This is the ninth column in my series trying to get our clients ready for their December Tax Planning Sessions.
Cost Segregation Studies
Real Estate that’s used for a business purpose is generally depreciated over 27.5 years if its Residential Property and 39 years for all other types. This means that if you purchase a piece of non-residential real estate for $1M and we set aside $100K of that purchase price for land, if the building is put into use on the first day of the year that we’ll only get a depreciation deduction of $23,077 per year.
Back in the eighties there was a hospital tax case that challenged this law saying that individual components of a building such as electrical, HVAC, or even landscaping had a very different useful life and should be depreciated as such. Interestingly enough, the courts agreed.
This allows us to speed up the depreciation process of any commercial building by segregating its components as 3, 5, 7, 9, and 15 year properties. In doing this, some of the components may also be included as bonus depreciation further increasing the annual deduction.
In order to do this, a Cost Segregation Study must be completed by a specialist and you must be up to date on your tax filings. In higher interest rate years, the added benefit of speeding up depreciation can make certain projects financially viable.
Entertainment and Club Dues
Entertainment expenses are again non-deductible. Club dues for a membership in a club organized for business, pleasure, recreation, or other social purposes are also non-deductible.
Qualified Charitable Distributions
A Qualified Charitable Distribution (QCD) is a transfer by a trustee or custodian from a taxpayer’s IRA made directly by the trustee to a charitable organization. The total amount of QCD’s for a taxpayer cannot exceed $105,000 and only qualifies for distributions from the IRA which would normally have been made. This can produce significant tax savings.
Beginning in 2023, donors may also contribute $53,000 to a qualified Charitable Remainder Trust or a Charitable Gift Annuity.
Qualified Trade or Business Definition
One of the major clarifications of the TCJA 2017 tax package was the definition of a Qualified Trade or Business that’s eligible for the 20% Qualified Business Income Deduction. We were hoping that the IRS would actually tell us what was eligible. Instead they only told us what isn’t, such as…
a – A Specified Trade of Business
b – Employee Wages or Guaranteed Payments of a Partner
Nowhere in the IRS Code is there a definition for “Trade or Business”. But the Supreme Court has defined it as a taxpayer involved in an activity, “with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit.”
The IRS went on to emphasize the absolute need for books and records as being a determinant for a Qualified Trade or Business. Taxpayers with multiple trades or businesses should note that, pursuant to Treasury Regulations, a trade or business is only considered separate and distinct from another trade or business if it maintains a separate and complete set of books and records. Also, the entity must maintain a separate bank account for income and expenses of the activity.
Why is this important? If your business was declassified as a trade or business, under tax law, it would become a hobby. As such you would lose the ability to get the up to 20% Qualified Business Deduction. And if your new “hobby” showed a loss, you would be unable to deduct it. The books and records we maintain on your behalf are more important than ever.
Let me leave you with this…
I’ve had several conversations with clients in the past couple of days. Some were elated and exuberant at the outcome of the election. Others were horrified.
Believe it or not, this wasn’t the most bitter and rancorous election in the history of our nation. That pathetic accomplishment goes to the election between John Adams and Thomas Jefferson in 1796.
Under a newly enacted constitution, George Washington had been elected to two terms. It was not known until two months before the actual election that Washington wouldn’t seek a third term.
The election of 1796 was the first race between two divided political parties in our history. It featured Vice President Adams of the Federalist Party against former Secretary of State Jefferson of the Republican Party.
The race almost immediately turned into nothing more than mud slinging.
An editorial ran in the Gazette of The United States accusing Jefferson of having an affair with one of his female slaves. It also accused him of running away from British Troops during the Revolution.
On the other side, Vice President Adams was accused of wanting to be a King and beginning a dynasty by having his son succeed him as President. He was also accused of being overweight and was nicknamed, “His Rotundity.”
Let’s remember that all of this happened in a country that was barely what anyone would call a country given its infancy. Accusing anyone of running from the British or wanting to be King was fighting words. And given the fact that everyone making the accusations had just beaten the most formidable army on the planet, the situation became dangerous indeed. Here’s my point…
Our nation survived and even thrived.
Wherever you are on the political spectrum; whether you’re left of Socialist or right of Religious Fanatic, our two party system works. We are the most advanced and successful Republic to ever grace this planet.
Please allow me to use a popular quote from American President to explain…
“America isn’t easy. America is advanced citizenship. You’ve gotta want it bad, ’cause it’s gonna put up a fight. It’s gonna say, ‘You want free speech? Let’s see you acknowledge a man whose words make your blood boil, who’s standing center stage and advocating at the top of his lungs that which you would spend a lifetime opposing at the top of yours.’
You want to claim this land as the land of the free? Then the symbol of your country cannot just be a flag. The symbol also has to be one of its citizens exercising his right to burn that flag in protest. Now show me that, defend that, celebrate that in your classrooms.
Then you can stand up and sing about the land of the free.”
I was born here in Chicago and raised by the guys who fought Viet Nam and the Big One. The Chicago of my youth was a very different place and It was a very different time.
One of the things they taught me was that just because someone disagreed with me, that the disagreement didn’t make them my enemy.
We’re all still Americans. We’re all still Brothers and Sisters. In the end, all we actually have is each other. Who else will actually come to our aid in the middle of a crisis? England? Fahgetabadit.
Let’s make it a point of respecting those who disagree with us. Let’s come together.
And please allow me to make another prediction. Whatever your feelings happen to be about the last election, I’ll bet you dimes to donuts that…
Our nation will again survive.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
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Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.`