Rebella Accountancy | 507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236

       

 

 

Monica Rebella, CPA/IAR - President

Rebella Accountancy

 

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Feature Articles

 

- Taking first steps for 2013 year-end tax planning


- Congress returns to work after recess with busy tax agenda


- IRS issues new rules on small employer health insurance credit


- FAQs-What important provisions are taking effect under the Affordable Care Act?


- How do I . . . compute the American Opportunity Tax Credit?


- September/October 2013 tax compliance calendar

 

 

 

Year-End 2013 Tax Planning Should Start Now + Renting Out a Vacation Home? + Court Denies Tax Deductions



If you are expecting to show AGI of $250,000 or more ($200,000 or more if single) the tax picture for 2013 will include significant tax changes that went into effect January 1st of this year.

 

Several new taxes which include:

 

the additional Medicare tax for employees earning $200,000 or more;

 

the additional Medicare tax on net investment income for joint returns reporting $250,000 (single returns reporting $200,000) or more in Total Income;

 

and the increase in capital gains tax from 15 percent to 20 percent for the higher income levels coupled with the limitation on itemized deductions and personal exemptions will significantly increase their tax liability.

 

Tax planning should start now to reduce your overall tax burden.

 

Additionally now is the time to review your investments for tax advantaged opportunities.

 

Call me at (714) 619-0667 to set up your Tax Planning appointment for this 2013 tax year (before we hit the 2014 tax season).

 


 

Renting Out a Vacation Home?

 

Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.

There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.

Known as the "Master's exemption", because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master's Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.

 

Tip: If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation--as long as it's two weeks or less. And, although you can't take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.


In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss.

 

You should also keep in mind that the definition of a "vacation home" is not limited to a house.

 

Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.

 

Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater).

 

When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.

 

Example: Let's say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.


The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario 85% of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E.

 

As for the remaining 15% of expenses, only the owner's mortgage interest and property taxes are deductible on Schedule A.

Questions about vacation home rental income? Give me a call at 714-619-0667. We'll help you figure it out

 


 

Court Denies Tax Deductions for Motorhome & Two Business Cars

Keith Dunford claimed $93,565 in deductions for his business motorhome and two business cars.

 

He lost all $93,565 in deductions.

 

What is the one thing that could cost him all his vehicle deductions? Answer: No mileage log.

Unpardonable Sin

When you have no mileage log, the IRS thinks you have no other records either. That opens you up for a full-blown audit.

In Mr. Dunford's case, he first had the IRS and then the court preoccupied with his lack of mileage records. There's no question that cost him a huge chunk of deductions.

His failure to keep a mileage log made the court turn a blind eye to his vehicle deductions. For example, in court he submitted receipts in support of his more than $8,000 of vehicle repair and maintenance expenses. The court said that it admired the receipts but that it had to ignore those receipts because Mr. Dunford had no mileage log to prove his business use.

The court did the right thing with its blind eye. It even said so in its opinion when it noted tax law's Section 274 that applies strict substantiation requirements to business use of vehicles and overnight travel. In fact, Section 274 tells to the court, don't allow deductions without the proof required by Section 274.

Here's what happened: Mr. Dunford claimed 100 percent business use of his Ford Explorer and his Saturn SC2. His lack of a mileage log cost him all the deductions related to those vehicles, other than those directly reimbursed by his consulting clients. That's bad, but it gets worse.

Motorhome

Mr. Dunford paid $283,494 for a Beaver Contessa motorhome. He used it for business and claimed depreciation deductions, but with no mileage log he lost all his motorhome deductions.

Think about this: He drove the motorhome from Quincy, Illinois, to his consulting job in San Jose, California, but he did not log the miles. He had no record of business and personal nights sleeping in the motorhome.

This lack of records cost him his rightful business deductions on that $283,494 motorhome.

Section 280A Exception Missed

The court treated the motorhome as a second residence and allowed only the interest deduction. But if Mr. Dunford had records and knew the law, he could have deducted depreciation, repairs and maintenance, gas and oil, and all other motorhome expenses up to his business-use percentage. In Section 280(f)(4), the law states that nothing in the disallowance-of-business-use-of-home rules shall disallow a business travel deduction.


This means that if Mr. Dunford had a record that showed his percentage of business use of the motorhome, he could have deducted that business use.

He had two possibilities for a log:
 

- Mileage log
 

- Personal and business nights sleeping-in-the-motorhome log
 

The second possibility arises because the motorhome is both a “hotel room on wheels” and a passenger vehicle. The question is how the IRS and/or the courts will treat it. In Dunford, the court looked only at mileage and, since there was no log, denied the motorhome business travel deductions.

But in Shirley, the court noted that you could deduct the motorhome either as a lodging facility or as a vehicle.

In the Dunford case, the question of whether the motorhome was a lodging facility and/or a vehicle never came up. That's what a bad mileage log can do. Both the court and the IRS knew that Mr. Dunford slept in the motorhome for both business and personal purposes, but that bad mileage log controlled the conversation to Mr. Dunford's demise.

Records Are the Answer

Mr. Dunford failed to keep tax records. The basic record for most small businesses starts with the mileage log.


If you want to deduct your vehicles and your motorhome, you need a good mileage log. It's not hard to keep. It doesn't take that much time. You just have to do it.

 


 

   

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To read this & my other articles online go to www.MyDentalCPA.com or www.RebellaCPA.com and click on the Newsletter section.

 


 

As always you can call me at 714-619-0667 if you have any questions about investing, retirement or any other tax & accounting related issues. 

 

Regards, Monica Rebella, CPA/IAR

President, Rebella Accountancy

 
Disclaimer:  The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. With any investment you should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing.  Past performance is not a guarantee of future results. The investment return and principle value of any investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.

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Monica Rebella, CPA/IAR | President - Rebella Accountancy | Certified Public Accountants
507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236
Email: mrebella@rebellacpa.com | www.RebellaCPA.com | www.MyDentalCPA.com