Airbnb – Save Taxes after Tax Reform

Posted on November 13, 2016 by Wis Laughlin

In this article, the author, Wis Laughlin, tells you how to pay the lowest legal taxes on your Airbnb rentals, particularly after 2017 Tax Reform. This article is based on a May 10, 2018, talk at Memphis Investors Group at the Embassy Suites. Handouts are below.

So, are you an Airbnb host or thinking about it? Airbnb is just being explored by the IRS and by tax preparers, so there is a lot of wrong information. Forbes.com warns: “deciphering the tax consequences of a part-time rental is no picnic.” Unlike long term rentals, Airbnb hosting generally produces significant profits.

MINIMUM RENTAL LOOPHOLE
If you use the Airbnb property as your home more than the greater of 14 days or 10% of the total days rented and you rent it for less than 15 days during the year-you need not report the rental income at all.
My advice: If you are close to meeting this rule, plan to rent for less than 15 days. Then you need to read no further.

HOW DOES THE IRS TAX AIRBNB HOSTS ?

How is Airbnb income reported, tax-wise? It depends. If it is classified as a real estate rent-al activity, you report it on your Form 1040 Schedule E. It is subject to regular income tax.
If it’s classified as small business income, then it must be reported on Form 1040 Schedule C. Schedule C income is “self-employment income” on which you pay 15% self-employment taxes (social security and Medicare) in addition to regular income taxes.
My Advice: Make sure you have rental in-come instead of self-employment income. Read on to learn how.

HOW TO AVOID SCHEDULE C INCOME
Is your Airbnb producing self-employment income? Not if you know what you are doing. Your income will be self-employment income if, like hotels and boarding houses, you provide your tenants with substantial services like regular cleaning, changing linens, or other maid services.” In contrast, furnishing heat and light, cleaning public areas, or trash collection are not substantial services.
My advice: If you want to avoid the self-employment tax– avoid providing substantial services. Don’t feed your tenants and don’t provide regular cleaning, changing of linens, or any other maid services.

NET INVESTMENT INCOME
Airbnb hosts are vulnerable to the “net in-vestment income” tax, a 3.8% additional tax on the lesser of (1) the taxpayer’s net invest-ment income (NII), or (2) ) the taxpayer’s AGI exceeding: $200,000 for a single filer, and $250,000 for joint filers. NII includes interest, dividends, capital gains, annuities, royalties and passive rental income. A real estate pro-fessional is not subject to this tax.

VACATION HOME RULES
If you use your Airbnb home personally for more than 14 days, or 10 percent of its rental use, the “Vacation Home” rules apply. Those rules require you allocate deductions between personal use, reported on Schedule A, and rental use, reported on Schedule E. Rental ex-penses are limited. See IRS Publication 527.

DEDUCTIONS — YOUR MAIN WEAPON

Your first defense against taxes is your operating expenses.’ See Schedule E.
Typical deductions include:  advertising, listing fees and commissions, auto & travel expenses  cleaning, maintenance,  the Airbnb fee,  insurance,  legal and profes-sional fees,  management fees,  mortgage interest,  Other interest, repairs,  supplies,  state and local sales and occupancy taxes,  depreciation and amortization of points and loan closing costs. There are many more. I use experience and checklists to find you more deductions.
DEPRECIATION
Capital expenditures purchase items that last more than one year, like a building, roof, or air conditioning unit. These cannot be deducted in the year purchased. The cost is prorated and deducted as depreciation over the item’s useful life. For example, a residential rental property is deducted over 27.5 years, 3.636% of the cost (adjusted basis) per year. Land is not depreciated.

COST/BASIS
The cost (“basis”) of your rental property is its contract price plus certain closing costs, plus the cost of improvements. The “adjusted basis” of the property is reduced by prior depreciation deductions. See GAIN OR LOSS.
My advice: To increase depreciation, sepa-rately depreciate items like furniture and ap-pliances, which have a shorter useful life.

GAIN OR LOSS
If you sell a property, you generally have tax-able gain to the extent its selling price exceeds its adjusted basis. If you hold a property for 12 months or more, the gain on the sale is con-sidered “long-term capital gain,” which quali-fies for lower tax rates. If you are a real estate “dealer,” regularly buying and selling properties, you do not qualify for long term capital gain treatment.
TRAP: Beware of “phantom gain” on a sale. Phantom gain exceeds the cash you receive. It often occurs if the property’s adjusted basis has been decreased by depreciation or if you refinanced the loan and took out cash.

