A net operating loss on your tax return isn’t all bad news

When a company’s deductible expenses exceed its income, generally a net operating loss (NOL) occurs (though of course the specific rules are more complex). If you’ve found when filing your income tax return that your business had an NOL, there is an upside: tax benefits.

When a business incurs a qualifying NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.

However, there is an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL.

Please contact us if you’d like more information on the net operating loss rules and how you can maximize the tax benefit of an NOL.

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Filling a paper return? Understand the Timely Mailed Timely Filed Rule

The IRS considers a paper return that’s due April 15 to be timely filed if it’s postmarked by midnight on April 15. But dropping your return in a mailbox on the 15th may not be sufficient.  You need to understand the Timely Mailed Timely Filed Rule.

For example, let’s say you mail your return with a payment on April 15, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then re-file and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:
• FedEx Priority Overnight
• FedEx Standard Overnight
• FedEx 2Day
• UPS Next Day Air Saver
• UPS 2nd Day Air
• UPS 2nd Day Air A.M.

Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. For example, DHL is no longer an authorized delivery service.

If you’re concerned about meeting the April 15 deadline, another option is to file for an extension. Call us, and we can help you determine if that makes sense for you.

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2014 IRA Contribution Deadline: April 15

The 2014 IRA contribution deadline is April 15, 2015. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2014).

If you haven’t already maxed out your 2014 limit, consider making one of these types of contributions by April 15:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2014 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits may reduce or eliminate your ability to contribute, however.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

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Tangible Property Safe Harbors

If your business has made repairs to tangible property, such as buildings, machinery, equipment and vehicles, you may be eligible for a deduction on your 2014 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. (A qualified small business is generally one with gross receipts of $10 million or less.)

Contact us to ensure that you’re taking all of the repair and maintenance deductions you’re entitled to.

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Deducting Investment Interest for 2014

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make the deduction less beneficial than you might think.

Your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward, and you can deduct it in a later year if you have excess net investment income.

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2014 return, please contact us. We can run the numbers to calculate your potential deduction — or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.

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Proper Substantiation for 2014  Charitable Donations

If you don’t meet IRS substantiation requirements, your deductions for charitable donations could be denied. To comply, generally you must obtain a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.

If you haven’t yet received substantiation for all of your 2014 donations, you may still have time to obtain it: “Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So as long as you haven’t filed your 2014 return, you can contact the charity and request a written acknowledgement — you’ll just need to wait to file your return until you receive it. (But don’t miss your filing deadline; consider filing for an extension if needed.)

Be aware that certain types of donations are subject to additional substantiation requirements. To learn what requirements apply to your charitable donations, please contact us.

Tax Tip: IRS Requires Accurate Records for Deductions

Are you looking for ways to lower your tax bill? Itemizing your deductions can potentially reduce what you owe. Common deductions include medical expenses, charitable donations or unreimbursed job-related expenses. If you decide to claim deductions, it’s very important that you keep accurate records and receipts to meet IRS requirements.

What Are Accurate Records?

According to IRS Publication 463, any evidence you use to support a deduction must be “documentary” and “adequate”, meaning it must be written and show the date, place, amount and nature of the expense. Examples of the types of documentary evidence you can use to support your deduction include mileage logs, itemized credit card receipts, bank statements, taxi and toll receipts, receipts for gifts, and receipts from gas stations, hotels and restaurants. NOTE: Credit card statements without itemized, supporting receipts are NOT adequate.

If you’re self-employed, keep the receipts for any business-related expense you incur, no matter how small. If you plan to claim the home office deduction, you’ll also need to keep detailed records regarding your home, including any costs you pay for property tax, rent, mortgages, utilities and repairs. You should also maintain detailed records if you’re paying out-of-pocket costs for your health insurance or other medical expenses.

Additional Guidelines

As a general rule, the IRS advises taxpayers to maintain records for at least three years following their tax filing. If you file early, the three-year limitations period begins on the annual filing deadline. No records are necessary if you claim the standard deduction but you could end up owing more in taxes. Even if you don’t plan on itemizing, it’s still a good idea to keep a paper trail so you can compare your deductions before you file.

If you would like to discuss your specific situation, please contact us.

Mileage Deduction: Are you deducting all of the mileage you’re entitled to?

You probably know that miles driven for business purposes can be deductible. But did you know that you might also be able to deduct miles driven for other purposes? The rates vary depending on the purpose and the year:

• Business: 56 cents (2014), 57.5 cents (2015)
• Medical: 23.5 cents (2014), 23 cents (2015)
• Moving: 23.5 cents (2014), 23 cents (2015)
• Charitable: 14 cents (2014 and 2015)

The rules surrounding the various mileage deductions are complex, however. Some are subject to floors and some require you to meet specific tests in order to qualify. There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2014 tax return — but not more. (You don’t want to risk back taxes and penalties later.) And if you drove potentially eligible miles in 2014 but can’t deduct them because you didn’t track them, then start tracking your miles now so you can potentially take advantage of the deduction when you file your 2015 return next year.

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Why you shouldn’t procrastinate on filing your 2014 income tax return

If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: Jan. 20. That’s the date the IRS began accepting 2014 returns, and filing as close to that date as possible could protect you from tax return fraud.

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax return fraud can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is Feb. 2 — the deadline for employers to issue 2014 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2014 interest, dividend or reportable miscellaneous income payments.

Contact us if you have questions about tax return fraud or would like help filing your 2014 return early.

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