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Tax Issues After Divorce

By: Mark Rhea, J.D.- Senior Assistant Accountant

I was at Roosters Restaurant a couple of weeks ago with my family and I was reading some of the funny sayings that were on the wall. One that stuck with me is “Love is grand. Divorce is twenty grand.” Divorce is painful and expensive. One thing that is not often talked about is tax issues that arise after divorce. After reading some recent tax cases and doing taxes returns for my first busy season this year, I wanted to share what I have read and discovered.

Did you know that several days ago, a tax court refused to recognize a tax deduction for alimony paid in an amount of $137,290 over a two-year period due to the fact that although the taxpayer was able to show that he did pay his ex-wife that amount of money and it was based on an oral agreement between him and his ex-wife, the IRS would not permit the deduction for that amount as the actual court-ordered alimony only totaled $48,000 for the two-year period. As a result, the taxpayer lost an alimony deduction of $89,290 due to the fact that there was no court order requiring the additional payments. See Barry L. Bulakites v. Commissioner, TC Memo 2017-79.

Another tax court recently found  that despite the fact that parties agreed in their divorce decree that they would split any tax liabilities “50-50”, the IRS was not bound by the that determination as they were not parties to the divorce proceeding and did not agree to that split. See Mae I. Asad, et al v. Commissioner, TC Memo 2017-80.

The rude awakenings that happened to these parties may not have happened had they consulted with tax professionals first. Tax professionals can help people who are recently divorced navigate this uncertainty and can answer any questions they have. This is especially true if the other spouse was solely handling all tax matters during the marriage. A tax professional can help with any questions that they may have and with tax matters that inevitably arise with divorce such as change in filing status, dependency deductions and exemptions, income tax withholding adjustments, evaluation of itemized deductions, health care savings accounts, investment and retirement accounts, and child care expenses.

When people get divorced, it is important that they seek help in navigating through tax laws and regulations so there are no surprises. At Holbrook & Manter, we stand ready to assist you in going forward with your life and ensure that your tax matters are handled with care.

Knowing the tax impact of renting our your vacation home

When buying a vacation home, the primary objective is usually to provide a place for many years of happy memories. But you might also view the property as an income-producing investment and choose to rent it out when you’re not using it. Let’s take a look at how the IRS generally treats income and expenses associated with a vacation home.

Mostly personal use

You can generally deduct interest up to $1 million in combined acquisition debt on your main residence and a second residence, such as a vacation home. In addition, you can also deduct property taxes on any number of residences.

If you (or your immediate family) use the home for more than 14 days and rent it out for less than 15 days during the year, the IRS will consider the property a “pure” personal residence, and you don’t have to report the rental income. But any expenses associated with the rental — such as advertising or cleaning — aren’t deductible.

More rental use

If you rent out the home for more than 14 days and you (or your immediate family) occupy the home for more than 14 days or 10% of the days you rent the property — whichever is greater — the IRS will still classify the home as a personal residence (in other words, vacation home), but you will have to report the rental income.

In this situation, you can deduct the personal portion of mortgage interest, property taxes and casualty losses as itemized deductions. In addition, the rental portion of your expenses is deductible up to the amount of rental income. If your rental expenses are greater than your rental income, you may not deduct the loss against other income.

If you (or your immediate family) use the vacation home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. In this instance, while the personal portion of mortgage interest isn’t deductible, you may report as an itemized deduction the personal portion of property taxes. You must report the rental income and may deduct all rental expenses, including depreciation, subject to the passive activity loss rules.

Brief examination

This has been just a brief examination of some of the tax issues related to a vacation home. Please contact Holbrook & Manter today for a comprehensive assessment of your situation. Know how you will be impacted tax wise before making a vacation home purchase.

Examining the New Accounting Standard for Not-for-Profit Organizations

By: William Bauder, CPA, CGMA, CITP, Manager of Assurance and Advisory Services 

We have blogged before about the new accounting standard that have come to pass for Not-For-Profit organizations in regards to accounting and their financial statements.  The Financial Accounting Standards Board (FASB) issued a new accounting standard in August 2016. The change was a major one for the not-profit community, as it was the most meaningful change made to the FASB’s current guidelines since 1993. After nearly a quarter century of doing things one way, not-for profits now have to adhere to the new standard that changes the disclosure and presentation requirements for financial statements. This new standard is designed to assist not-for-profits in sharing more detailed and relevant information with everyone from donors to creditors and everyone in between that may review their financial statements. According to the FASB, the new standard simplifies and improves the face of the financial statements for not-for-profits and enhances the disclosures in the notes.

