To be deductible expenses, a business expense must be ordinary, necessary and reasonable in amount. The part of that three-pronged test that seems to give taxpayers the biggest problem is the reasonable amount.
It's official! The House, Senate, and President passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which includes momentous tax breaks and incentives for taxpayers. Included in this legislation are over 20 vital permanent provisions that will benefit individuals and businesses alike, including a permanent R&D credit, Section 179 deduction, and the American Opportunity Tax Credit.
Your company probably offers an array of fringe benefits to its employees, including health insurance and group-term life insurance. While there are certain requirements, these fringe benefits are generally deductible by the company and tax-free to the employees as long as they are not discriminatory in nature. (If your company decides to reward a select group, such as limiting benefits to only the corporate officers, the benefits are generally taxable to the recipients.)
There are instances when you can write off interest on personal loans used for business purposes, such as injecting capital into an S corporation, multi-member LLC, partnership or C corporation. But keep in mind that interest expenses must be classified into one of four categories (see box at the bottom of this article for details).
In my previous article, How to Start a Global Sales Strategy for Your Exports , I discussed some significant incentives and resources Maryland offers manufacturers that are considering an export initiative. This second article of the three part series will look at tax structures for exporters and the incredible tax savings these structures provide.
Transfer pricing continues to be one of the most important matters facing multinational companies. The tax situation in any given country can affect whether or not your business sets up facilities or holds intellectual property ownership there. The IRS and numerous tax authorities worldwide are intensifying their focus on how corporations allocate income and expenses among related entities abroad because of the potential to shift income inappropriately to lower tax jurisdictions.
Most people hear the phrase "Research and Development" or "R&D" and think "That doesn't apply to me". They think the term implies only to the use of scientists in a lab. In reality, the definition of Research and Development as it pertains to the income tax credit is quite broad.
What You Can Deduct
As we all know, people look to grow their money by making good investments. Earnings received from investments such as stocks, bonds, and mutual funds are taxable for income tax purposes unless they are derived from tax exempt investments such as municipal bonds. These taxable earnings include interest, dividends, annuities and royalties. They also include the capital gains and losses from the sale of the investments.
Since the income from investments is taxable, the related costs incurred to hold the investments and earn the income are tax deductible as investment expenses. A common type of investment expense is stock brokerage fees. The net of the investment income less the investment expenses is the net investment income.
What About Borrowing?
Most of the time investments are acquired with extra money that people have to invest, but that’s not always the case. Sometimes investors borrow money to acquire the investments. The loan may be from a bank or it may be a margin loan from the brokerage firm. Regardless, the loan will include interest. The interest paid on a loan to buy investments qualifies as a tax deduction. It is called investment interest expense. However, the amount of the deduction is limited to the amount of net investment income. Any amount not deducted may be carried forward to a future year.
In computing net investment income, qualified dividends and long term capital gains are not included. This is because both are subject to special tax rates and are not taxed at ordinary tax rates. For most taxpayers, the maximum rate is 15% (20% for taxpayers in the 39.6% tax bracket). However, taxpayers may make an election to have all or some of the dividends and long term capitals gains taxed at the ordinary tax rates instead of the special rates. If so, then those dividends and long term capital gains are treated as investment income for purposes of deducting investment interest.
This is a strategy to use when investment interest exceeds net investment income and all of the interest cannot be deducted. Treating all or some of the dividends and long term capital gains as investment income will allow for the deduction of additional investment interest expense. The tax savings from deducting more interest expense often exceeds the additional tax resulting from taxing the dividends and long term capital gains at a higher rate. However, before making this election, one should consult with their tax advisor to decide if it’s the best strategy for their particular situation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
There's more than one way to collect deductions. "It's better to give than to receive," the old saying goes. Fortunately, charitable giving can also help save on taxes. Here are six ways to maximize your deductions:
Now that school is back in session, it's time to take a look at the various tax benefits you may qualify for to help offset the cost of higher education. Below are the various benefits that you may qualify for. If you are "phased out" don't be discouraged; there is still the possibility that these credits may be claimed on your child's return.