We believe in creating a strong working relationship with our clients to determine their specific accounting and compliance needs.

Beware of the “Kiddie Tax”

Making gifts to children and grandchildren is a strategy sometimes used to reduce taxes. Doing so may shift some of your income into a lower tax bracket and remove assets from your taxable estate. But if you employ this strategy, beware of a hidden tax sometimes called the “kiddie tax.”

The kiddie tax isn’t a separate tax. Rather, it’s an income threshold above which a minor’s unearned income (interest, dividends and capital gains) is taxed at his or her parent’s marginal tax rate instead of the child’s rate.

Who’s a “kiddie”?

For kiddie tax purposes, a child is anyone under age 19 or any full-time college student under age 24. Previously, the kiddie tax applied only to children under age 14. But Congress increased the age limit to make it harder for parents and grandparents to reduce taxes by shifting income.

The first $1,050 of a child’s unearned income is tax-free and the next $1,050 is taxed at the child’s marginal rate. All unearned income above $2,100 is then taxed at the parent’s marginal rate, which could be as high as 39.6%.

Let’s assume you own stock that has appreciated by $10,000 and want to give this to your 16-year-old son. Assuming your son doesn’t have any other unearned income, only $2,100 of the taxable gain would be taxed at his marginal rate. The remaining $7,900 would be taxed at your marginal rate.

Are there strategies to avoid the tax?

There’s a possible way to skirt the kiddie tax, particularly if your child or grandchild is in college. If he or she earns income via a wage or salary that provides more than half of his or her support, he or she might not be treated as a dependent. Further, there may be some additional income tax benefits related to tuition, because your child may be able to claim a deduction or credit that you could not.

Another strategy (if you want to help pay your child’s or grandchild’s college tuition) is to make tuition payments directly to the school instead of gifting assets to him or her. This payment wouldn’t be subject to gift tax — another benefit of this approach.

If your child has only unearned income totaling less than $10,500 (2016), you may be able to include this on your tax return and not file a separate return for him or her.

Complex details

The details involved in planning gifting strategies to avoid the kiddie tax can be complex. Contact us to discuss your particular situation. H&M is always standing by to help.

Knowing the Tax Challenges of Self-Employment

Today’s technology makes self-employment easier than ever. But if you work for yourself, you’ll face some distinctive challenges when it comes to your taxes. Here are some important steps to take:

Learn your liability. Self-employed individuals are liable for self-employment tax, which means they must pay both the employee and employer portions of FICA taxes. The good news is that you may deduct the employer portion of these taxes. Plus, you might be able to make significantly larger retirement contributions than you would as an employee.

However, you’ll likely be required to make quarterly estimated tax payments, because income taxes aren’t withheld from your self-employment income as they are from wages. If you fail to fully make these payments, you could face an unexpectedly high tax bill and underpayment penalties.

Distinguish what’s deductible. Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” Basically, these are costs that are commonly incurred by businesses similar to yours and readily justifiable as needed to run your operations.

The tax agency stipulates, “An expense does not have to be indispensable to be considered necessary.” But pushing this grey area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, accounting fees, equipment, supplies, legal expenses and business-related software.

Don’t forget your home office: You may deduct many direct expenses (such as business-only phone and data lines, as well as office supplies) and indirect expenses (such as real estate taxes and maintenance) associated with your home office. The tax break for indirect expenses is based on just how much of your home is used for business purposes, which you can generally determine by either measuring the square footage of your workspace as a percentage of the home’s total area or using a fraction based on the number of rooms.

The IRS typically looks at two questions to determine whether a taxpayer qualifies for the home office deduction:

1.      Is the specific area of the home that’s used for business purposes used only for business purposes, not personal ones?

2.      Is the space used regularly and continuously for business?

If you can answer in the affirmative to these questions, you’ll likely qualify. But please contact our H&M for specific assistance with the home office deduction or any other aspect of filing your taxes as a self-employed individual.

H&M’s Managing Partner Gives Radio Interview

With tax season now in full swing, H&M team members are answering the call to provide tax advice. Listeners of the New 92.9 WDLR & 1550 WDLR in Delaware county and True Oldies 98.7 and 1270 WQTT in Marysville got to hear H&M’s Brad Ridge share tax advice during the morning show today. He shared tips and information regarding what taxpayers can expect as they prepare to file.

Brad had a great time in studio…. thank you to the New 92.9 WDLR & 1550 WDLR in Delaware county and True Oldies 98.7 and 1270 WQTT in Marysville for having him.

Renting Property to your Business Could Backfire

If you own both property and a business, it just makes sense to lease the property to your business, right? Not always — this approach could be costly tax-wise, especially in light of the 3.8% net investment income tax (NIIT) now imposed on certain passive income. Fortunately, there may be a way to avoid these undesirable consequences.

The self-rental rule

The self-rental rule applies when you rent property to a business in which you and/or your spouse “materially participate.” The rule treats rental income as nonpassive but rental losses as passive. A taxpayer materially participates in a business if he or she works on a regular, continuous and substantial basis in its operation.

