Rising from the Ashes – Casualty, Disaster, and Theft Losses

Rising from the Ashes – Casualty, Disaster, and Theft Losses

by | Jul 15, 2019 | Individual Tax

Disasters are never easy to handle. They come by surprise and the personal feelings that follow it are immeasurable. Fortunately, there are tax provisions that allow individuals to ease the painful costs that follow experiencing disasters like floods and wildfires. By claiming disaster losses on Form 4684, then reporting them as a deduction on your Schedule A for your individual 1040 filing, you can potentially lower what you owe in taxes.

Call it a Disaster

The Tax Cuts and Jobs Act of 2017 upended a lot of what everyone knew about the tax code. Casualty, disaster, and theft losses were no exception. Starting from 2018 through 2025, in order to be able to claim the casualty loss deduction, the President of the United States must officially declare a “federal disaster” in order for casualty losses to qualify. This is usually applied to large-scale natural disasters like wildfires and hurricanes that periodically hit states and regions.

Figuring the Loss

Once an official federal disaster is declared, you are now able to claim any related casualty losses, such as a damaged or lost car. Here’s a sample scenario:

Paul lives in Red Creek, CA, which was recently declared a federal disaster zone due to wildfires. His car, valued at $5000, was destroyed but fortunately firefighters were able to save his home. He also noticed his entire Knight Rider VHS collection was stolen by looters while the fire was raging. Insurance paid out to him $2000 for his lost vehicle, but did not cover his loss of his VHS collection.

He can only deduct for casualty losses the remainder of what is not covered by insurance. So Paul can claim up to $3000 in casualty losses. Theft-related losses are limited to the adjusted basis (aka the original cost) and not the fair market value (FMV) of the lost item. So even if his Knight Rider VHS collection may have commanded a high FMV from collectors, Paul can claim no more than what he paid for the tapes, which in this case was probably a paltry few bucks from a garage sale.

Loss Limitations

Of course there are limits to claiming casualty, disaster, and theft losses. A “$100 rule” applies for each casualty loss incident claimed which reduces the loss claim by $100. The total loss deduction is then subtracted against 10% adjusted gross income (AGI) of the individual. However, these rules do not apply to business property losses.

So, going back to the previous example, Paul’s wildfire and all losses related to it are considered one incident ($100 rule). After insurance reimbursement, his loss is $3000. Paul has an AGI of $32,000 for the year. Applying loss limitation rules, unfortunately we find out Paul cannot claim a casualty loss deduction because his loss is less than 10% of his AGI ($3,000 – 100 = $2,900, 10% of his AGI is $3,200, $2,900 – $3,200 = (300)).

 

Calculating casualty losses can get complicated. Busy owners may not have the time. Having a tax-savvy accounting support staff like us at MiklosCPA can ease that burden.  We are a California-based accounting firm that helps small business clients of assorted industries with their accounting and tax needs. Reach out to us if you want to learn more of our services, and also follow us on our social media pages for more future “good to know” articles like this one.

Take that L, and Carry It Forward – Net Operating Losses

Take that L, and Carry It Forward – Net Operating Losses

by | Jul 1, 2019 | Business Tax, Individual Tax

Owning and running a business comes with unlimited potential for growth and lofty dreams. It also comes with the risk of failure and defeat. Losses are just as much a part of life as success, and luckily the law give us the opportunity to leverage some of those losses towards potentially paying less taxes.

Net Operating Losses (NOL)

Let’s say that you are preparing your small business taxes on your Schedule C. You notice that your deductions are more than your income. Your business may have a net operating loss (NOL). Don’t fret. NOL can be used as a deduction for your individual taxes to reduce your taxable income and ultimately lower what you owe in taxes. However, there are some limits. Spending money on a bad date unfortunately won’t count as NOL.

For the most part, NOL comes from running a business. Expenses associated with starting and maintaining a business often qualify for business deductions. Sometimes your profits won’t match what you’ve spent to keep the business going and you’ll have a qualifying NOL. Only in narrowly defined circumstances, such as qualified casualty losses, can personal losses qualify. There are also limits to NOL for individuals, such as the NOL cannot exceed 80% of the individual’s taxable income. Capital losses, such as stocks losing value, cannot exceed capital gains.