  • The new standard is effective for fiscal years beginning after 12/15/2017 (effective for 2018 financial statements). Let’s take a look at the main provisions to the standard:
  • There are no longer three classes of new assets, now only 3 remain.
  • It is now permissible to present the cash flow for the organization using the direct of indirect method.
  • Organizations are no longer required to disclose investment related expenses.
  • Enhanced disclosures now exist as they relate to:

           Board or self-imposed restrictions-

           Donor restrictions

           Cash management

          Cost allocation methods

          Underwater endowment funds

          Expense classification by natural and functional classification

As someone who works with Not-For-Profits daily, I believe the biggest change maybe be for those entities that were never previously required to present a statement of functional expenses.  Difficulties or questions we expect to hear would be related to determining how to do this; how to set up a chart of accounts to accomplish this; and how to determine reasonable basis’ for allocation methods. 

Currently, a statement of functional expenses is only required for health and welfare organizations.  Although, most organizations that do not meet this definition for financial reporting, still must break down expenses in this way for presentation on their 990.  This is only the case for 501(c)(3) and 501(c)(4) organizations, however. 

Please contact us today with any questions you may have about the new standard. We would be happy to assist you.

H&M’s Justin Linscott Attends House Ways and Means Committee Meeting

As some of my previous blogs have outlined, I travel to Washington D.C. often to attend important hearings, usually almost always on the topic of tax. I just returned from my most recent visit to the nation’s capital where I attended a Ways and Means Committee hearing on the topic of tax reform and how it could potentially grow our economy and create jobs across America.

The hearing took a close look at tax reform policies (as opposed to a simple tax cut policy) that will generate economic growth, create jobs and increase pay checks for those working in the United States. Witnesses spoke about specific policy proposals surrounding possible tax reform under President Donald Trump.  It was extremely exciting to be present at the hearing. I was even fortunate enough to have a conversation with House Ways and Means committee Chairman, Kevin Brady (R-TX). I enjoyed walking back to the Capital with him, a picture of us can be found below. I spent the remainder of my time in D.C. speaking with representatives from both parties and meeting with business owners and executives.  More specifics about the hearing and tax reform can be found here: https://taxfoundation.org/takeaways-house-ways-means-may-18-tax-reform-hearing/

My next trip to D.C. will be in June or July to meet with U.S. Representatives and legislative aids in June or July. I will be sure to share details on our blog. In the meantime, be sure to follow us here on our website and also through our social media outlets for the latest in tax news.

 

Vote for Holbrook & Manter for “Best of Business” Award

Holbrook & Manter  is proud to once again be a finalist for a Columbus CEO Magazine “Best of Business” award. Voting for the 2017 poll is now open.

We are nominated in the “Best Accounting Firm” category (less than 20 CPAs). You will find this under the “Financial” section of the voting ballot. We were honored to be named the winner in this category in 2015.

The ballot can be accessed here and voting is open through July 14, 2017.

http://columbusceo.secondstreetapp.com/l/Columbus-CEOs-Best-of-Business-2017/Ballot/FINANCIAL

Our team values and appreciates all the hard work each of us provides to support each other, and most importantly, our clients. We also value and encourage supporting all businesses in the region. Vote now for all of your favorites!

Voting only takes a moment. We are honored to be nominated and appreciate your support.

H&M’s Managing Principal Records Podcast for Tri-Village Chamber Partnership

Holbrook & Manter enjoys the relationship we share with the Tri-Village Chamber Partnership. This is the chamber that serves the areas of Grandview Heights, Marble Cliff and Upper Arlington. Our Columbus area office is located in Grandview Heights, in the Grandview Yard development. Just over a year ago, the Tri-Village Chamber Partnership was born thanks to the joining of the Grandview and Upper Arlington chambers.  They are such a great resource for businesses of all sizes in all three neighboring communities.

Michelle Wilson, Executive Director of the Tri-Village Chamber Partnership, recently invited us to be the featured member on the new podcast series they launched just this year. We were excited to share our story. H&M’s Managing Principal, Brad Ridge was a natural fit for the interview and enjoyed sitting down with Michelle to talk about our firm’s history and our service offerings. He also shared some personal information about himself. He talked about everything from the importance of mentoring to a key piece of advice he would share with other professionals.

