UNUSUAL TAX RULES MOST PEOPLE (AND ACCOUNTANTS) DON'T KNOW
The tax law is a strange hybrid containing many obscure rules, exceptions to the exceptions, and deeply counter-intuitive definitions. Buried in the clutter of what Congress created is opportunity. Finding useful opportunities in the tax law is like digging through a mountain of dirt in order to find gold. Here are some important rules most people and accountants don't know:
When Can You Deduct Business Expenses Charged to a Credit Card?
Many of my clients have asked me when they can deduct expenses charged to a credit card. For both business owners and individuals any item that is otherwise deductible may be claimed as an expense in the tax year the purchase is charged to a credit card. For example, assume a business owner purchases $1,000 in supplies on December 31 and charged the purchase to his credit card on that date. The credit card bill is not due until the following January. When can the purchase be claimed as a deduction? The answer is in the year the purchase is charged to the credit card, NOT later when the card is paid. It doesn't matter if the taxpayer uses the cash or accrual method of accounting.
There is WIDESPREAD confusion on this issue. There is no doubt the answer presented above is correct. See IRS Revenue Ruling 78-39 and Granan v. IRS Commissioner (1971.) I've argued with other accountants who incorrectly claim that if the taxpayer uses the cash method of accounting then no deduction is allowed until the credit card bill is paid. This is FALSE.
Tax Free Rent Income
There is a special rule that allows you to rent out your home, or a portion of your home for less than 15 days and receive tax-free rent income. Any rent paid to you for such short term rentals is not taxable. Here is the description of the rule as stated in IRS Tax Topic 415:
Minimal Rental Use
There's a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don't report any of the rental income and don't deduct any expenses as rental expenses.
The less than 15 day period is per year. So in the course of an entire year your could rent out your home for less than 15 days and receive tax-free rent income.
Disabled Access Credit
This is one of the best tax credits available today. There is a 50% tax credit for expenditures made by a business (including landlords who rent out property) for improvements that facilitate access to disabled individuals. Such improvements include qualifying ramps and doors, bathrooms that are renovated to help the disabled with handles and wider doors, and other improvements. See IRS Form 8826. The cost of any improvement must exceed a minimum amount of $250. The credit is available to costs incurred up to $10,000. Thus, the maximum tax credit is $5,000.
Blind and Disabled People Can Create a Tax Free "ABLE" Account
Individuals who are legally blind or disabled may create a special tax free account called Achieving a Better Life Experience ("ABLE".) Contributions to this account are tax free and may be made by friends, family members and third parties. Earnings in the account are generally tax-free. Distributions from the account to pay for disability related expenses are tax free. Limitations apply. See IRS Publication 907.
Zero Percent Tax Rate on Long Term Capital Gains
If you sell stock, real estate or other property and have a long-term capital gain you may qualify for a zero percent tax rate if your 2018 taxable income (excluding the capital gain) is below these thresholds:
| Single Taxpayer | $38,600 |
| Married Filing a Joint Return | $77,200 |
| Head of Household | $51,700 |
This special rule has great significance for tax planning and shifting income from one year to another in order to qualify for zero tax on long term capital gains. Note that short-term capital gains for property owned less than one year will not qualify.
Credit Card Points and Frequent Flyer Miles Are Probably Not Taxable
These benefits provided by credit card and airline companies are generally viewed by the IRS as a reduction in the costs and fees charged and not as taxable income. A 2002 Announcement issued by the IRS (No. 2002-18) stated that the IRS would not pursue the issue of taxing frequent flyer miles. And in a Private Letter Ruling from 2002 (PLR 200228001) the IRS said it did not view credit card points as taxable. However, if these perks are received in a business context or as a promotion then they could indeed be taxable.
Sell Your Business or Commercial Property Tax-Free
One of the most powerful tax saving tools in the entire Internal Revenue Code is a Charitable Remainder Trust or CRT. A business or property owner could contribute the asset they plan to sell to a CRT. The owner would name himself as the beneficiary of this very special trust. At the conclusion of this step the trust would own the asset. Then, the trust sells the asset tax-free. Sales proceeds can be invested in many ways and the trust would pay a lifetime annuity to the owner. The very large tax bill usually incurred in selling a business or appreciated commercial property is completely avoided. Restrictions and limitations apply. See IRC Section 664.
George Adams
Certified Public Accountant Master of Business Administration
Tel: (207) 989-2700 E-Mail: GeorgeAdams@IntelligenceForRent.com
450 South Main Street: The HQ of IQ
Brewer, Maine 04412-2339
©2015 Copyright George Adams CPA MBA. All Rights Reserved.