Unfortunately, the Internal Revenue Code generally prohibits taxpayers from deducting passive losses. A passive loss usually can offset only passive income, meaning income from a business in which you don’t materially participate, or rental real estate in which you don’t actively participate. “Active” participation is a less stringent standard than “material” participation. The active participation rules provide for limited circumstances under which you’ll be able to deduct passive losses; typically, though, absent passive income you may not claim current deductions for passive losses.

On top of that bad news, higher-income taxpayers generally will be subject to the NIIT on some or all of their unearned income, including rental income. This is in addition to — and calculated separately from — the taxpayers’ regular income tax or alternative minimum tax liability.

An alternative approach

You might be able to avoid the negative self-rental rule results by electing to “group” your business activities and rental activities for purposes of the passive loss rules — if both activities together constitute “an appropriate economic unit.”

The factors given the greatest weight when determining whether a group is an appropriate economic unit are:

  • Similarities and differences in types of businesses,
  • The extent of common control,
  • The extent of common ownership,
  • Geographical location, and
  • Interdependencies between or among the activities.

The interdependencies factor might consider, for example, the extent to which the activities purchase or sell goods to each other; involve products or services that are normally provided together; have the same customers or employees; or are accounted for with a single set of books and records.

Proceed with caution

If you qualify for the grouping election, you could offset your business’s nonpassive income with the otherwise passive rental losses. The rules for grouping are complicated, though, and include conditions beyond the appropriate economic unit requirement. H&M can help you chart the best course forward to minimize your taxes. Contact us today to get started.

New Staff Accountant Joins the H&M Team

The H&M team continues to grow with the addition of Andrew Roffe. Andrew joins us as a staff accountant.

Originally from Portsmouth, Ohio, Andrew is a graduate of Shawnee State University with a degree in accounting and marketing. Andrew states that learning the way a business runs and succeeds is what drew him to the accounting industry. Andrew is excited to work with H&M’s various clients and looks forward to providing them with excellent service as they work to meet their business goals.

Andrew currently resides in Grandview and enjoys running in his spare time. He also enjoys sports and going to car shows. Welcome to the firm, Andrew!

Software is the focus of Brian Ravencraft’s latest OCJ article

H&M’s Brian Ravencraft continues to write a monthly article for Ohio’s Country Journal. His “Farm and Finance” features cover various topics that apply to the financial side of agribusiness.

His latest article focuses on analytical software options for farmers. Read the article at the link below:


Have an idea for a future article for Brian? Send your ideas to him via email at BRavencraft@HolbrookManter.com

The Importance of Documenting Loans from a Tax Perspective

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

If you have ever purchased a house, an automobile, furniture, or any household item that required financing, you know that there are many documents that must be signed when financing a purchase. Chances are you have signed documents with all kinds of terms related to principal amounts, interest rates, due dates and penalties. Although reading these documents can be somewhat terrifying, especially when reading the penalty provisions, these documents serve a purpose.

For businesses that make loans, these documents are the legal proof that establishes that they are entitled to money and how they are to be repaid. When a business goes to court to get a judgment against someone who has not paid them, they are expected to produce those documents to prove that they are owed money from a specific person. And the truth is we would not have it any other way. Fairness demands that if a business is demanding someone to pay them, they need to have written proof of it.

Businesses, big and small, also need these documents to prove to their accountants and to the IRS the existence of those loans for tax purposes. There are times when businesses may feel that there is no need for these documents because it’s an inconvenience or they know the party that they are lending to. This is a big mistake. Recently, in the case of John M. Sensenig, et ux. v. Commissioner, TC Memo 2017-1, Code Sec(s) 166; 385; 6662; 7491, the tax court found that lack of documentation of loans was a major factor in the denial of bad debt loss deductions by a taxpayer. As a result, not only did the taxpayer lose major deductions for bad debt losses due to the lack of documentation, but the taxpayer incurred significant accuracy-related penalties as well.

Just as a court would demand those documents in order for a business to be able to obtain a judgment against someone who owed them money, a tax court and the IRS will demand to see those same documents to prove that they are entitled to claim a bad debt loss deduction. Another wrinkle in the Sensenig case was that the loans made in that case were made between businesses that had common ownership. Due to the common ownership and the lack of formal documentation of the loans (among other things), those loans were not only not allowed to be claimed as bad debt losses but were treated as equity by the tax court, which has further significant accounting and tax consequences (not to mention headaches).

Loans that are made to shareholders, members or other related businesses receive a high level of scrutiny from the IRS and tax courts. Not only does documentation play a major role in determining whether the loan should be treated as a loan or as an equity contribution, but so do things such as creditworthiness, relationship of the lender and debtor, attempts to collect the debt if delinquent, capital structure of the debtor, and other factors related terms of the repayment of the loan.

Documentation of a loan is a critical first step in establishing that a loan should be treated as loan and nothing else such as a gift or equity.