PASSIVE LOSS RULES
The “Passive Activity Loss” rules apply to limit deductible losses on most rental activities. However, losses are generally not a problem with Airbnb. Besides a property is not subject to these rules if you use it personally for more than 14 days per year.

YOUR 20% DEDUCTION — TAX REFORM AT ITS BEST

Airbnb hosting is a pass-through, eligible to deduct up to 20% of its profits in 2018, but not more than 20% of taxable income. This deduction reduces taxable income even if you don’t itemize. There are limits on QBI and certain service providers do not qualify but these limits do not apply to a single taxpayer with taxable income not exceeding $157,500 ($315,000 for a joint filer). See the handouts below: 199A Calcs and Primer for 20% Deduction.

YOUR TAX RETURN

It is useless to understand the tax rules unless you know how to take advantage of them on your tax return! With Airbnb, you will have profits and taxes to deal with. I recommend professional tax preparation, but not just anyone. A preparer who doesn’t fully understand the tax rules may make costly mistakes or just be too shy.  It takes years of education and experience to understand the tax rules. Don’t assume that a CPA is a tax expert. Less than 25% of the CPA exam covers taxes. An H & R Block preparer may have less than 90 hours of training. I advise you to use a tax lawyer or a CPA with a masters in taxation. Don’t risk your tax dollars!

I have the expertise and the state of the art Proseries Professional software to prepare your tax return for your best advantage. My custom designed Tax Mastery© program guarantees you the lowest legal taxes. See an example of a memo:  Tax Mastery

Try me with no risk. Ask for a *Free ½ hour Consultation* : Email me.

HANDOUTS:

Primer for 20% Deduction

Tax Mastery

199a calcs

References:

Wikipedia on Airbnb

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Real Estate, Investments WW2016_9

Posted on September 19, 2016 by Wis Laughlin

How can you boost your after-tax return on your real estate and other investing? Normally, a taxpayer’s rental property losses are limited to $25,000 per year or less, but a landlord can deduct unlimited rental property losses by qualifying as a “real estate professional.” A real estate professional. can take unlimited losses, but the rules are complicated. You have to qualify yourself and your activities with a loss property

Real estate pros can deduct unlimited rental losses, but must spend over 50% of their working hours and more than 750 hours per year materially participating in real estate.

Bad news for a full-time real estate agent who also owns rental properties: Even though the agent is a real estate professional he can’t deduct rental losses in a rental activity because he didn’t “materially participate” in the rental activity. To satisfy material participation, over 500 hours must be spent in the rental activity or just 100 hours as long as no one else, including non-owners, puts in more time. Use of a property manager will shoot you in the foot!

My advice: Make sure that you spend the required time working with the property and with real estate activities. If you have any questions, call Wis.

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Individual Tax Tips WW 2016_9

Posted on September 19, 2016 by Wis Laughlin

There is a saying about taxes that is so true: “You don’t know what you don’t know.” Taxes are so complex that you don’t even realize that you are missing something. For example, two of my clients have a “marriage made in heaven”: they are both Fedex pilots married to each other. I help this couple find all of their deductions, select which is best: joint status versus married filing separately, and find strategies to avoid the alternative minimum tax.

This couple lives in Alabama where they pay state income taxes. Pilots have employee expenses that are deductible as miscellaneous deductions. I use checklists to help these clients find all of their deductions. For example, we deduct required testing and ratings, at least a portion of cell phones and home computer used to keep up with job information. I put them in touch with specialized companies that easily and inexpensively calculate per diems that these pilots can deduct in excess of what Fedex reimburses.

This couple has other challenges. They have high incomes and their incomes are close in amount. In that case use of joint status may be best in some years and married filing separately may be better in others. My professional Proseries software compares their tax bill both ways.

Finally, pilots who live outside of Tennessee often pay state income taxes. The combination of state income taxes and miscellaneous expenses often leads to the dreaded alternative minimum tax. What do you do? Well, again, adding my knowledge of the tax law as a tax lawyer to my use of Proseries, I advise these clients how to avoid the AMT. For example, the AMT does not affect charitable deductions.

My Tax Mastery© provides these clients with an understandable road map to take control of their taxes Am I too expensive? They don’t think so!

Take Action: So if you are wondering if you don’t know what you don’t know, find out with no risk. Try my*
FREE 1/2 Hour Consultation:* Find out how to save some taxes, then lower your federal tax withholding and increase your take home pay.

