, your Section 179 deduction will be phased out. Your total Section 179 deduction is limited to your taxable income for the year; unused Section 179 expenses in one year can be carried forward to the next year. Please note that most - but not all - property qualifies for Section 179 expensing. Examples of property that does NOT qualify is leased property and air-conditioning or heating units.
Note for rental property owners: Section 179 does not apply to rental properties; if you own rental property, you can't use Section 179 expensing.
Bonus depreciation is a sort of hybrid between regular depreciation and Section 179 expensing, where you can claim 50% of the cost of an asset as a deduction, and then depreciate the remainder of the cost. Bonus depreciation is available to rental property owners. One caveat on bonus depreciation: it can only be claimed on assets that are brand new. (Section 179 can be claimed on used assets, as long as the asset is "new" to your business.) One other note on bonus depreciation: the tax bill being debated right now by Congress proposes to allow 100% bonus depreciation on assets purchased between September 9, 2010, and December 31, 2011. (UPDATE: this proposed legislation became official in the tax bill passed by Congress.)
Most of the time, a business will just take the Section 179 expense and be done with it. It provides an immediate deduction and eliminates the need for cumbersome depreciation schedules. However, Section 179 expenses are limited to the amount of taxable income (as calculated before the Section 179 deduction). In other words, Section 179 cannot create a business loss. But regular depreciation and bonus depreciation can create business losses. Plus, if you expect that your business income will grow in future years but you won't be purchasing assets in those years, it might be nice to have a depreciation deduction available to offset the increase in income.
As you can see, your depreciation/Section 179/bonus depreciation strategy is part of tax planning and is a good conversation to have with your tax advisor.
Thursday, December 16, 2010
Deducting Charitable Mileage (And Other Miscellaneous Charitable Deductions)
An often overlooked charitable deduction is the deduction for mileage driven for charitable purposes.
Taxpayers can take a deduction -- 14 cents per mile in 2010 and 2011 -- for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.
Iowa taxpayers are allowed to take 39-cents per mile as a deduction. (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction. The net effect is 39-cents per mile.)
Example
You volunteer to answer the phones once a week for a charitable organization. The organization's office is 10 miles from your home. You can claim 20 miles (10 miles each way) as a deduction each week. If you do this 52 weeks a year, that would be 1,040 miles. At 14-cents per mile, the charitable mileage deduction would be $146. If you live in Iowa, your total deduction on your Iowa return would amount to $406.
Taxpayers can also deduct certain other out-of-pocket expenses incurred while giving services to a charity. For example, if the organization you volunteer for requires you to wear a special uniform, the cost of the uniform and the cost of dry-cleaning the uniform would be deductible.
The "value of your time" is NEVER deductible. In the example above, if a receptionist would be paid $10 per hour to answer the phones, you CANNOT claim a deduction of $10/hour for the time you spend doing that work.
Special rules apply to travel expenses other than mileage. Generally, you can't deduct travel costs (airplane expenses, motels, etc.) for charitable work if there is any element of recreation to the travel. If you are planning to travel for charitable work, I would suggest consulting a tax advisor to determine if any of your travel expenses are deductible.
Taxpayers can take a deduction -- 14 cents per mile in 2010 and 2011 -- for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.
Iowa taxpayers are allowed to take 39-cents per mile as a deduction. (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction. The net effect is 39-cents per mile.)
Example
You volunteer to answer the phones once a week for a charitable organization. The organization's office is 10 miles from your home. You can claim 20 miles (10 miles each way) as a deduction each week. If you do this 52 weeks a year, that would be 1,040 miles. At 14-cents per mile, the charitable mileage deduction would be $146. If you live in Iowa, your total deduction on your Iowa return would amount to $406.
Taxpayers can also deduct certain other out-of-pocket expenses incurred while giving services to a charity. For example, if the organization you volunteer for requires you to wear a special uniform, the cost of the uniform and the cost of dry-cleaning the uniform would be deductible.
The "value of your time" is NEVER deductible. In the example above, if a receptionist would be paid $10 per hour to answer the phones, you CANNOT claim a deduction of $10/hour for the time you spend doing that work.
Special rules apply to travel expenses other than mileage. Generally, you can't deduct travel costs (airplane expenses, motels, etc.) for charitable work if there is any element of recreation to the travel. If you are planning to travel for charitable work, I would suggest consulting a tax advisor to determine if any of your travel expenses are deductible.
Closure on Bush Tax Cuts Could Come Today
The long wait to know what the tax landscape will look like in 2011 could end today. The U.S. House is expected to vote on an extension of the "Bush Tax Cuts." The Senate approved the extension yesterday by a vote of 81-19. Iowa's Senators were split on the measure, with Republican Charles Grassley voting for it, and Democrat Tom Harkin voting against it. In addition to extending the Bush-era tax rates, the measure also includes other tax provisions such as another "patch" to the Alternative Minimum Tax.
Tuesday, December 14, 2010
Donating a Car to Charity
In the good old days (before 2005), taxpayers could donate a car to charity and claim a deduction for the fair-market value of the car. It didn't matter if the charity only sold the car for a few-hundred dollars. The taxpayer could claim a deduction for the fair-market value of the car. That all changed in 2005.
You can still claim a deduction for donating a car to charity, but there are limits on the amount you can deduct. If you donate a car to charity and the charity sells the car as a fundraiser, your deduction is limited to the lesser of the car's fair-market value or what the charity sold the car for.
