Posts Tagged ‘Jennifer McNett’

Are Property Losses from Hurricanes Deductible?

Jennifer McNettBy Jennifer McNett, CPA
Manager, Tax Services Group

As residents in Texas, Florida and Puerto Rico recover from a trio of deadly hurricanes and the humanitarian crisis has started to ease, people’s thoughts have started to turn to practical matters. One question that has come up amongst those who own property in those regions is on the deductibility of losses due to hurricanes.

Hopefully, they carried property insurance, including a hurricane policy, to guard against damage from natural disasters. There are still bound to be some property losses that are unreimbursed, due to deductibles or because they fall outside the specific terms of an insurance policy. Is there any tax relief available for these losses?

The short answer is yes – but don’t expect it to be a simple process, or receive a huge amount of relief. Here is an overview.

In general, the federal tax code is not very generous when it comes to deductions for damages from disasters such as hurricanes, also known as casualty losses. In order to have a chance of recovering those unreimbursed losses through tax deductions, one usually must have low adjusted gross income (AGI), poor insurance coverage and be able to document the loss.

For personal use property, the loss is measured by the lesser of the adjusted-basis of the property or the economic loss. The adjusted-basis is usually the purchase price or value upon acquisition, adjusted by any subsequent capital improvements. The economic loss is calculated by the change in the property value immediately before and after the event.

From the lesser of those two values, we subtract the insurance payment or other reimbursement/mitigation. For personal use property losses, the IRS makes two reductions: first a flat $100, then a further 10 percent of the owner’s AGI. If there is still a loss after these reductions, it can be reported as an itemized deduction on the taxpayer’s federal return. Itemized deductions can also be limited depending on income, and on most state tax returns, including Indiana, federal itemized deductions are not allowed.

As an example, let us say Martha sustained $5,000 of post-insurance losses from a hurricane and has an AGI of $40,000. The IRS reductions of $100 and 10% of her AGI ($4,000) leaves her with a net casualty loss deduction of $900.

With for-profit business property, the casualty loss is similarly determined by computing the difference in fair market value immediately before and after the event. However, each identifiable property is treated separately, and the loss is not subject to the $100 or 10% of AGI reductions. For example, damages to a building, landscaping or vehicles parked there would be viewed and computed separately. Obviously, this makes the process more complex for businesses.

Inventory losses from hurricanes are not generally reported as casualty losses, but are deducted as a cost of goods sold expense under the general provisions relating to inventories.

The biggest challenge in claiming casualty loss tax deductions is being able to determine and document the pre-event value of the property and its diminishment as a result of the hurricane or other disaster. Usually a qualified appraiser is necessary who has knowledge of the region and type of property. In certain cases, the cost of repairs can be used to document the decline in value, but you are still required to start your calculation with the value before the loss.

The IRS and state taxing authorities do often give further concessions to taxpayers when the loss occurs in a federally declared disaster area – which is usually the case with severe hurricanes like Harvey, Irma and Maria. The primary concession is to allow the owner to obtain economic relief sooner than normal by permitting them to report the loss on the tax return for the year in which the loss occurred, or on an amended return for the immediately preceding tax year. In other words, if you are able to document a casualty loss from the 2017 hurricanes, you could file an amendment to your 2016 return right away.

If you want more information about casualty losses, you can visit the IRS webpage on that topic, or contact Jennifer McNett in our Tax Services department at (317) 608-6699 or email jmcnett@sponselcpagroup.com.

Lease or Buy?

Jennifer McNettBy Jennifer McNett, CPA
Manager, Tax Services Group

One of the most frequent questions we encounter as business advisors is whether a client should lease or buy an expensive piece of business property. This can pertain to virtually any kind of asset, from real estate and vehicles to factory equipment and laptop PCs for the staff.

This is a seemingly easy question with a multifaceted answer, as the best course of action is specific to each organization’s circumstances. Depending on your company’s needs – maximizing deductions, preserving cash flow, maintaining newer equipment, etc. – leasing or buying can each lend their own advantages.

In general terms, if cash flow is an issue then leasing is generally the best option. For tax deductions, buying is usually more advantageous, especially when you use accelerated depreciation to expense the full amount up front.

Leasing is more complicated, and you should ask plenty of questions before signing a contract. These include the length of the lease, whether property must be insured, who’s responsible for property taxes, and options for modifying the lease and penalties for early termination.

You should also learn whether the lease is a capital lease or an operating lease. A capital lease is similar to a loan, and the property is considered an asset on the balance sheet, so you obtain the tax benefits of ownership. An operating lease (the more common type) means you rent the equipment or property and the lessor retains ownership.  Historically operating leases were expensed and not reported on the company’s balance sheet but new standards beginning in 2020 will require most privately held organizations to record an asset representing the right to use the underlying leased asset over the term of the lease along with a liability for the present value of the lease payments.

