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When Can You Discard Old Tax Records?

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.

It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments that also apply to the state return.

How is Income Taxed on Vacation Home Rentals?

If you have a second home in a resort area, or if you have been considering acquiring a second home or vacation home, and with summer just around the corner, you may have questions about how rental income is taxed for a part-time vacation-home rental.  The applicable rental rules include some interesting twists that you should know about before you begin renting. Although some individuals prefer to never rent out their homes, others find such rentals to be a helpful way of covering the cost of the home. For a home that is rented out part time, one of three rules must be considered, based on the length of the rental:

  1. Home Rented for Fewer Than 15 Days – If a property is rented out for fewer than 15 days in a year, the property is treated as if it were not rented out at all. The rental income is tax-free, and the interest and taxes paid on the home are still deductible as part of itemized deductions and within the usual limitations. In this situation, however, any directly related rental expenses (such as agent fees, utilities, and cleaning charges) are not deductible. This rule can allow for significant tax-free income, particularly when a home is rented as a filming location or during a major sports event such as the Super Bowl.

  2. Home Rented for At Least 15 Days with Minor Personal Use – In this scenario, the home is rented for at least 15 days, and the owners’ personal use of the home does not exceed the greater of 15 days or 10% of the rental time. The home’s use is then allocated as both a rental home and a second home. For example, if a home is used 5% of the time for personal use, then 5% of the interest and taxes on that home are treated as home interest and taxes; these costs may be deductible as itemized deductions. The other 95% of the interest and taxes, as well as 95% of the insurance, utilities, and allowable depreciation, count as rental expenses (in addition to 100% of the direct rental expenses). If the rental income less the expenses result in a loss, the loss is limited to $25,000 per year for a taxpayer with adjusted gross income (AGI) of $100,000 or less and is ratably phased out when AGI is between $100,000 and $150,000. Thus, if a taxpayer’s income exceeds $150,000, the rental loss cannot be deducted; it is carried forward until the home is sold or until there is rental profit in a future year or the taxpayer has gains from other passive activities that can be used to offset the loss. 

  3. Home Rented for At Least 15 Days with Major Personal Use – In this scenario, a home is rented for at least 15 days, but the owner’s personal use exceeds the greater of 14 days or 10% of the rental time. With such major personal use, no rental-related tax loss is allowed. For example, consider a home that has personal use 20% of the time and is a rental for the remaining 80%. The rental income is first reduced by 80% of the combined taxes and interest. If the owner still makes a profit after deducting the interest and taxes, then direct rental expenses and certain other expenses (such as the rental-prorated portion of the utilities, insurance, and repairs) are deducted, up to the amount of the remaining income. If there is still a profit, the owner can take a deduction for depreciation, but this is also limited to the remaining profit. As a result, no loss is allowed, and any remaining profit is taxable. The interest and taxes from the personal use (20% in this example) are deducted as itemized deductions, which are subject to the normal interest and tax limitations.

Vacation Home Sales – A vacation-home rental is considered a personal-use property.  Gains from the sales of such properties are taxable, and losses are generally not deductible.

Unlike primary homes, second homes do not qualify for the home-gain exclusion. Any gain from a second home is taxable unless it served as the taxpayer’s primary residence for two of the five years immediately preceding the sale and was not rented during that two-year period.  In the latter scenario, the taxpayer does qualify for the home-gain exclusion, if he or she has not used that exclusion for another property in the prior two years.  As a result, the home-gain exclusion can offset an amount of gain that exceeds the depreciation previously claimed on the home; this amount is limited to $250,000 for an individual or $500,000 for a married couple filing jointly (if the spouse also qualifies).

There are complicated tax rules related to the home-gain exclusion for homes that are acquired in a tax-deferred exchange or converted from rentals to primary residences.  Homeowners may require careful planning to utilize the home-gain exclusion in such cases.

As an additional note, when a property is rented for short-term stays or when significant personal services (such as maid services) are provided to guests, the taxpayer likely will be considered a business operator rather than just an individual who is renting a home.  If so, the reporting requirements will differ from those outlined above.

As with all tax rules, there are certain exceptions to be aware of.  Please call this office to discuss your situation in detail.

Business Due Dates for June 2022

June 15 – Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, June 15 is the due date for you to make your deposit of Social Security, Medicare, and withheld income tax for May 2022. This is also the due date for the non-payroll withholding deposit for May 2022 if the monthly deposit rule applies.

June 15 – Corporations

Deposit the second installment of estimated income tax for 2022 for calendar year corporations.

If you have any questions, please give us a call.

S Corporations Reasonable Compensation Requirement

Unlike a C corporation, which itself pays the tax on its taxable income, an S corporation does not directly pay taxes on its income; instead, its income, losses, deductions, and credits flow through to its shareholders’ individual tax returns on a pro rata basis. These distributions are not subject to self-employment (Social Security and Medicare) taxes. As a result, many S corporations ignore the requirement that each shareholder-employee must take reasonable compensation in the form of W-2 wages in exchange for services performed for the corporation. These wages are subject to Social Security and Medicare taxes (which the corporation and the employee generally split equally); the corporation is also responsible for paying the Federal Unemployment Tax (as well as any state unemployment taxes).

May 2022 Individual Due Dates

May 10 – Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during April, you are required to report them to your employer on IRS Form 4070 no later than May 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

May 31 –  Final Due Date for IRA Trustees to Issue Form 5498

Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2021. The FMV of an IRA on the last day of the prior year (Dec 31, 2021) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 72 or older during 2022.

Cash Flow Solution for Seniors

The annual inflation rate in the U.S. accelerated to 7.5% in January of 2022, the highest since February of 1982, hitting those on fixed retirement income, namely seniors, the hardest.

On top of escalating living expenses due to inflation, some retirees are faced with a significant amount of debt and inadequate income. Some seniors that have a mortgage on their home have retirement income too low to cover the mortgage payments and have enough left over to be able to enjoy their golden years. Are there any remedies for this situation?

The Tax Filing Deadline is Drawing Near

As a reminder to those who have not yet filed their 2021 tax returns, April 18, is the due date to either file a return (and pay the taxes owed) or file for an automatic extension (and pay an estimate of the taxes owed). The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia – even if you don’t live in DC. If you live in Maine or Massachusetts, the filing due date is April 19, 2022, because of the Patriots’ Day holiday in those states.

THE STEPS TO ESTIMATE START-UP COSTS BEFORE YOU LAUNCH YOUR NEW BUSINESS

According to one recent study, start-ups created over two million jobs in the United States in 2015 alone. In fact, by 2018, there were 30.2 million such organizations operating in the country — making up a significant part of the economy.

But having an idea for a product or service and bringing that vision into reality are often two different things. It’s one thing to come up with something innovative — it’s another thing entirely to avoid the trials and tribulations that the business side of the equation often brings with it. That’s why it’s so important to estimate start-up costs before you launch your new business — it can help you avoid as many of these issues as possible.