Frequently Asked Questions for tax year 2008
Q: How much equipment can I write off in the year of purchase?
A: Section 179 is an election that allows the first $108,000 of business equipment, furnishings, and vehicles to be deducted against income in the year it is acquired, regardless of when in the year it is purchased. This deduction is reduced if more than $430,000 of tangible assets is acquired during the year and no deduction is available if more than $538,000 of tangible assets is placed in service during the year.
Q: Are raffle tickets deductible?
A: No part of a raffle ticket is tax deductible.
Q: Can I deduct contributions made to a political candidate or a political action committee (PAC)? What about expenditures for lobbying?
A: Expenditures made to candidates, committees, or political organizations cannot be deducted; however, expenditures for state and local lobbying may be deductible if they relate to one's business activities. Expenditures for federal lobbying are always nondeductible.
Q. Can I deduct the cost of tenant or leasehold improvements that I make over the term of the lease?
A. No. These types of improvements must be depreciated over the same useful life as the real property, which are 27 ½ years for residential property and 39 years for non-residential property. There are some exceptions for tangible personal property and land improvements.
Q: Is it better to buy or lease business equipment?
A: It depends. While there are many types of leases and ways to own property, both options represent different financing methods. Leasing usually requires less money at inception and over the term of the lease while ownership might be more beneficial if you want the flexibility to sell the equipment at any time. Business equipment is often accounted for as a capital lease, whereby both the asset and liability is recorded on the company's books as if it is owned. The other type of lease, known as an operating lease, is often associated with vehicle and office leases and is not reflected on the company's balance sheet.
Q: If I borrow from a personal, but unsecured, line of credit and use the proceeds to improve my home, can I deduct the interest as home mortgage interest?
A: No, the loan must be secured by your home in order for it to qualify as home mortgage interest.
Q: If I borrow on margin from my brokerage account, is the interest deductible?
A: With the exception of a home mortgage, which must be secured by the home to be deductible, the deduction of other interest is governed by a complex set of rules. In general, the proceeds of the loan must be "traced" to determine its deductibility. For example, interest paid on proceeds used for a business activity may be deductible as either business interest or investment interest, while interest paid on a loan that was used to acquire an asset such as a personal vehicle is nondeductible. Investment interest, which is often times associated with the purchase of investment property, may only be deducted to the extent that one has investment income (interest, dividends, and some capital gains).
Q: I refinanced my mortgage this year and paid points. Can I deduct them?
A: Points, also known as loan origination fees and discount fees, must be amortized (deducted) over the term of the new loan. This rule applies to refinancing loans and to mortgage loans used to acquire rental property; however, points paid upon the purchase of a personal residence or incurred to substantially improve a residence are fully deductible when paid.
Q: Should I bother keeping track of medical expenses?
A: While medical-related expenditures must exceed 7.5% of federal adjusted gross income (AGI) to be deductible, Arizona taxpayers can deduct 100% of these expenses on their state income tax return.
Q: What is a personal property tax and is it tax deductible?
A: Personal property tax is deductible as an itemized deduction. This tax is most often associated with a state's vehicle license tax (VLT) if it is assessed on the fair market value of a vehicle (which is the case in Arizona) or on property that is affixed to real property such as mobile and manufactured homes.
Q: I've read about some changes that allow many more businesses to use the cash method of accounting. Does it make sense to change?
A: Recent changes in the law allow many businesses whose gross revenues average less than $10 million per year the opportunity to use the cash method of accounting. Contrasting the cash method with the accrual method, the cash method provides many small businesses with the flexibility of deducting expenses when paid (rather than when incurred) and recognizing income when received (rather than when earned). Some businesses, such as manufacturers or ones that hold goods as inventory, are excluded from using the cash method.
Q: I contributed to my child's public school for a field trip she took. Can I claim a federal tax deduction for that?
A: There are two types of deductions that qualify for Arizona's public school tax credit - contributions to the school's general fund and fees paid for extracurricular activities; however, only the contribution can be deducted on the federal return as a charitable contribution. Fees are not deductible. The maximum state credit for public schools is $400 (married filing joint) and $200 (all others).
