June 2017 Tax Newsletter

Keep your audit fears in check
Reasons to incorporate your business
4 Tips to landing your dream home in a seller's market
A tax break for business travel with your spouse
How to sidestep the wash sale tax rule

Keep your audit fears in check

Getting audited by the IRS is no fun. However, your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals some interesting and reassuring facts about the risk of an IRS audit.

Audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been steeply declining over the last five years, which the IRS commissioner said was due in part to declining budgets and a smaller workforce.

Audits target the rich. It's a fact: IRS audits target the super-rich. The statistical chance of being audited increases dramatically for people of higher income levels.

Missing data can get you audited. High income isn't the only thing that gets you audited. Any missing data on your return can also trigger an audit.

Standing out gets you audited. The IRS takes a close look at business expenses, charitable donations, and high-value itemized deductions. They have statistical data on what amounts are typical for various professions and income levels. If your return stands out from what is "normal," it may be flagged for review by the agency's computer system.

More audits are done by mail. If you face an audit, most likely it will be done by mail. Only about one in four IRS audits are field audits conducted in person by an IRS agent. The most common issues, such as math errors or missing data, are done through mail correspondence.

If your issues are more complicated, you may face a field audit and you may owe more to the IRS. The average field audit recommended the individual pay an additional tax of nearly $19,000, while the average correspondence audit recommended a payment of less than $7,000.

Most audits end up costing you. You can fight the tax law, but the tax law usually wins. Most people audited by the IRS end up owing additional tax. Only 11 percent of correspondence audits and 8 percent of field audits concluded with a "no change"finding in favor of the taxpayer.

Contact us with any questions or concerns.

Reasons to incorporate your business

Here are some reasons you may want to consider incorporating your growing business.

Protect your personal assets from creditors. When you operate your business within a corporation, creditors are often limited to corporate assets to satisfy a debt. Your home, savings, and retirement accounts are no longer fair game.

Provide a personal liability firewall. The corporate form can help protect you against claims made by others for injuries or losses arising from actions of your business.

Issue shares of stock. You can help build your business by issuing shares to new investors, or by offering stock options to key employees as a form of compensation.

Gain tax flexibility. A corporation can provide you with more tax flexibility. Deliberate planning can help optimize the taxable division between corporate income, dividends, and your personal wages.

Enhance your business presence. Being incorporated sends a signal that your business is a serious enterprise and it could open doors to opportunities not offered to sole proprietors. Consumers, vendors, and other businesses often prefer to do business with incorporated companies.

If you are still going over the pros and cons of incorporating your business, pick up the phone. Together, we can complete a thorough tax review that will help shed light on the impact such a move will have on your business situation.

4 Tips to landing your dream home in a seller's market

Here are some suggestions to landing your dream home in our current real estate market.

1. Be nimble, be flexible. Try to investigate new listings quickly within hours of their first posting, if possible. If you're interested in a house but an inspection finds a few flaws, you may have to be flexible about accepting a house with a few quirks or in need of some repairs.

2. Make a strong offer. A seller's market isn't a time to lowball your first offer on a house you want. If you've prepared and set your expectations below your minimum price range, you should be able to make a strong offer to ensure you are among the most attractive bidders. You shouldn't wildly overpay, but making a strategic offer above the listing price may sweeten the deal enough to close quickly.

3. Earnest money. You may consider offering a meaningful earnest money component to your offer to show you are serious. Just understand that this money is put at risk if you later change your mind.

4. Few strings. Try to make your offer as simple as possible. The more contingencies, the more room for someone else to sneak in and snap up your target home. Flexible move-in dates may help the seller navigate their purchase. Having to sell your home before buying theirs may create a snag versus another offer.

A tax break for business travel with your spouse

Suppose you're planning to take a business trip across the country. Are you eligible for tax benefits if you invite your spouse to accompany you? It depends on your circumstances. Specifically, the tax rules differ if your spouse is an employee of your company or is just going along for the ride.

If your spouse is an employee Generally, if you're traveling primarily for business reasons, you can deduct the costs of your business travel, including airfare, lodging and meals, qualified entertainment, and local transportation costs. Meals and entertainment are subject to a 50% limit.

Therefore, if your spouse works for your company and legitimately performs business services on the trip, you can deduct the expenses both of you incur. Be aware, however, the expenses attributable to personal recreational activities are completely nondeductible.

If your spouse is not an employee This is a different story. Although you can continue to write off the full amount of the expenses for your travel for business purposes, the portion of the cost allocated to your spouse can't be deducted. It's purely a personal expense. However, you may be in line for a tax break. If your cost is reduced because your spouse is traveling with you, you can deduct what it would have cost to go alone. For example, if you pay for a double room at the hotel, you're allowed to deduct the cost of a single room, even if that's more than half the cost of a double.

Usually, business travel expenses are paid by the company via an accountable plan, with any reimbursements tax-free to employees. Contact us if you need help. We can help with the tax logistics of your business travel.

How to sidestep the wash sale tax rule

Usually if you sell securities and the transaction results in a loss, you can use the loss to offset capital gains, plus up to $3,000 of ordinary annual income. Any excess loss over that amount is then carried over and can be used to offset losses next year. Because of these tax benefits, investors often "harvest" losses from securities sales, especially at the end of the year.

But there's a potential stumbling block. Under the "wash sale rule," you can't claim a loss from a securities sale if you acquire substantially identical securities 30 days before or after the date of the sale. The loss is disallowed for tax return purposes.

What is considered substantially identical? Clearly, if you buy back the same stock it will trigger the wash sale rule, but not necessarily if it's the stock of a company that's merely in the same industry. However, transactions involving mutual funds within the same family of funds could cause a loss to be disallowed.

Frequently, a wash sale occurs when you reacquire securities you just sold at a loss because you believe the price is about to rebound. There are two relatively easy ways to avoid a wash sale.

1. Wait until 30 days have passed before you buy the same or similar securities. This preserves the loss without any question.

2. Use a "doubling up" strategy. Buy the same amount of the security you want to sell for a tax loss, temporarily doubling your holdings. Wait at least 31 days, and then sell the original batch of shares for a loss. Now you have your deductible loss, still own the same amount of shares, and can benefit from future appreciation.

If your loss is disallowed because of the wash sale rule, you can still find some tax solace. The amount of the disallowed loss is added to your basis in the shares you reacquired. Thus, when you eventually sell those shares, either your tax loss will be increased or your taxable gain will be reduced. Contact us for assistance.