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Mind Your Business WW 2016_9

Posted on September 19, 2016 by Wis Laughlin

Your business can result in costly complex tax and legal issues Are you using form contracts that cost you more than they save you? Are you throwing away tax savings? I bet you are. I can be your one stop source of tax, legal and estate advice. I can help you increase revenues with win-win contracts and save you money on taxes.

As corporate counsel for a national software company, I negotiated win-win contracts with customers like Chase and Bank of America that today produce roughly $5 million in residual revenues each year.

My Advice: Avoid using a form contract for an important transaction. So if you have an important contract coming up you know who to bring it to, right? E-mail Wis

Your business profits are an ideal source of business financing. But the IRS may be taking over 40% of that in taxes: up to 39.6% in regular taxes and 15.3% in self-employment taxes. What do you do? Call Wis.

Do it yourself tax preparation is a sure way to end up paying higher taxes. In my seminars, I show parents how to save $2,000 or more in taxes by hiring one of their children. But watch out ! A recent Tax Court decision took away such a deduction where the parents couldn’t proof that the bonuses were typical of similar businesses and jobs. This week, I am working with a corporate client to find jobs for his son that would justify his salary.

For professional tax advice on these or other questions. E-mail to Wis

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Estate Planning WW 2016_9

Posted on September 19, 2016 by Wis Laughlin
How do I simplify your estate ? clients often don’t consider the fact that once a person dies, the dededent is not available to transfer property to his family. So often the family must go to the Probate Court to handle the estate. I can show you many ways to simplify or eliminate the Probate process, You don’t have to spend hours of your time and sign hundreds of pages of documents that you don’t understand.
I can show you many ways to simplify or eliminate the Probate process. You don’t have to spend hours of your time making your estate plan, and you don’t have to sign hundreds of pages of documents that you don’t understand. Just a few ways to avoid these problems include a revocable living trust, certain types of ownership that pass the assets by contract to a family member, naming the right beneficiaries for certain accounts and affidavits of heirship for real estate
However, with my guidance, if your desires are not too complicated, you can use other ways to transfer property at your death:
1. A revocable living trust offers one of the best ways to handle property and solves so many other goals.

2. Owning a property jointly with right of survivorship (JTWROS) passes ownership to the joint owner and can be set up before  you die with real estate, bank accounts, and brokerage accounts.
3. Payable on death accounts pay to a named beneficiary and can be used with bank accounts and brokerage accounts.
4. Retirement accounts will transfer ownership to a named beneficiary and secondary beneficiaries. 

There are ways to pass real estate without the full Probate Process. For example, a valid will can transfer real estate if filed properly with the Probate Court. Without a will, I can file Affidavits of Heirship filed with the Shelby County Register can establish that a real property has passed to the decedent’s heirs. 

Beware transfers of retirement accounts in trust for kids. Parents with minor children will want to protect those plans while the kids are young. But watch out! Using a trust without specialized language will trigger a 5-year payout of the plan taxable when paid! 

My advice: Make the spouse the first beneficiary of a retirement account followed by adult children. If it must go to minor children I can prepare a special “conduit trust” to manage the retirement account for the kids.
Do you still have questions? You are smart! Email Wis for a *FREE ½ hour Consultation*.
Ready for your own estate planning? Get started by downloading my
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Can you afford to throw away THOUSANDS in taxes?

Posted on September 19, 2016 by Wis Laughlin

Would you like to Master your Taxes? Learn from a proven professional, Wis Laughlin. In more than 35 years as a tax attorney, Wis Laughlin created Tax Mastery© (“TM”), the most effective tax planning program on the planet! Wis shows you how to pay the lowest legal taxes. 

Try a free half hour consultation — you go home free if TM does not pay for itself.       Give Wis a call – (901) 218-7820 or Contact Wis.

With Tax Mastery© I help you MASTER your taxes.  How?  Technology and knowledge.

TM is an Excel program, VBA driven, created by Wis that analyzes your tax numbers and gives you strategies that result in the greatest savings on your tax return. TM give you a written report that you can consult throughout the year. Advantages you cannot get elsewhere:

I. TM is Professional. Designed by Wis, a Super Lawyer for 2017-2021. TM strategies are not picked by a computer like those in most tax preparation programs. Wis uses his professional judgment to select your strategies. 

II. TM is Personal. TM analyzes your numbers from your tax return and tells you strategies to save taxes. TM calculates your tax savings from each strategy. TM warns you of traps that you face.