Q: Are contributions to Arizona's private schools deductible?
A: If the contribution is made to a qualified tuition organization, you may claim a credit of up to $1000 (married filing joint) to $500 (all others). This contribution also qualifies on the federal tax return as a charitable contribution and can be claimed as a state tax credit in addition to the public school credit discussed above.
Q: I did some free-lance work this year but didn't receive a 1099 form. Do I have to report that income?
A: Independent contractors should receive Form 1099-MISC for amounts received in excess of $600 annually. Nonetheless, all income, whether reported on a tax reporting form or not, should be reported on your tax return.
Q: How much can I contribute to my IRA for 2008?
A: You may contribute $5,000 to your IRA, which increases to $6,000 if you were age 50 or older by the end of 2008. As in the past, you must make this contribution by the original due date of your individual tax return, and you must have earned income that exceeds the amount of the contribution. Whether you will be able to deduct the IRA contribution depends on many factors including your AGI and whether you (or your spouse) are an active participant in a company-sponsored retirement plan.
Q: Are contributions to my company's 401(k) plan deductible?
A: Sort of. Contributions of your wage or salary income to a 401(k) plan reduce your taxable wages, so the amount on which you are taxed is lower than if you did not participate at all. You do, however, pay social security and Medicare taxes on your gross wages.
Q: What is the maximum 401(k) contribution for 2008?
A: The maximum level is 100% of wages not to exceed $15,500 ($20,500 if you will be 50 or older in 2008). Please remember that additional limits within your specific plan may apply.
Q: Can I deduct the cost of my home computer if I use it for business?
A: While it may seem that such an expenditure would be deductible, the rules bar any deduction unless the home computer is a condition of employment and was purchased at the convenience of the employer. Even if deductible, it is subject to the 2% limit on miscellaneous itemized deductions, making it even more difficult to obtain a tax benefit.
Q: I established a revocable (living) trust last year. Must I file a separate tax return for it?
A: In general, no, a separate tax return is not required. In fact, you should use your social security number for all assets acquired by this trust.
Q: Is it necessary to file a tax return for a single-member LLC (SMLLC) formed to acquire and hold some rental property?
A: While a SMLLC is a separate legal entity, it is "disregarded" for income tax purposes and no separate filing is needed.
Q: What kinds of receipts are necessary for contributions to charity?
A: The law requires that you have either a bank record (such as a cancelled check or account statement) or written acknowledgement from the charity. If the contribution is $250 or more, then you MUST have written acknowledgement from the charity.
Q: What are the tax benefits of donating appreciated stocks, bonds, or property to a charity?
A: Gifts of appreciated property that have been held over one year have a few advantages over cash. First, you may deduct the fair market value of the property, not just its cost. Second, you avoid having to pay the capital gains tax that would have occurred if the property was sold and the cash was donated. Third, you can retain cash you otherwise might donate and avoid having to forego the earnings on it. Your deduction, however, is subject to a 30% of AGI limitation.
Q: Can I get an extension to pay my taxes?
A: Both businesses and individuals can obtain an automatic extension to file but any tax due must be paid at the time the extension is filed to avoid interest and penalties.
Q: Can I pay my taxes by credit card?
A: Individuals may pay their federal taxes, including estimated tax payments, by using a credit card but should be aware of the fees that might be charged by the card issuer.
Q. What is cost segregation and how can my business benefit from that?
A. In a cost segregation study, we analyze the specific costs involved in constructing or remodeling a building to determine whether some of those costs could be deducted over a shorter period of time. If the result is positive, additional depreciation is realized and net income (and income tax) is reduced. (We have successfully performed this analysis for many clients in the past couple of years with great results).
Q. Is there a tax credit available for setting up a retirement plan?
A. Yes. Small employers (100 employees or less) may be eligible to claim a tax credit for setting up and maintaining a newly-established retirement plan. The maximum credit of $500 may be claimed for the first three years of the plan. (Please contact our subsidiary company, Pinnacle Plan Design, P.C. for more information).
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