Click below to read some additional highlights of the interview and be sure to select one of the many ways to listen to the full podcast at the bottom of the page. Thank you to the Tri-Village Chamber Partnership for having us!

https://chamberpartnership.org/business-inspires-episode-4-holbrook-manter-cpas/

H&M’s Justin Linscott Speaks at Columbus Startup Week

H&M’s Justin Linscott had the honor of speaking at Columbus Startup Week along with Allison DeSantis, Director of Business Services, Office of The Ohio Secretary of State John Husted.  Justin and Allison’s session was entitled “How to Become an LLC” and touched upon everything from how to register your business as an LLC to all of the financial considerations and tax matters that business owners need to consider when starting a new venture.

Detailed information about the LLC process was shared during the hour long session, held at Vue Columbus, where Columbus Startup Week Basecamp 2017, Powered by Chase for Business is set up. Allison and Justin presented on the main stage to a room full of attendees who were armed with great questions, which made for a very interactive session.

Allison shared that the LLC form for Ohio is basic and can be filled out online. She explained that it costs $99.00 to register your business. She suggested that entrepreneurs register their business name before embarking on any business practices such as ordering marketing materials or placing signs on doors. This way, the business owner can be sure that their business name is available and preserved for their use. She shared that open business names can be searched on the Secretary of State’s website or, a quick phone call or email to the office will let you know if the desired business name is an option. Learn more about registering your LLC with the State of Ohio by clicking here: https://www.sos.state.oh.us/SOS/

Justin presented during the second half of the session and touched on the financial elements that come into play when deciding your entity structure. Justin encouraged those in attendance to have good advisors in their corner from the beginning, including an attorney, accountant and insurance professional. In addition to registering with the Secretary of State’s office, Justin explained that new businesses should also register with the Ohio Business Gateway: http://business.ohio.gov/starting/  He explained the ins and outs of planning for and paying quarterly taxes, payroll taxes, commercial activity tax, etc. Justin also shared what businesses planning to sell goods should also register for a vendor’s license.

Justin and Allison enjoyed fielding questions from those in attendance. It’s a difficult task to cover everything that one must know about starting an LLC is just a one-hour session. Justin and Allison stayed after to visit with attendees and address additional concerns.

If you have specific questions about starting a business, please reach out to Holbrook & Manter. We would be happy to assist you and place you on the road to success. 

Managing IRD Issues when Inheriting Money

Once a relatively obscure concept, income in respect of a decedent (IRD) can create a surprisingly high tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there are ways to minimize or even eliminate the IRD tax bite.

How it works

Most inherited property is free from income taxes, but IRD assets are an exception. IRD is income a person was entitled to but hadn’t yet received at the time of his or her death. It includes:

  • Distributions from tax-deferred retirement accounts, such as 401(k)s and IRAs,
  • Deferred compensation benefits and stock option plans,
  • Unpaid bonuses, fees and commissions, and
  • Uncollected salaries, wages, and vacation/sick pay

IRD isn’t reported on the deceased’s final income tax return, but it’s included in his or her taxable estate, which may generate estate tax liability if the deceased’s estate exceeds the $5.49 million (for 2017) estate tax exemption, less any gift tax exemption used during life. (Be aware that President Trump and congressional Republicans have proposed an estate tax repeal. It hasn’t been passed as of this writing, but check back with us for the latest information.)

Then it’s taxed — potentially a second time — as income to the beneficiaries who receive it. This income retains the character it would have had in the deceased’s hands. So, for example, income the deceased would have reported as long-term capital gains is taxed to the beneficiary as long-term capital gains.

What can be done

When IRD generates estate tax liability, the combination of estate and income taxes can devour an inheritance. The tax code alleviates this double taxation by allowing beneficiaries to claim an itemized deduction for estate taxes attributable to amounts reported as IRD. (The deduction isn’t subject to the 2% floor for miscellaneous itemized deductions.)

The estate tax attributable to IRD is equal to the difference between the actual estate tax paid by the estate and the estate tax that would have been payable if the IRD’s net value had been excluded from the estate.

Suppose, for instance, that you’re the beneficiary of an estate that includes a taxable IRA. If the estate tax is $150,000 with the retirement account and $100,000 without, the estate tax attributable to the IRD income is $50,000. But be careful, because any deductions in respect of a decedent must also be included when calculating the estate tax impact.

When multiple IRD assets and multiple beneficiaries are involved, complex calculations are necessary to properly allocate the income and deductions. Similarly, when a beneficiary receives IRD over a period of years — IRA distributions, for example — the deduction must be prorated based on the amounts distributed each year.

H&M can help

If you inherit property that could be considered IRD, please reach out to our firm for assistance in managing the tax consequences. With proper planning, you can keep the cost to a minimum.

