Dear clients and friends:

We hope your summer is going well so far.  Since the year is halfway over, we thought this would be a good time to send out a newsletter with a few reminders.

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really should keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method). The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

Unpaid Taxes? Goodbye Passport

There’s a new law that requires and/or authorizes the State Department to deny, revoke, or limit your passport if you have “seriously delinquent tax debt.” You have seriously delinquent tax debt if

• the amount you owe exceeds $50,000, including interest and penalties;
• the IRS has assessed that amount; and
• the IRS has filed a notice of tax lien, and all administrative remedies have been exhausted or served to you by levy.

Be Smart and Use an LLC Operating Agreement

When you form an LLC, you need to draft articles of organization that comply with the state’s LLC act and then file the articles with the appropriate state office. Typically, the required articles are broadly worded and likely don’t address members’ rights and responsibilities as you would like them addressed.

You should consider taking the extra step of having an attorney create a written operating agreement. This agreement provides operational rules for running the business and can override or alter the default rules in your state’s LLC act to better meet your needs. Having a formal agreement is often overlooked with family owned businesses as well as family owned property such as a vacation home owned jointly by several family members. Having your rights and responsibilities in writing is a good idea, even with family.

With the operating agreement, you

1. Increase the LLC’s limited liability protection by making it more difficult to “pierce the veil,” because the operating agreement makes your LLC appear more business-like;
2. Can prevent the unwanted dissolution of the LLC, which distributes the assets to the members with no LLC shield from creditors’ claims; and
3. Can create the plans you need in case of death, divorce, or withdrawal.

It’s also nice to know that you can deduct the legal fees incurred to create the operating agreement. The rules allow you to deduct up to $5,000 in organization costs immediately and then amortize the balance over 180 months.

Section 529 plans to save for college

There are two basic types of plans:

1.       Prepaid tuition plan – under this plan, you pay tuition at today’s tuition rates and the plan assumes the financial risk. For example, your child is three years old and you pay for four years of college at today’s rates. Regardless of what the tuition is 15 years from now, your child’s tuition is paid. You do not get a deduction for putting the funds in the plan, but you escape taxation for the benefit received.

2.       Savings plan – under this plan you do not get a tax deduction for contributing funds, but the funds grow tax free, and there is no tax when the funds are used for the child’s higher educational expenses. For example, your child is three and you put $200,000 in the plan today (beware of gift tax issues). When your child is 18, the savings plan has grown tax-free to $420,000 (this growth is just an example, not a guarantee.)

Which is better?  If the increase in tuition outpaces the investment return in the savings plan, the prepaid tuition plan is better. The prepaid plan also eliminates volatility in the market.  You can learn more at www.privatecollege529.com.

IRS is outsourcing tax debts to private debt collectors

If you have certain debts with the IRS and are selected for this process, the IRS and the private collection agency will each send you and your representative a letter about your case being assigned to the debt collector.  There will be a unique 10-digit identifier on the letter in place of your social security number.

However, the IRS has issued many warnings about Scam IRS calls.  How can you tell the difference between the private debt collection agency and a fraudster?  For one, you will have received a letter from the IRS. The private collection agency will only direct taxpayers to make payments to the IRS. The following are the only agencies the IRS will use:

·         CBE Group in Cedar Falls, IA

·         Conserve in Fairport, NY

·         Performant in Livermore, CA

·         Pioneer in Horseheads, NY

Turbocharge your retirement with a Health Savings Account - HSA

To qualify for an HSA, you must have a qualifying high deductible health plan.  If you do, you can open an HSA and make annual contributions. The result is very different than having an IRA. With an IRA, there is a deferral of tax. You or your beneficiaries will pay tax on withdrawals.  This is not true of the HSA since you can save receipts for qualifying medical expense and then reimburse yourself in retirement. Those reimbursements are tax free! Remember you don’t need to reimburse yourself from the HSA in the same year you incurred the medical costs.

If you are a business owner, convert your charitable deductions to business expenses

A business deduction is usually better than an itemized deduction for tax savings. You can do this if the donation is directly related to your business and made with a reasonable expectation of a commensurate economic return.

You can do this by advertising that a portion of the sales price of a given product or service will be earmarked for charity. Be careful that you get the deduction instead of the customer getting the deduction.  You can do this by not offering the customer the option of receiving the earmarked amount in cash instead of it going to charity and the customer receives fair value for the total price paid (including the earmarked amount).

Save the date

The Morre & Company client party will be on the evening of Wednesday, September 20, 2017 at Inn Marin.

Please contact us if you have any questions about these thoughts or other tax, financial or bookkeeping issues.