III. TM is Thorough. Wis reviews roughly 350 strategies in the Tax Mastery© database to select yours. TM covers deductions, credits, and all kinds of taxes. TM compares tax consequences in the current and later years. With this comprehensive approach, Wis seldom misses a strategy

IV. TM is Up to date. While many tax preparers get ready for tax season by taking a course right before tax season, Wis reviews and updates the TM database every day using nationally recognized tax sources like Bloomberg Tax Daily Tax Report, Kiplinger, Lexis and many others. 

Imagine. Understanding your tax situation so you can plan. This is your advantage with Tax Mastery. See the following example of Tax Mastery:

TAX MASTERY for John Doe (assumes $50,000 wages and $150,000 business income):

● My initial calculations show that you are getting a $4,770 refund.
$ I identified $20,000 or more in possible tax savings, below, marked “$”.
$ You can contribute up to $30,000 to a SEP, saving $7,250.
● The last dollar of your regular income is taxed at 24%.

SCHEDULE A – ITEMIZED DEDUCTIONS

● Your standard deduction on a joint return is $25,100.
● I use actual itemized deductions: taxes, interest, and contributions $26,500 since greater.
$ You save $480 if you increase charitable deductions by $2,000.
● For your Adjusted Gross Income, the average state and local taxes were $6,559.
$ By proving an additional $20,000 in sales taxed purchases, you save over $420.

SCHEDULE C – YOUR BUSINESS

● Your business profits are taxed at 37.5%, so a $1,000 business deduction saves you $375.
● A truck or SUV, with a 6000 GVW rating may be 100% deductible when purchased.
$ Purchasing such a vehicle for $35,000 could save you over $13,000. ___________________________________________

For a taste of TM, try a *FREE ½ hour Consultation* Call 901 218-7820 or Contact Wis.

Wis will show you various TM strategies. If you want more, for a reasonable fee, Wis can provide a written TM report, a tax forecast for this year, Wis’s tax preparation services and more.

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Mind Your Business WW 2016_7

Posted on July 8, 2016 by Wis Laughlin

Good News for self-employed taxpayers. In an effort to recover more taxes, the IRS is shifting away from auditing self-employed taxpayers (those who file Schedule C on their Form 1040. The IRS is instead focusing on auditing pass-through firms like partnerships, S corporations and the like with more complicated tax issues and higher deficiencies.

Bad news: estimated business mileage trap. The tax rules to deduct vehicle use are strict. You must prove your miles driven, time and place and business purpose. Estimating business mileage is hazardous to your deductions! In a recent Tax Court case, the Court denied deductions for estimated mileage where no destination was identified.

My Advice: Use your calendar on your phone to record destinations but be sure you can also establish mileage and business purpose.

Big pickup – big tax break. In the last WealthWISe, I discussed the tax break for large SUV’s. However, certain large pickup trucks placed in service in 2016 qualify for the largest deduction of any vehicle, a one hundred percent write-off.

For example, if you buy a qualifying pickup truck  for $40,000 in 2016, you can deduct 100% of its price under IRC 179. A qualifying pickup truck is one with a gross vehicle rating exceeding 6,000 pounds and a cargo bed that’s at least six feet long and not accessible from the cab.
My advice: If you are about to buy a business vehicle, discuss it with me.

Ordinary Vehicles. Depreciation for ordinary passenger autos put in service in 2016 hasn’t changed. The first-year maximum deduction remains at $11,160 for new vehicles and $3,160 for used ones. The second- and third-year caps are $5,100 and $3,050. After that, it is $1,875 a year.

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How to sell real estate tax free 2016_7

Posted on July 8, 2016 by Wis Laughlin

Wouldn’t it be great to sell your investment property and replace it with a better piece of property, without having to pay taxes on the gain from the sale? Well you can. One way to do this is a “like kind exchange,” which may not be an exchange at all. When you make a like-kind exchange, you are not currently taxed on resulting gain. As long as you do not receive cash or other nonqualifying property, any gain is postponed.

One dangerous myth is that you can sell a property, receive the proceeds and later reinvest the proceeds in a like property, tax-free. Wrong! This type of sale does not qualify as a like-kind exchange. It is taxable.

In this article, I will call the party who is getting rid of a property the “exchanging party.” The property you give up is called the “relinquished property.” The property you acquire is the “replacement property”. Here is a summary of the requirements to qualify for a like-kind exchange.