Another option is the buyout lease, which can apply to everything from vehicles to computers, in which the lessee agrees to purchase the property at the end of the lease period, sometimes at less than present market value. This is considered a capital lease since you essentially own the equipment at the end of the contract. A buyout lease is generally more expensive than a standard lease, but the company can still take advantage of accelerated depreciation, especially if they are showing profits.

The type of property is also important to consider when choosing between lease or buy. For instance, vehicles are a rapidly depreciating asset in which leases usually include mileage limitations that incur overage fees when exceeded. On the other end, real estate is appreciable instead of depreciable, and control factors can be more important in determining whether you want to be the owner or merely the tenant.

There are many factors to consider when choosing lease or buy, but there are a few general rules of thumb.

The benefits of leasing include:

  • Ensuring your equipment is up-to-date.
  • Predictable monthly expenses.
  • Low cost up front.

Downsides of leasing include:

  • You generally pay more in the long run.
  • You have to keep paying even if you no longer need the asset.

Benefits of buying include:

  • Less complicated than leasing.
  • Generally cheaper in the long run.
  • Equipment is tax deductible.

Drawbacks of buying include:

  • Higher initial cost.
  • Getting stuck owning outdated equipment.

If you are unsure whether to lease or buy, seek the advice of a trusted counselor who can look at the practical and fiscal impacts of each and help you weigh which option makes the most sense for your organization.

 

If you have any question or comments, please call Jennifer McNett in our Tax Services department at (317) 608-6699 or email jmcnett@sponselcpagroup.com.

Dress for Success Indianapolis Names McNett Treasurer

Jennifer McNettJennifer McNett, a Manager in the Tax Services department of Sponsel CPA Group, has been elected Treasurer of Dress for Success Indianapolis by her fellow board of directors members. The non-profit charitable group works to empower women to achieve economic independence by providing a network of support, professional attire and the development tools to help women thrive in work and in life.

McNett has volunteered with Dress for Success Indianapolis for several years in various capacities, including their Finance Committee. As treasurer, she will oversee their finances and expenditures, using her expertise in public accounting to best leverage the organization’s assets.

“I am very honored to be given this trust by my fellow board members. Dress for Success Indianapolis is a vital organization that helps people who want to find work and jump-start their career, often after long absences including homelessness,” McNett said. “And I am proud to work for a company that places such a high priority on service to the community.”

McNett joined Sponsel CPA Group in 2011. She works with individuals and closely-held businesses across a broad range of industries on tax planning, compliance and multistate tax issues. She specializes in tax controversy, representing clients before taxing authorities when disputes arrive.

Board appointments for Sponsel team members

Jennifer McNettJosie DillonLila CasperSponsel CPA Group has always made civic involvement a cornerstone of our company culture. Many of our team members serve in a voluntary capacity with local nonprofit groups. We are pleased to recognize three new board appointments of our staff:

  • Lila Casper was appointed to  the Audit Committee for Second Helpings, which repurposes unused food for the hungry.
  • Josie Dillon was recently elected as Treasurer of the Center Grove Education Foundation, on whose board she also sits.
  • Jennifer McNett was elected Treasurer by her fellow board members of Dress for Success, which provides professional attire for those in need.

Thanks to all three for their service to the community!

Indiana Tax Amnesty Letters May Be In Error

Jennifer McNettRecently the Indiana Department of Revenue offered a Tax Amnesty Program in which past-due tax bills can be paid free of penalty, interest or collection fees. It covers about 40 different types of taxes for periods prior to Jan. 1, 2013, including individual and corporate income tax, payroll withholding tax and sales tax.

However, there have been a number of reported cases in which individuals and businesses received letters from the Indiana Department of Revenue incorrectly implying they had underreported their liability. Upon further investigation it was revealed that the INDOR was using a third party to send out these letters, which went to an unapproved group of taxpayers.

The state has since ordered the contractor to stop sending the letters and has apologized to taxpayers. But since approximately 150,000 such letters went out in all — about 3% of all taxpayers — it’s led to much confusion about the veracity of the claims contained in the letters.

A follow-up letter is being mailed by the INDOR contractor soon that is supposed to help clarify the taxpayer’s individual circumstance. We are also more than happy to assist you with determining if any action is required on you or your company’s part. If it turns out you do have an outstanding liability owed to the state, the tax amnesty program represents an opportunity to resolve the issue.

If you haven’t yet filed for tax amnesty, there’s still time: it ends Nov. 16, 2015. Call 1-844-TAXES-IN or go to www.taxamnesty.in.gov to start the process of paying your account during the amnesty period.

Again, if you require any assistance or counsel on this matter, please don’t hesitate to contact us.

Call Jennifer McNett in our Tax Services department at (317) 608-6699 or email jmcnett@sponselcpagroup.com.

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