David Moseman CPA, Author at CironeFriedberg, LLP

What Business Owners Need to Know About Depreciation

June 13, 2022 by David Moseman CPA

Depreciation is an annual tax deduction that allows small businesses to recover the costs of certain eligible property that decreases in value over its lifetime. Depreciation is an allowance for the wear and tear, deterioration or obsolescence of the property.

As a small-business owner, you can depreciate property when you place it in service for use in your trade or business or an income-producing activity. Depreciation stops when the full cost of the property has been recovered or when the property is retired from service, whichever happens first.

What’s depreciable? Machinery, equipment, buildings, vehicles and furniture that are owned by the business. Personal property is never depreciable. If you use an asset — a car, for instance — for either business or investment and personal purposes, you can depreciate only the business or investment use portion of the asset. Other depreciable assets may consist of building improvements and land improvements, but land is never depreciable.

To depreciate property, your business must:

Own the property. The business is considered to own property even if the property is subject to a debt.
Use the property in a business or income-producing activity. If your property is used to produce income, the income must be taxable. Property that’s used solely for personal activities can’t be depreciated.
Be able to assign a determinable useful life to your property. This means it must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes.
Expect the property to last more than one year. The property must have a useful life that extends substantially beyond the year you placed it in service.
Exclude excepted property from depreciation. Excepted property includes certain intangible property, certain term interests, equipment used to build capital improvements and property placed in service and disposed of in the same year.

Consider the different depreciation methods

The IRS allows you to use different depreciation methods, depending on the type of property and life of the property.

The most common depreciation method for tax purposes is the modified accelerated cost recovery system (MACRS). This method is used to recover the basis of most business and investment property placed in service after 1986. This method allows a depreciation deduction based on a percentage of the total cost based on when the property was placed in service and the life of the property.

Other depreciation methods that may be used are the straight-line method or the forecast method. The straight-line method lets you deduct the same amount of depreciation each year over the useful life of the property. While the forecast method depreciation is calculated each year by the cost of the property being multiplied by a fraction, which is the current year’s net income from the property over the anticipated net income that the property will bring in 10 years after it is placed in service.

There are also methods that are called accelerated depreciation methods, and the most common of these are bonus depreciation and Section 179 depreciation. These methods allow a more upfront depreciation deduction and may allow the entire cost of the property to be depreciated in the first year.

Work with one of our tax professionals to help you decide what method is the best choice for your situation.

New for 2022

Recently, the IRS imposed new dollar limits on the Section 179 deduction. For tax years beginning in 2022, the maximum Section 179 expense deduction is $1.08 million. This limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year exceeds $2.7 million. Also, the maximum Section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2022 is $27,000.

This is just a brief introduction to a complex topic; there are many other provisions. Again, your best bet is to work closely with a qualified tax adviser at our Firm to make sure you’re following the rules and getting all the breaks to which you are entitled.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Capital Gains and Home Sales

June 6, 2022 by David Moseman CPA

If you are selling your home, there is a good chance that the profit or a portion of the profit from the sale will not be taxable. Thanks to the Section 121 Exclusion (commonly referred to as the home sale exclusion), provided by the Internal Revenue Code, individual taxpayers can exclude up to $250,000 in profits from capital gains tax when they sell their primary personal residences, while married taxpayers can exclude up to $500,000 in gains.

Calculating Your Capital Gain or Loss

To calculate your capital gain or loss on the sale of your residence you subtract your cost basis from your sales price. The cost basis starts with what you paid for the home plus the costs you incurred in the purchase, such as title fees, escrow fees, and real estate agent commissions. Then add the costs associated with any major improvements you made, such as replacing the roof or the furnace, you made to the home. Minor renovations or maintenance costs such as painting a room do not count. Then subtract any accumulated depreciation you may have taken over the years, if any, based on items like taking a home office deduction. The resulting number is your cost basis.

Your capital gain or loss is the sales price of your home minus your cost basis and any expenses related to the sale (commissions, fees, etc.). If you end up with a capital loss, you cannot claim a deduction for the loss under the Internal Revenue Code.

If you end up with a capital gain, you can subtract the home sales exclusion, if eligible, to determine your taxable gain. To be eligible for the exclusion, you must have lived in the home for a minimum of two of the five years immediately preceding the date of sale. The two years do not have to be consecutive, and you do not have to live there on the date of the sale.

Know the Details

You can use this two-out-of-five-years rule to exclude your profits each time you sell your main home. However, you can claim the exclusion only once every two years because you must spend at least that much time in the residence. You cannot have excluded the gain on another home in the last two-year period.