Carry on, my wayward NOL

Once you’ve correctly calculated your NOL, you can use it as a deduction for your taxes. Of course, there are rules to it though. The Tax Cuts and Jobs act made it so NOL after 2018 cannot be “carried back” to previous tax years, with some specific exceptions in industries like farming. If your NOL hits the “80% of your taxable income” limit, the excess NOL will be carried over to the next tax year and onward until that NOL is depleted.

By using NOL effectively, you can mitigate the costs associated with starting up a business. Learning the ins and outs of NOL while starting up that business may be too time consuming and costly. Having a back-room team manage those details can help your start-up get on the right foot. Our firm, MiklosCPA, has supported many small business clients with their tax and accounting concerns so they can focus on their ambitions to grow their business. Get in touch with us to learn more about how we can help your business, and follow us on our social media pages for future “good-to-know” articles and other interesting tax tips.

The Small Business Filing – Schedule C

The Small Business Filing – Schedule C

by | Jun 17, 2019 | Business Tax, Individual Tax

Are you the sole proprietor of your small business? When it comes time to file your taxes, where do you put those expenses to claim the plethora of deductions available to small businesses? The answer, you see, is the Schedule C.

Schedule C is used to report income or losses for a business, operated as a sole proprietorship. To qualify as a business to use Schedule C, the individual must be regularly and continually involved in the operations of that business with a main focus on income or profits. It cannot be something mostly passive such as selling cookies for the annual church bake sale. Corporations and partnerships have different forms to report income or losses. For now, we’re focusing on the Schedule C that gets attached to an individual’s Form 1040.

The Schedule C – Simplified

The form itself can be outlined as:

  • Biographic info, such as name, address, accounting method, etc.
  • Income – gross sales, returns and allowances.
  • Expenses – such as actual expenses, depreciation, commissions, contract labor, premiums on business insurance, contributions, and business use of home.
  • Cost of Goods Sold (COGS), if applicable.
  • Vehicle Information, to claim deductible expenses for business use of a vehicle.
  • Other Expenses, not already listed above such as amortization, bad debt expenses, and business start-up costs.

Once this is all added up, a small business owner can determine if they had a profit or a net operating loss. Profits are always good, but even a net operating loss can be useful for deductible expenses or carrying the losses over to the next year.

Taking advantage of small business-related expense deductions on Schedule C like the business use of home, vehicle expense, and others require a bit of planning and know-how to use properly. Sometimes up-and-coming businesses and their owners may not have the time to plot these things out. Imagine having a knowledgeable support team take care of those needs, while you can focus on what counts most, growing your business! That’s us here at MiklosCPA. We are a California-based accounting firm that supports small and mid-sized business clients with their accounting and tax needs. Contact us to learn more about our services, and follow us on our social media pages for future good-to-know articles like this one!

A Place for Your Deductions – The Schedule A Form

A Place for Your Deductions – The Schedule A Form

by | May 27, 2019 | Individual Tax

You’ve probably heard of people claiming deductions for their taxes. But where exactly do you put those deductions when you file your taxes? Individuals who file their Form 1040 will need to fill out Schedule A, and the form is less intimidating than it sounds. For more information on HOW to calculate certain deductions, check out our articles on those deductions that are linked in this article.

Schedule A Breakdown

The form can be found on the IRS website in a fillable format. The form itself is broken down into major categories of itemized deductions with information on any needed additional forms and calculations. The major categories in order:

The last section tallies up all the claimed itemized deductions and the final line is a confirmation that you are electing to itemize deductions even if it may be less than the standard deduction, in case you may be inclined to do so.

Overall, the form itself is straightforward and only a single page. The calculation of certain itemized deductions may require some extra work and recordkeeping. Most individuals opt to do it on their own, but individuals with more complex accounting issues may require some assistance, especially business owners.  Which is where we at MiklosCPA come in. MiklosCPA is a California-based accounting firm that has helped many small business owners with their accounting and tax needs through our “virtual office” team. Contact us to learn more of our services and follow us on our social media for future updates and other good-to-know postings!