1. The relinquished property and the replacement property must both be held for business or investment purposes.
2. Property held primarily for sale or for personal use does not qualify as replacement property.
3. In a real estate exchange, personal property and cash do not qualify as replacement property.
4. If the transfers are not simultaneous, the transfer may qualify if the taxpayer follows strict identification rules and time limits for closing on the replacement property.

If you receive nonqualifying property or cash (called boot) in addition to like-kind property, the exchange can qualify, but the boot triggers taxable gain in an amount up to the boot’s value. Furthermore, if the property you relinquish is mortgaged, you are treated as if you received cash (boot) equal to the amount of the debt you get out of.
Example: if in an exchange you receive besides property a vintage Mercedes worth $35,000. You must report taxable gain of $35,000.

As I said earlier, gain from a like-kind exchange is taxable, but taxed later. The delay is accomplished by substituting your basis (cost) in the relinquished property for your basis in the replacement property received. So if your relinquished property has a $100,000 basis, the basis of the replacement property is $100,000. This basis is called carryover basis.

If you receive taxable boot, the replacement property’s basis decreases by the amount of cash boot but increases by gain you report. If you pay cash or transfer other boot in addition to the relinquished property, the replacement property’s substituted basis increases by the value of the boot. This is getting simple, right?

THE NONEXCHANGE

If you sell first and replace later, it can be a qualifying exchange, but things get more complicated. You must transfer the relinquished property to a “qualified” intermediary. The “qualified” intermediary may sell the relinquished property and use the cash to buy a replacement property from a third party and then transfer it to exchanging party. If the exchanges are not simultaneous, the exchanging party must identify the replacement property within 45 days after the closing of the sale of the relinquished property. You must close on the purchase of the replacement property within 180 days after the earlier of the transfer of the relinquished property or the timely filing of your tax return. Guaranties and other security arrangements can blow the deal. If you or your agent receives any cash from the sale of the relinquished property, the IRS may treat you as if you received the cash. Agents include your employee, attorney, accountant, investment banker, broker, real estate agent or broker. The “qualified” intermediary cannot be your agent (closing attorney, accountant, etc.).

The IRS enforces these rules strictly. One common thread in these rules limits the exchanging party’s access to the proceeds from the sale of the replacement property. Multiple or alternative replacement properties are allowed but there are more rules. The best way to reduce your risk is to work with a professional and use a contract that locks in compliance with the safe harbors.

Caveat: If you are considering a 1031 transaction, make sure you have proper tax and exchange advice.

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Tax Mastery WW 2016_7

Posted on July 3, 2016 by Wis Laughlin

Read more.

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Individual Taxes WW 2016_7

Posted on July 3, 2016 by Wis Laughlin
First, the bad news. The IRS is hiring 600-700 new personnel to increase the number of audits and tax enforcement. The Tax Court has held that using Turbotax is no defense against large IRS penalties when you make large errors on your tax return. What to do?

My Advice: Use a tax professional like me for tax planning and preparation, not Turbotax or an amateur tax preparer. Ask your CPA how much of his or her practice is taxes.

The good news. There’s a way to get a pay raise from the IRS. How?

My Advice: Get midyear tax planning. Take advantage of my *FREE 1/2 HourOffer* and increase your paycheck by your tax savings For example, if I find $1,500 in deductions that you missed, and you are in the 28% tax bracket, with six months left in the year, you can add $70.00 per month to your paycheck.
If you take me up on my*FREE 1/2 HourOffer:* I will apply my Tax Mastery© program to find deductions you are missing. A typical one would be your actual sales tax deduction, as discussed below.  A $1,500 increase in that deduction will save you $420 if you are in the 28% tax bracket. With six months left in the year, you can decrease your federal tax withholding and increase your take home pay by $70 per month for the rest of the year. And that is the savings with just one deduction.

If you want to know more, for roughly $300-500 I will use Tax Mastery© to give you written tax planning instructions covering your entire tax return and save even more. I can also forecast your taxes for 2016.

Sales tax deduction. In my experience, the IRS table sales tax figures are much too low. However, the IRS requires that you keep actual receipts, not charge statements. I can tell you how to make this easier.

If you don’t want to keep your receipts, you can use the IRS table and then add the sales tax from buying a car or boat. The big tip here is to calculate sales tax on a home improvement. To prove these, be sure to have your contractor break out the sales tax for the materials that go into your home ad improvement. It will be big.

One thing to be aware of is that the Tennessee sales tax is 7% (5.5% on nonrestaurant food).  And don’t miss the Shelby County sales tax, 2.25%, 2.75% on purchases over $1,600.

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