You also want to document any unforeseen circumstances that might force you to sell your home before you’ve lived there the required period of time. The IRS defines an unforeseen circumstance as an event that you could not reasonably have anticipated before buying and occupying your main home. Natural disasters, a change in employment that left you unable to meet basic living expenses, death, divorce and multiple births from the same pregnancy qualify as unforeseen circumstances under IRS rules. Any unforeseen circumstances may result in you getting a partial exclusion.

Active-duty service members are not subject to the residency rule. They can waive the rule for up to 10 years if they’re on qualified official extended duty.

If you realize a profit in excess of the home sale exclusion or if you do not qualify for the exclusion, you will report the sale of your home on Schedule D of your Individual Tax Return.

Be advised this is just a summary and there may be other provisions and exceptions applicable to you. Be sure to consult a tax professional before filing.

Estimated Taxes are Due June 15th

May 29, 2022 by David Moseman CPA

The U.S. income tax system is pay-as-you-go, meaning that you pay taxes as you earn income. According to the IRS, sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when they file their tax return.

If you are self-employed as an independent contractor or freelancer, you pay your taxes quarterly. You file quarterly taxes with Form 1040-ES, Estimated Tax for Individuals.

The next 2022 Payment Due Date for Estimated Taxes is June 15th.

For more information about estimated taxes, please refer to this article by David Moseman, CPA and CironeFriedberg partner.

Overview of Blockchain and Cryptocurrency

May 24, 2022 by David Moseman CPA

The COVID-19 pandemic disrupted life as we knew it. We are still in the midst of finding our way to a new normal, but it is not clear how long that will take or what it will look like. Some things are becoming clearer, however, and one of those things is that blockchain technology and cryptocurrency are growing in popularity. For example, Bitcoin, a kind of cryptocurrency, is often in the headlines as its value goes up and down.

Many still believe cryptocurrency is a fad, but the fact that Congress is considering legislation affecting it runs counter to that thought. This year alone, Congress introduced 19 bills that impact blockchain and cryptocurrency. The proposals range from the Blockchain Promotion Act of 2021, which seeks to define and promote blockchain, to the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2021, which seeks to make the U.S. competitive in cryptocurrencies on the global market.

There is good reason for the level of attention that blockchains and cryptocurrency are attracting: While they are something of a novelty today, there are many ways industries are envisioning how they can be used in the future. Health care and financial services are two industries that are carefully watching how these technologies evolve.

As with most new innovations, wide acceptance takes time. Nevertheless, it is important to understand some of the basics. Here is a brief overview of some facts.

Four types of blockchain

Blockchain is a special type of database shared among a network and is essential to keeping track of virtual currency transactions. There are four major types of blockchain:

Public blockchains. Public blockchains are open, decentralized networks of computers accessible to anyone wanting to request or validate a transaction.
Private blockchains. Private blockchains have access restrictions and usually are governed by one entity. Only people who have permission from the system administrator can join.
Hybrid blockchains or consortiums. Hybrid blockchains or consortiums have both centralized and decentralized features.
Sidechains. Sidechains are blockchains that run parallel to the main chain. They allow users to move digital assets between two different blockchains.

Important features

The most important feature of these technologies is their ability to address these key, interrelated issues:

Auditability. Blockchain will make audits more trustworthy because companies will not be able to change their records. Once a transaction starts, it cannot be undone, changed or stopped.
Security. Blockchain technology produces a secure ledger of transactions. There have been numerous hacks of source codes and personal digital keys, however. In addition, the owner of the digital key is the only person with access to the cryptocurrency it unlocks, so if the key is lost, so is the cryptocurrency in that account.
Trust. The transparency inherent in blockchain technology provides an element of trust, even between parties that are not familiar with each other.

Two ways to prove that a transaction is valid

Public blockchains use consensus mechanisms to validate transactions. Two common ways to validate transactions in a blockchain’s decentralized system are proof of work and proof of stake. At their most basic, PoW and PoS can be described this way:

PoW, the technical term for mining, is based on cryptography. It is the original consensus mechanism. This method uses a lot of electricity (causing environmental concerns) and is slow (causing scalability issues).
PoS, another consensus mechanism, also uses cryptographic algorithms for validation but tries to solve some of these issues by having a chosen validator validate transactions. Validators are chosen based on their stake, or how many coins they hold.

Pros and cons

Blockchain has pros and cons. The pros are that blockchains have increased transparency and transactions can be accurately tracked at a low cost.

The cons concern the unknowns surrounding blockchain technology, such as what the laws governing it will look like, how it will be taxed and how those laws will be implemented. Scalability is another concern. The system’s ability or inability to handle a growing number of transactions can affect its growth. Finally, concern about the effect of mining on the environment is impacting the industry. This is another area in which the industry needs to evolve.