Cancelled Debts? They May Still be Taxable.

Cancelled Debts? They May Still be Taxable.

by | May 1, 2019 | Business Tax, Individual Tax

Debt has become inevitable in many lives in the modern age. In fortuitous circumstances and probably after jumping through many legal hoops, debts may be cancelled and loans forgiven by a lender. However, even though you may be freed from those debts by a lender, that cancelled debt may still be taxable. Most people don’t know, but they may still end up having to pay taxes related to those cancelled debts since the balance of those cancelled debts are treated like income for tax purposes.

 

Cancelled debts

Say for example, a lender compromises with you regarding an outstanding personal loan of $8,000. They agree with you that if you pay off $4,000 of that debt, they’ll accept it in satisfaction of the loan. The remaining $4,000 of that loan now gets treated as part of your gross income for annual tax filing.

 

Bankruptcy, Gifts, and Other Exceptions

Of course, there are exceptions to keep in mind. Generally, debts cancelled in relation to a bankruptcy are excluded and not taxable on a person’s income. Debts canceled as a gift or inheritance are also not taxable. Cancelled qualified debts in real property and farming may also be excluded from being taxable.

 

1099-C

If you have any canceled debts, you should receive a 1099-C form from an applicable entity, such as a bank or a government entity like FDIC. Besides the usual identifying information, the form has an “Identifiable Event Code” section where a letter denoting what kind of event the canceled debt is related to. For example, “A” would be for Bankruptcy, “F” would be for By Agreement. You’ll need this document with your individual filing.

 

The taxability of cancelled debts may not be something commonly known. Having a knowledgeable accounting support team can help you and your business swerve around these potential financial potholes. MiklosCPA is a California-based accounting firm that helps many clients with their accounting and tax needs. Learn more of how our services can your business reach its growth potential! Contact us, and also follow our social media for more future “good-to-know” posts.

Individual Filing Gets a Facelift – The Revised Form 1040

Individual Filing Gets a Facelift – The Revised Form 1040

by | Mar 13, 2019 | Individual Tax

Tax season always brings lively moments to accountants and other tax professionals, and this year is no different with the Tax Cuts and Jobs Act (TCJA) seeing itself fully implemented. Individual filers will find a dramatically revised Form 1040. The IRS scuttled the 1040-EZ and 1040-A versions of the 1040. In its place for tax years 2018 and beyond, the 1040 will now be the main form that most taxpayers with simple income will file with, similar to how the 1040-EZ was used in the past.

Put Your Items on a Schedule

For certain other items like claiming certain tax credits, the IRS has provided six schedules to attach to the 1040.

  • Schedule 1 focuses on additional income items (e.g. capital gains, interest income) and adjustments (e.g. IRA and student loan interest deductions).
  • Schedule 2 pertains to those who owe alternative minimum tax and excess advanced premium tax repayments.
  • Schedule 3 deals with claiming nonrefundable credits such as the Foreign Tax Credit and Lifetime Learning Credit.
  • Schedule 4 concerns those owing “other taxes” like the self-employment tax and household employment taxes.
  • Schedule 5 involves “other payments and refundable credits” like excess social security and estimated tax payments.
  • Schedule 6 relates to foreign filers and third-party designees.

Popular credits like the American Opportunity Tax Credit and Earned Income Credit still require their associated attachments, such as Form 8863 for AOTC. Other schedules such as Schedule A and C haven’t changed much. Essentially, these new schedules divide up the previous 1040 form and relegate certain line items onto associated schedules to attach to the taxpayer’s 1040.

While our California-based firm, MiklosCPA, focuses on helping small and mid-sized businesses with their tax and accounting needs, we enjoy dispensing information for our readers on useful “good-to-know” developments in the accounting and tax world, such as this one. Follow us on our social media pages for more future pieces like this one, or if you wish to know more of our services, contact us!

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