At Holbrook & Manter CPAs, we can help guide you and your business through the steps to effectively document and preserve any loan interests you and your business may have.

H&M’s Justin Linscott Attends Hearing in Washington D.C.


By: Justin Linscott, CPA, CFP, CITP, CGMA- Principal

You may remember a blog I wrote on the topic of the possible changes on the horizon for estate and gift taxes. In that post (read it here:)  I mentioned that I would be traveling to Washington D. C. in early December to attend the hearing for Internal Revenue Code Section 2704. I have returned from my trip to the nation’s capital and I am still gathering my thoughts about the proposed regulations issued by the IRS that, if made final, would place major restrictions on estate valuation discounts.

Before I share some specifics about my trip, a reminder from my last blog about Section 2704 and the changes that could be coming that would make it harder for wealthy family and closely-held business owners to transfer assets to family members without paying the proper amount of estate and gift taxes……  IRC Section 2704 was enacted in 1990 and is designed to prevent the reduction of taxes through valuation discount techniques in an attempt to reduce the value of an estate, thus lowering the value of property and assets gifted to taxpayer’s beneficiaries. The new proposed regulations would change the landscape of this tax exercise drastically, no longer allowing for the understatement of the value of assets and interests as they apply to intra-family transfers. IRC Section 2704, as it stands now, only refers to corporations and partnerships. The proposed regulations would broaden the reach and also apply to limited liability companies and other entities and business arrangements.

My visit to D.C. was brief but busy. I walked a great deal and with each step I learned more and more about how these proposed regulations could affect our valued clients. Some occasions simply call for “boots on the ground” learning and this was one of those occasions.

When I say my boots were on the ground, I mean it in a literal sense…. I walked nearly 11 miles through the nation’s capital that day. I started by walking by the White House and then over to the Capital Building. There I met with some congressional aides that I know and we talked about tax policy. Tax is my passion and this was the ideal way for me to start my day. From there, I visited the Ways & Means Room. This is where much of our tax policy is written. My next stop was the IRS building where the Section 2704 hearing was taking place. This hearing was lengthy and interesting and my presence there positions me to better serve our clients should these proposed changes become reality. At the very least, I believe we will see significant  modifications take place. However, the extent of those modifications lies in the hands of the incoming presidential administration, the cabinet and the new treasury department. Should new changes become enacted, as it stands now, nothing will be final for 30 days. So for now, we watch and wait and I keep you posted on any and all new developments.

 As for how my trip wrapped up- after over six hours at the IRS building for the hearing, I made my way to the new Trump Hotel on Pennsylvania Avenue for a bite to eat and then went on to the National Archives to take a look at the Constitution and the Declaration of Independence. My next stop was the FBI Building, which has special meaning to me because my father and my uncle are both retired FBI agents. From there I took in some of the sights and sounds of the holidays in D.C. by witnessing the lighting of the national Christmas tree. My journey continued from with a visit to the Vietnam Wall and the Lincoln Monument and then I ventured across the Potomac River to Arlington National Cemetery to wrap up my day.

While it was the 2704 hearing that prompted my trip to Washington, D.C.- it was very rewarding (and a bit tiring) to also use the day to enjoy all that they city has to offer.  Again, I will keep you posted on 2704. Feel free to reach out to me with any questions you may have. I would be happy to sit down with you and review your estate plan ahead of these proposed changes.

H&M’s Danielle Cottle Contributes to Guide for AccountingWEB

H&M manager, Danielle Cottle, CPA, CGMA recently served as an expert source for an E-Guide published on www.AccountingWEB.com

Written by Deanna C. White, the guide is called, “The Accountants Guide to Advising E-Commerce Clients”. The piece contains testimonials from CPAs who work with e-commerce clients on a regular basis. Look for several quotes from Danielle throughout the guide, which can be downloaded here for free:


As stated on their website: AccountingWEB is the leading online community for CPAs in the United States, providing news, software tools and guidance from top industry voices. We aim to inspire the modern accountant to embrace new ideas, develop, grow and make changes that matter.

Important 2017 Q1 Tax Deadlines

Tax season is upon us. Holbrook & Manter is committed to keeping you informed and compliant in 2017. Please review the important deadlines and information provided below and contact our tax team with any questions you may have.

January 17

  • Individual taxpayers’ final 2016 estimated tax payment is due.

January 31

  • File 2016 Forms W-2 (“Wage and Tax Statement”) with the SSA and provide copies to your employees.
  • File 2016 Forms 1099-MISC (“Miscellaneous Income”) reporting nonemployee compensation payments in box 7 with the IRS and provide copies to recipients.
  • Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (“Employer’s Annual Federal Tax Return”).
  • File Form 940 (“Employer’s Annual Federal Unemployment [FUTA] Tax Return”) for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 943 (“Employer’s Annual Federal Tax Return for Agricultural Employees”) to report Social Security, Medicare and withheld income taxes for 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

  • File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in box 7 must be filed by Jan. 31, beginning with 2016 forms filed in 2017.)

March 15

  • 2016 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return is not extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.