Example:
You donate a car with a fair-market value of $2,000 to a charity. The charity sells the car at a fundraising auction, but only gets $800 for the car. Your charitable contribution deduction is limited to $800.
You can still claim the fair-market value as a deduction if the charity uses the car as part of its "stated cause" rather than selling it as a fundraiser.
Donating a car to charity is not always a straightforward tax situation, and there are recordkeeping requirements that must be met. It's best to consult with a tax pro before making such a donation.
You can still claim a deduction for donating a car to charity, but there are limits on the amount you can deduct. If you donate a car to charity and the charity sells the car as a fundraiser, your deduction is limited to the lesser of the car's fair-market value or what the charity sold the car for.
Example:
You donate a car with a fair-market value of $2,000 to a charity. The charity sells the car at a fundraising auction, but only gets $800 for the car. Your charitable contribution deduction is limited to $800.
You can still claim the fair-market value as a deduction if the charity uses the car as part of its "stated cause" rather than selling it as a fundraiser.
Donating a car to charity is not always a straightforward tax situation, and there are recordkeeping requirements that must be met. It's best to consult with a tax pro before making such a donation.
Saturday, December 11, 2010
Tax Problems for Rapper Doug E. Fresh
Rapper/record producer/beat-boxer Doug E. Fresh appears to be in trouble with the IRS. Fresh owes more than $2.2 million in back taxes, and the IRS has filed a lien against him in New York. It's not the first time Fresh has had problems with the IRS; the IRS came after him in 2008 for $367,000 in back taxes.
Read more here and here.
Read more here and here.
Friday, December 10, 2010
Section 179 Limits for 2010 and 2011
The Section 179 expensing limits have been increased for 2010 and 2011. A Section 179 election allows businesses to elect to expense asset purchases in the year of the purchase, rather than depreciating those assets over a period of years. For both 2010 and 2011, businesses can elect to expense up to $500,000 of assets in any one year. (NOTE: watch legislation this month to see if anything happens with the 2011 limits.)
Section 179 does not apply to owners of residential rental property. However, rental owners can take advantage of "bonus depreciation," a special election to expense 50% of the cost of an asset and depreciate the remaining 50%. Bonus depreciation is an option available to businesses, as well. In some cases, a business may not want to take a Section 179 expense, and instead take bonus depreciation.
Iowa taxpayers should keep in mind that Iowa does not follow along with federal Section 179 rules or with federal bonus depreciation. Iowa only allows Section 179 expensing of up to $133,000, and does not honor bonus depreciation at all. This means an Iowa business or rental property owner could very easily have to track multiple depreciation schedules and basis information.
Section 179 does not apply to owners of residential rental property. However, rental owners can take advantage of "bonus depreciation," a special election to expense 50% of the cost of an asset and depreciate the remaining 50%. Bonus depreciation is an option available to businesses, as well. In some cases, a business may not want to take a Section 179 expense, and instead take bonus depreciation.
Iowa taxpayers should keep in mind that Iowa does not follow along with federal Section 179 rules or with federal bonus depreciation. Iowa only allows Section 179 expensing of up to $133,000, and does not honor bonus depreciation at all. This means an Iowa business or rental property owner could very easily have to track multiple depreciation schedules and basis information.
Recordkeeping Requirements for Charitable Contributions
We've explored the basics of charitable contributions and which organizations qualify for tax-deduction purposes. Today, I'll explore the recordkeeping requirements for documenting your charitable contributions.
Documentation for contributions by cash, check or credit card is straightforward enough. Maintain receipts or other records that show the amount donated and when.
If you donate more than $250 in cash to an organization at any one time, the organization must provide you with a written confirmation of the donation.
What if you donate property, such as used clothing to Goodwill? In that case, you should try to obtain a receipt from the organization.
If you donate more than $500 worth of property to charities during the year, you have to file Form 8283 and include more detail to the IRS about who you made the contribution to, what type of property was donated, and how you determined the value of the property.
If you donate $500 or more of any single item of clothing or household items that are not in "good condition," you must include a report from a qualified appraiser.
If you claim a deduction for more than $5,000 worth of property donations, you also must include a report from a qualified appraiser.
The rules for donating a car to a charity are even more complex, and will be explored in a future blog post.
If you donate more than $5,000 worth of property, even more detail is required, such as (possibly) a report from an appraiser.
Documentation for contributions by cash, check or credit card is straightforward enough. Maintain receipts or other records that show the amount donated and when.
If you donate more than $250 in cash to an organization at any one time, the organization must provide you with a written confirmation of the donation.
What if you donate property, such as used clothing to Goodwill? In that case, you should try to obtain a receipt from the organization.
If you donate more than $500 worth of property to charities during the year, you have to file Form 8283 and include more detail to the IRS about who you made the contribution to, what type of property was donated, and how you determined the value of the property.
If you donate $500 or more of any single item of clothing or household items that are not in "good condition," you must include a report from a qualified appraiser.
If you claim a deduction for more than $5,000 worth of property donations, you also must include a report from a qualified appraiser.
The rules for donating a car to a charity are even more complex, and will be explored in a future blog post.
If you donate more than $5,000 worth of property, even more detail is required, such as (possibly) a report from an appraiser.
Subscribe to:
Posts (Atom)
