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The Augusta Rule: How to Receive Tax-Free Income

What is the Augusta Rule?

The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return. 

Originally created to protect residents of Augusta, Georgia who would rent out their homes to attendees of the annual Masters golf tournament, the Augusta Rule applies to any taxpayer who owns a home in the United States, provided that your home is not your primary place of business. 

How Does it Work for the Homeowner?

So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return.  The rent you charge must be reasonable and in-line with what the rental market supports; charging $1000 per night when comparable houses rent for $200 per night is not considered reasonable! 

Homeowners can rent their house to individuals looking for vacation opportunities or they can rent their house to a business owner who intends to use it for business purposes. 

Shifting Income from Your Business

If you are a business owner and do not use your home as your primary place of business, employing the Augusta Rule can be an effective strategy for moving income away from your business and shifting it to personal income, where there would be no tax consequence. 

For example, as a business owner, you host a monthly meeting with your Board of Directors.  Under the Augusta Rule, your business can pay you a reasonable amount to rent your house to conduct the once-per-month meetings.  Provided that the total rental period doesn’t exceed 14 days and the rent charged is reasonable, your business is able to deduct the rent payment on the business tax return and you won’t have to report this as income on your personal taxes! 

Having documentation to support your claiming this as a business deduction is critical—to prove the rent was reasonable, you could print rental quotes for similar meeting locations.  To document that a meeting occurred, you could keep minutes or other records of business discussions.

Contact P.T. Anderson Accounting to find out more.

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Year-End Accounting Tasks: What Should You Do?

Accounting Tasks at Year-End

You might wonder why there are so many extra tasks at year-end. While the government requires much of the work, there is clean-up work and adjustments that need to be done to make the books accurate. It’s not always cost-effective to perform all of these updates monthly, so you’re actually saving money by doing some of them at year-end. 

Here are just some of the items that are performed at year-end.

Tax-related:
  • If you have payroll, employees need to be sent their W-2s, and the federal and state government need a copy of the W-2s with a W-3 transmittal. 
  • For employees, you must also have an up-to-date W-4 signed by them. 
  • For employers, your federal unemployment 940 return is due.
  • If you have contractors, they need to be sent their 1099s, and the IRS needs the 1099s and the 1096 transmittal. 
  • For contractors, you must also have an up-to-date W-9 form from them.  You may also need to request an insurance certificate, or you may get a surprise at your workers compensation audit. 
  • For vendors that claim exemption from sales tax, you’ll need to be sure you have an exemption certificate in your files from them.
  • If you pay sales tax annually, your return and payment are due.
  • Your personal federal, state, and local income tax and returns are due in the spring, and they can be extended until later in the year.
  • Depending on the type of entity your business is organized as, you may have franchise, federal and state tax returns to file. This deadline comes up sooner than the individual tax return due date. 
Books-related:
  • Just about every asset on your balance sheet needs to be verified in some way or other:
    • Petty cash accounts need to be reconciled and reimbursed as of year-end
    • Bank accounts need to be reconciled with the bank statements. This includes PayPal.
    • Accounts receivable balances and all other receivables need to be tied to each customer and any amounts determined to be uncollectible need to be written off.
    • A physical inventory count needs to be taken and the inventory account should be adjusted accordingly.
    • Fixed assets need to be reconciled to their fixed assets ledger and depreciation should be properly recorded.
    • Goodwill accounts need to be checked and amortization adjusted.
    • Accruals, deposits, deferred accounts and all other asset accounts need to be adjusted if necessary.
  • Liabilities and equity need to be adjusted too:
    • Accounts payable balances and all other payables need to be tied to each vendor.
    • Liabilities that haven’t been recorded need to be added to the books.
    • Loans need to tie to lender statements, and interest paid on loans needs to be properly expensed.
    • The Equity accounts need to be checked and tied out to prior year balances.
  • Corrections and adjustments need to be made:
    • Any misclassifications and corrections need to be made on the books with adjusting journal entries or other classification tools.
    • If the client is a cash-basis taxpayer, a reversing journal entry needs to be made to get the correct tax numbers. 
  • A clean set of reports can now be run and used.
Documents-related:
  • This is a good time to file and store your receipts in case you are ever asked for them. For long-term storage, thermal receipts should be copied or scanned in before the ink fades. 

