Summer News & Tips About Sales Tax, IRS Flags, and more
In this issue some good news about Florida sales tax, and we let you now how the IRS selects returns for audits. Would you like to learn more about capital gains & losses, or how to deduct medical expenses on your tax return? Read on for helpful information about these topics.
Florida Reduces the Sales Tax on Commercial Rent
Effective January 1, 2018, Florida is reducing the sales tax rate on commercial rent. Florida is the only state in the country that has a sales tax on commercial rent, so many people have felt that the tax put Florida at a disadvantage when trying to attract new businesses considering Florida.
There has been a movement to repeal this tax for several years, but it should be noted that Florida’s general revenue stream is very heavily reliant on sales tax in general. For the 2016-17 fiscal year, the sales tax accounted for 78.5 percent of all such revenue.
A long-time goal of Governor Scott, the first step in eliminating the tax on commercial rent has finally become law. The step, however, is a small one with a reduction only going from 6% to 5.8% at the state level and remaining the same at the county level. Therefore, for properties located in Walton County, the total sales tax rate for commercial rent will go from 7 to 6.8%.
For those of you tax savvy enough to try to take advantage of the new, lower rate by delaying rent payments until after December 31, 2017, nice try. The law specifically provides that the tax rate applicable to a rent payment is based on the date the property is occupied, not when the payment is due or paid.
For landlords, this change in the law means you can share the good news with your tenants that their leases need to be amended to reflect the lower tax rate for occupancy after January 1, 2018.
Red Flags for IRS Auditors
Do you wonder why some tax returns are selected for audits by the IRS while most are ignored? The IRS is short on personnel and funding, so it only audits a very small percentage of individual tax returns. Your chances of being audited go up depending on various factors, including income level, the types of deductions or losses you claim, the business you’re engaged in, writing off a loss for a hobby, or claiming 100% business use of a vehicle.
Although the overall individual audit rate is only about one in 143 returns, the odds increase dramatically as your income goes up. IRS statistics for 2016 show that people with an income of $200,000 or higher had an audit rate of 1.70% or one out of every 59 returns. Report $1 million or more of income? There’s a one-in-17 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.65% (one out of 154) of such returns were audited during 2016, and the vast majority of these exams were conducted by mail.
If the deductions on your return are disproportionately large compared with your income, the IRS may pull your return for a review. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.
Schedule C is a treasure trove of tax deductions for self-employed people. But it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don’t report all of their income. The IRS looks at both higher-grossing sole proprietorships and smaller ones.
You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you’re in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses.
When you depreciate a car, you have to list on Form 4562 the percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it’s rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.
The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Be sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy record keeping makes it easy for a revenue agent to disallow your deduction.
As a reminder, if you use the IRS’s standard mileage rate, you can’t also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.
Understanding Capital Gains and Losses
A capital gain is what the tax law calls the profit when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares or real property. The profit is your gain over the basis paid. The basis is typically defined as the original price plus any related transaction costs.
You can have a short-term gain or a long-term gain. The law divides investment profits into different classes determined by the calendar. Short-term gains come from the sale of property owned one year or less; long-term gains come from the sale of property held more than one year. The tax rate you pay depends on whether your gain is short-term or long-term.
Short-term profits are taxed at your maximum tax rate, just like your salary, up to 39.6%. Long-term gains are treated much better. Long-term gains are taxed at 15% for taxpayers in four tax brackets (25%, 28%, 33%, 35%). If you’re in the highest bracket (39.6%), then your long-term gains are taxed at 20%. Low-bracket taxpayers (10% and 15%) pay no capital gains tax at all.
A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or real estate. As with capital gains, capital losses are divided by the calendar into short- and long-term losses.
Deducting Medical Expense on Your Tax Return
Many medical expenses that you pay out of pocket for yourself, your spouse and your dependents may be tax-deductible, but you can only deduct those expenses to the extent they exceed 10% of your adjusted gross income in 2017. You also need to itemize deductions to take advantage of this write-off.
You can count your health insurance deductibles, co-payments, prescription drug costs (and insulin without a prescription), and other expenses that aren’t covered by your insurance, such as vision and dental care. The cost of contact lenses, glasses, chiropractors, acupuncture, travel to receive medical care, a smoking-cessation program and many other expenses count. You can also deduct a portion of eligible long-term-care insurance premiums based on your age.
You can’t deduct any medical expenses that you paid with tax-free money from a flexible-spending account or health savings account.