H&M Named “Business of the Year” By Union County Chamber

Holbrook & Manter, CPAs Professional Services Firm with offices in Columbus, Dublin, Marion and Marysville has been named “Business of the Year” by the Union County Chamber.

The award was presented at the chamber’s Annual Celebration, held on Thursday, April 20, 2017 at the Dutch Mill Greenhouse in Marysville. The award recognizes all that Holbrook & Manter, CPAs has done to improve the quality of life in Marysville and Union County.      

Firm principals, Robert Buckley, Brian Ravencraft and Stephen Smith accepted the award and addressed the over 200 attendees at the event sharing how humbled the firm is to be the recipient of this honor. During the acceptance speech, Robert credited the H&M team members for the firm’s continued success. Brian touched on how much the firm enjoys being a part of and giving back to the community. Stephen highlighted the fact that three of the firm’s six principals call Union County home.

Holbrook & Manter, CPAs has had a presence in Union County since 1981. H&M’s current Marysville location at 103 Professional Parkway was built in 2006. Holbrook & Manter, CPAs is proud to support the Union County Chamber. As it reads on their website, The Union County Chamber of Commerce is the nucleus of the Union County community providing a forum and the collective voice for business, government, and the citizenry. Through member services, small and large business assistance, tourism development, community support and promotion, and business advocacy the Chamber will ensure business and community growth and development thereby improving the quality of life of Union County.

Holbrook & Manter, CPAs is a professional services firm specializing in family and closely held businesses. Since its origination in 1919, H&M has been dedicated to providing superior accounting, tax and management consulting advice to both businesses and individuals. Holbrook & Manter, CPAs provides cost effective, high quality technical service combined with sound personal attention. They are able to serve clients in virtually all areas of business, including those that require specialized expertise.

H&M is a member of Allinial Global, an association of legally independent accounting and consulting firms who share education, marketing resources and technical knowledge in a wide range of industries.

Please visit the following sites to learn more about our service offerings and areas of expertise:

www.HolbrookManter.com 

www.SocAuditServices.com 

www.BusinessAccountingServicesOhio.com

  

 

For press inquiries, please contact:

Molly Pensyl, Business Development Manager

614.516.0040 or MPensyl@HolbrookManter.com

Should you Open a Second Location?

Business is going so well that you’re thinking about adding another location. Before you plan the ribbon-cutting ceremony, be sure you’ve done all you can to ensure the success of both your existing and new locations. Ask yourself some key questions to get a better sense of whether a new location will actually help grow your business:

1.      What’s driving your interest in another location? It’s important to articulate specifically how the new location will help your business move toward its long-term goals. Expanding simply because the time seems right isn’t a compelling enough reason to take on the risk.

2.      How solidly is your current location performing? As management, you’ll find that your time and attention will be diverted while you get the second location up and running. Yet, you’ll need to maintain the revenue your first location is generating — especially until the second one is earning enough to support itself. The upshot? Your original operation needs to be able to operate well with minimal management guidance.

3.      Can you expand in other ways that are less costly and risky?You might be able to boost sales by adding inventory or extending hours at your current location. Another option is to revamp your website or mobile app to encourage more online sales. The investment required for any of these steps would likely be a fraction of the amount required to open another physical location.

4.      How strong is the location you’re considering? Just as you did with your first location, you want to make sure the surrounding market is strong enough to support your business. Whether it’s an urban center or a suburban industrial complex, the setting should complement your business. You’ll want to consider proximity to your competitors. In some cases, such as a cluster of restaurants in a small downtown, proximity can help. The area becomes known as a destination for those seeking a night out. But too many competitors could mean that all businesses will be fighting for the same small group of customers.

5.      How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two locations will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.

6.      What are the financial issues? You’ll also need to consider the economic aspects. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But it’s not uncommon for construction costs and timelines to exceed initial projections. You’ll want to include some extra dollars in your budget for delays or surprises. If you have to starve your first location of capital to fund the second, you’ll risk the success of both.

7.      What are the tax implications? It’s important to take into account the tax ramifications as well. Property taxes will affect your bottom line. For instance, you may be able to cut your tax bill by locating in an Enterprise Zone. Of course, the location still needs to make sense for your business. The key is to include the tax impact when assessing locations.

8.      Can you duplicate the success of your current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to do the same at subsequent locations. 

Opening another location is a significant step. Holbrook & Manter can help you address these questions to minimize risk and boost the likelihood of success. Contact us today.