If you’re wondering why we’re so busy this time of year, it’s all of the extra work we have to do over and above the normal monthly load. Contact P.T. Anderson Accounting to find out more.

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The IRS Just Contacted You – How to Tell if it is a Scam

Protect Yourself from Tax Scams

There are many tax scams out there with the purpose of stealing your identity, stealing your money, or filing fraudulent tax returns using your private information. Tax scammers work year-round, not just during tax season and target virtually everyone. Stay alert to the ways that criminals pose as the IRS to trick you out of your money or personal information.

IRS-Impersonation Telephone Scam

An aggressive and sophisticated telephone scam targeting taxpayers, including recent immigrants, has been making the rounds throughout the country. Callers claim to be employees of the IRS, but are not. These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets from information gathered from online resources, and they usually alter the caller ID (caller ID spoofing) to make it look like the IRS is calling.

If the phone is not answered, the scammers often leave an urgent callback request. Victims are often told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Alternatively, victims may be told they have a refund due to try to trick them into sharing private financial information.

Phony IRS Emails — “Phishing”

Scammers copy official IRS letterhead to use in email they send to victims. Emails direct the consumer to a web link that requests personal and financial information, such as Social Security number, bank account, or credit card numbers. This practice of tricking victims into revealing private personal and financial information over the internet is known as “phishing” for information.

The IRS does not notify taxpayers of refunds or payments due via email. Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer.

The IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts.  If you receive an email from someone claiming to be from the IRS and asking for money, take the following steps:

  • Do not reply to the email message.
  • Do not give out your personal or financial information over email.
  • Do not open any attachments or click on any of the links. They may have a malicious code that will infect your computer.
  • Forward the email to the IRS at phishing@irs.gov.
  • Delete the email.

Ways to Protect Yourself from Scams

Here are eight ways to stay safe this tax season:

  1. Personal information should not be provided over the phone, through the mail, or on the internet unless the taxpayer initiated the contact or is sure s/he knows who s/he is dealing with.
  2. Social Security cards or any documents that include your Social Security number (SSN) or individual taxpayer identification number (ITIN) should not be carried around.
  3. Do not give a business your SSN or ITIN just because they ask — provide it only if required.
  4. Financial information should be protected. Do not give out any financial information over the phone or via email.
  5. Credit reports should be checked yearly.
  6. You should review your Social Security Administration earnings statements annually.
  7. Protect personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for internet accounts.
  8. Report any instances of tax scams to the IRS.

If you have any questions about any situations that come up, please know we’re here for you; just contact us at P.T. Anderson Accounting to find out more!

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Three Essential Business Roles for Success and Balance

In his book, The Rebel Rules: Daring to Be Yourself in Business, author Chip Conley describes what investors look for in a management team when considering providing startup money to new businesses. He says your management team should consist of a “brain trust that includes a passionate visionary, a ‘get-your-hands-dirty’ operator, and a responsible, finance-minded executive.”

Even if you’re never going to seek venture capital money to fund your business, this tidbit of advice makes a great strategy question to consider for your business, especially if you are an entrepreneur. Do you have these three roles in your company?

Passionate Visionary

The passionate visionary is a creative idea person. She has the technical knowledge that supports the service or product that will be created and offered. She sees the market need and just how to sell and position the product so that clients or consumers will want the offering.

The visionary often has more ideas than budget. The finance role can evaluate the profitability of the visionary’s ideas and prioritize the projects. The operator can execute the visionary’s ideas.

The visionary provides strategic direction for the company and keeps the market offerings fresh.

If your business is missing a visionary, you might also struggle to keep your practice full as often (but not always); the sales function could fall to the visionary. You might also find yourself getting stagnant with your service offerings and falling behind the marketplace. 

The fix for a missing visionary is to develop a sales and marketing team and/or a research and development team that can serve these functions.