Blockchain and cryptocurrency are still at a relatively early stage of becoming mainstream. Still, their journey has been compared to that of the internet in the late 1990s. It does not seem as if the technology is going away, and business owners need to stay abreast of the way the technology is progressing.

Understanding Estimated Taxes and Penalties

May 14, 2022 by David Moseman CPA

The IRS requires taxpayers to pay their taxes for a given year in that year. For taxpayers who are employees of companies, their employers must withhold income tax from each paycheck and report it on a Form W-2 early in the following year. If your employer withholds too much, you get a refund. If it withholds too little, you owe taxes. Either way, you can fine-tune your status by filing a new Form W-4 with your employer, as well as any appropriate state tax form.

Paying Estimated Taxes

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.

Taxpayers who work freelance, for example, do not have income tax withheld from the income they generate by invoicing clients. They must follow a different route for paying their taxes, and they cannot just wait until April 15 for an accounting of the previous calendar year.

These taxpayers must file their estimated taxes on a quarterly basis: April 15, June 15, September 15, and January 15. (If any of those dates fall on a weekend or a federal holiday, they are due on the first business day after the due date.)

Avoiding Penalties

With some exceptions, failure to have enough taxes withheld could result in a tax penalty. Notes the IRS: “We calculate the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.” More details are available on the IRS “Common Penalties” page. Refer to the IRS Fact Sheet on this topic.

Three ways to avoid the estimated tax penalty:

Pay at least 90% of the current year’s tax liability due.
Pay at least 100% of the prior year’s tax liability or 110% if your adjusted gross income (AGI) for the prior year exceeded $150,000. (These amounts may be tweaked in future years.)
Pay at least 90% of the current year’s “annualized income.” Taxpayers who do not receive income evenly over the course of the year, such as snowplow drivers, may use this method by completing Form 2210, Schedule AI.

The penalty may be waived if either of the following occurred:

The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.
You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

In addition, no penalty is assessed if either of the following occurs:

The total tax shown on your return minus the amount you paid through withholding is less than $1,000.
You had no tax liability in the previous year.

This is just a summary. Tax rules may change. To learn more about estimated taxes and other provisions that may apply visit the IRS site and seek the advice of a qualified tax professional.

For a calendar schedule of due dates for estimated taxes, read our article.

Annual Reviews of Federal Withholding for Employees

May 2, 2022 by David Moseman CPA

The IRS says, “All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.” However, employees may not be aware of the IRS’ suggestion, which is why employers should tell them about it.

Why employees should review their withholding

If they have too little federal income tax withheld, employees may end up owing taxes or being hit with a penalty at tax time. Conversely, if they have too much tax withheld, their paychecks will be smaller — which might hurt them financially, as they must wait until tax time to get a refund.

Employees should submit a new Form W-4 if necessary

All new hires must complete a Form W-4, which helps determine how much federal income tax to withhold from their wages. The employee’s Form W-4 information is driven by a person’s personal and financial situation. If an employee experiences certain life changes during the year, they may need to give you a new Form W-4.

Employees should review their withholding every year if they:

Have a spouse who works as an employee.
Have two or more jobs simultaneously.
Work partially during the year.
Have dependents who are at least 17 years old.
Claim tax credits such as the child tax credit.
Itemized deductions on prior year tax returns.
Earn high incomes.
Have complex tax returns.
Had large refunds or large tax bills for the previous year.

Employees may need to update their W-4 if they experience life changes, such as:

Marriage.
Divorce or legal separation.
Childbirth.
Adoption of a child.
Retirement.
Bankruptcy.
Home purchase.
Starting a new job or stopping a second job.
Their spouse gaining or losing a job.
Adjustments to income, such as student loan income deduction.
Gain of tax credits or itemized deductions, such as medical expenses, donations to charity, education credit and child tax credit.
Gain of dividends, self-employment income, IRA distributions, capital gains, interest income, and other taxable income not subject to withholding.

Although year-end may be a convenient time to review filing and withholding statuses, taxpayers can submit a new Form W-4 anytime. Often, they will see a need to do so after preparing their tax returns each year. Depending on where your employees work, they may also need to review their state and/or local tax withholdings every year.

Direct your employees to the IRS Tax Withholding Estimator

The Tax Withholding Estimator helps employees ensure the correct amount of federal income tax is withheld from their paychecks. Employees can review the Tax Withholding Estimator FAQs if they have questions about using the estimator. Also, they can consult with their CironeFriedberg professional.

What Business Owners Need to Know About Depreciation

Capital Gains and Home Sales

Estimated Taxes are Due June 15th

The next 2022 Payment Due Date for Estimated Taxes is June 15th.

Overview of Blockchain and Cryptocurrency

Understanding Estimated Taxes and Penalties

Annual Reviews of Federal Withholding for Employees

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