“Roll-up-your-sleeves” Operator

The operator is an action person who can execute. She gets things done. She can find and hire the right team. She is a systems builder who can develop the systems, job descriptions, procedures, and processes that makes the company unique.

The operator takes the visionary’s ideas and makes them happen. She needs the visionary’s ideas because she would rather take someone else’s ideas and work with them than create her own. She also needs the support of the finance executive to stay on budget and to focus on one project at a time or avoid hiring too many people.

A business without a good operator never gets the product to market and may also constantly be short of team members.

Responsible, Finance-minded Executive

The finance expert helps to make the dollars work for the company. She can tell us how much we need to sell and how much we can spend. She can also provide capital sources for the company via investors or loans.

The finance executive loves numbers and can help to make sure the company’s operations are profitable. She’ll work closely with the operator to make sure that the right number of people are hired at the right salary levels. She’ll work with the visionary to plan and budget for new sources of revenue and new product lines.

Without a finance executive, a company often spends more than they bring in and may not have a viable profit plan. They may also run out of cash which can cause problems with creditors and investors. 

This is the role we can not only help you fill, but also help you build your financial literacy to the level that you need for the stage your company is in now and for the future. 

Your Business Success Trinity

As you were reading, which role are you? Which role jumped out at you that might need shoring up in your business? You might be strong in one area and need to outsource another while keeping a strategic eye on things overall.

Take a look at each of these roles and objectively assess your business. How are all three roles being served in your company? Which ones need more development in order for your business to grow?

Getting clear on your company’s roles can very well take you to the next level of success.

Which trends impact your business the most? Which ones speak to you? Contact P.T. Anderson Accounting to find out more.

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Tax Strategies for the Retired Taxpayer: Convert your IRA’s Required Minimum Distribution into a Qualified Charitable Distribution

After years of saving for retirement, it’s time to start using those savings—even if you don’t really need to.  Once you reach 70 ½ years old, you must begin taking annual distributions from your qualified retirement plan.  This is called a required minimum distribution (RMD.)  If you don’t take your RMD, the IRS imposes a severe penalty—it’s a tax of 50% of the amount that was not withdrawn in time! Additionally, any RMD taken is considered ordinary income and will count toward your taxable income for the year. 

What if you don’t need that money for current living expenses?  An excellent alternative to consider is converting your IRA’s RMD into a qualified charitable distribution (QCD.)

A QCD is a direct transfer of your IRA funds to a qualified 501 (c)(3) charitable organization.  QCDs can be counted toward satisfying your RMD for the year, as long as the amount is $100,000 or less per taxpayer.  For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is typically December 31st.

What is the benefit to making a QCD? 

QCDs don’t count as taxable income!  As long as basic requirements are met, most of which are mentioned above, your RMD will not be included in your ordinary income.  QCDs don’t require you to itemize, which means that with the new tax law changes, you may take advantage of the higher standard deduction while still using a QCD for charitable giving. 

Scenario:

Taxpayer John Smith is 71 years old and retired.  His wife is 67 years old and still employed.  They both collect Social Security and have comfortable investment income.  Taxpayer Smith must take an RMD from his retirement plan.  Most of their itemized deductions were a result of charitable giving, but due to the recent tax law changes, they expect to fall within the significantly increased standard deduction.  Knowing that he won’t be itemizing his deductions any longer, Taxpayer Smith still wants to be charitable, but is looking for a way to offset his taxable income.  In this situation, Taxpayer Smith should consider converting his RMD into a QCD—that way, he can take advantage of the more favorable standard deduction, have the RMD not included in his taxable income, and support his preferred charitable organizations!

How is a QCD treated for tax reporting purposes?

  • Whether the QCD is mailed to you or your eligible charitable organization, the check must be payable to the charity. 
  • A QCD is not subject to income tax withholding
  • For a non-inherited IRA, the QCD will be reported as a normal distribution on form 1099-R.   For an Inherited IRA, the QCD is reported as a death distribution.
  • The taxpayer must receive a donation acknowledgement from the charity.

Contact us at P.T. Anderson Accounting to find out more about strategies for the retired taxpayer.