Red Rock Accounting Group, LLC .is pleased to you with the professional services described below. This letter, and the attached Terms and Conditions Addendum and any other attachments incorporated herein (collectively, “Agreement”), confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide. The engagement between you and our firm will be governed by the terms of this Agreement.
ENGAGEMENT OBJECTIVE AND SCOPE
We will prepare the federal and state tax returns for the year ended December 31, 2022:
We will not prepare any tax returns except those identified above, without your written request, and our written consent to do so. We will prepare your tax returns based upon information and representations that you provide to us. We have not been engaged to and will not prepare financial statements. We will not audit or otherwise verify the data you submit to us, although we may ask you to clarify certain information.
We will prepare the above referenced tax returns solely for filing with the Internal Revenue Service (“IRS”) and state and local tax authorities as identified above. Our work is not intended to benefit or influence any third party, either to obtain credit or for any other purpose.
You agree to indemnify and hold our firm and its partners, principals, shareholders, officers, directors, members, employees, agents or assigns (collectively, “firm,” “we,” “us,” or “our”) harmless with respect to any and all claims arising from the use of the tax returns for any purpose other than filing with the IRS and state and local tax authorities regardless of the nature of the claim, including the negligence of any party.
Our engagement does not include any procedures designed to detect errors, fraud, or theft. Therefore, our engagement cannot be relied upon to disclose such matters.
This engagement is limited to the professional services outlined above.
CPA FIRM RESPONSIBILITIES
Unless otherwise noted, we will perform our services in accordance with the Statements on Standards for Tax Services (“SSTS”) issued by the American Institute of Certified Public Accountants (“AICPA”) and U.S. Treasury Department Circular 230 (“Circular 230”).
We will prepare your tax returns based upon your filing status (single, married filing jointly, married filing separately, head of household or qualifying widow[er] with dependent child) as reflected in your income tax returns for last year. If your filing status has changed, you wish to change your filing status, or you have questions about your filing status, please contact us immediately.
Bookkeeping assistance We may deem it necessary to provide you with accounting and bookkeeping assistance solely for the purpose of preparing the income tax returns. These services will be performed solely in accordance with the AICPA Code of Professional Conduct. We will request your approval in writing before rendering these services. Additional charges will apply for such services.
Estimated tax payments
You may be required to make quarterly estimated tax payments. We will calculate these payments for the 2023 tax year based upon the information you provide to prepare your 2022 tax returns and have no obligation to update recommended payments after the engagement is completed. If you ask us to update your estimated tax payments, we will confirm this in a separate engagement letter.
Tax planning services
Our engagement does not include tax planning services. During the course of preparing the tax returns identified above, we may bring to your attention potential tax savings strategies for you to consider as a possible means of reducing your taxes in subsequent tax years. However, we have no responsibility to do so, and will take no action with respect to such recommendations, as the responsibility for implementation remains with you, the taxpayer. If you ask us to provide tax planning services, we will confirm this representation in a separate engagement letter.
Government inquiries
This engagement does not include responding to inquiries by any governmental agency or tax authority. If your tax return is selected for examination or audit, you may request our assistance in responding to such an inquiry. If you ask us to represent you, we will confirm this representation in a separate engagement letter. Third-party verification requests We will not respond to any request from banks, mortgage brokers or others for verification of any information reported on these tax returns.
CLIENT RESPONSIBILITIES
We will provide you with an income tax organizer to help you compile and document the information we will need to prepare your income tax returns. You must complete the income tax organizer with accurate and complete information. Income from all sources, including those outside the U.S., is required. We rely upon the accuracy and completeness of both the information you provide in the income tax organizer and other supporting data you provide in rendering professional services to you.
Documentation
You are responsible for maintaining adequate documentation to substantiate the accuracy and completeness of your tax returns. You should retain all documents that provide evidence and support for reported income, credits, and deductions on your returns, as required under applicable tax laws and regulations. You are responsible for the adequacy of all information provided in such documents. You represent that you have such documentation and can produce it, if needed, to respond to any audit or inquiry by tax authorities. You agree to hold harmless our firm and its partners, principals, shareholders, officers, directors, members, employees, agents or assigns with respect to any additional tax, penalties, or interest imposed on you by tax authorities resulting from the disallowance of tax deductions due to inadequate documentation.
Personal expenses
You are responsible for ensuring that personal expenses, if any, are segregated from business expenses and that expenses such as meals, travel, entertainment, vehicle use, gifts, and related expenses are supported by necessary records required by the IRS and other tax authorities. At your written request, we are available to provide you with written answers to your questions on the types of supporting records required.
State and local filing obligations
You are responsible for determining your tax filing obligations with any state or local tax authorities, including, but not limited to income, franchise, sales, use, property or unclaimed property taxes. You agree that we have no responsibility to research these obligations or to inform you of them. If upon review of the information you have provided to us, along with information that comes to our attention, we believe you may have additional filing obligations, we will notify you of this responsibility in writing and ask you to contact us. If you ask us to prepare these returns, we will confirm this representation in a separate engagement letter.
Record retention
It is our policy to keep records related to this engagement for 3 years. However, we do not keep any of your original records, so we will return those to you upon the completion of the engagement. When records are returned to you. It is your responsibility to retain and protect the records for possible future use, including potential examination by governmental or regulatory agencies. By engaging our services, you acknowledge and agree that upon the expiration of the 3 year period, we are free to destroy our records related to this engagement.
U.S. filing obligations related to foreign financial assets
As part of your filing obligations, you are required to report the maximum value of specified foreign financial assets, which include financial accounts with foreign institutions and certain other foreign non-account investment assets that exceed certain thresholds. You are responsible for informing us of all foreign assets, so we may properly advise you regarding your filing obligations.
Foreign filing obligations
You are responsible for complying with the tax filing requirements of any other country. You acknowledge and agree that we have no responsibility to raise these issues with you and that foreign filing obligations are not within the scope of this engagement.
Ultimate responsibility
You have final responsibility for your income tax returns. We will provide you with a copy of your electronic income tax returns and accompanying schedules and statements for review prior to filing with the IRS and state and local tax authorities (as applicable). You agree to review and examine them carefully for accuracy and completeness. You will be required to verify and sign a completed Form 8879, IRS e-file Signature Authorization, and any similar state and local equivalent authorization form before your returns can be filed electronically.
In the event that you do not wish to have your income tax returns filed electronically, please contact our firm. Additional procedures will apply. You will be responsible for reviewing the paper returns for accuracy, signing them, and filing them timely with the tax authorities.
TIMING OF THE ENGAGEMENT
We expect to begin our services upon receipt of the completed 2022 income tax organizer and all tax documents requested either in the organizer or by our office. If your return is electronically filed, our services will conclude upon the earlier of:
- the filing and acceptance of your 2022 tax returns by the appropriate tax authorities,
- written notification by either party that the engagement is terminated, or
- the year from the execution date of this Agreement.
If you have the option to file a paper return and choose to do so, our services will conclude upon the earlier of:
- delivery to you of your 2022 tax returns for your review and filing with the appropriate tax authorities,
- written notification by either party that the engagement is terminated
EXTENSIONS OF TIME TO FILE TAX RETURNS
The original filing due dates for your tax returns are April 17, 2023 for federal and state. Due to the high volume of tax returns prepared by our firm, the information needed to complete the tax returns must be received no later than April 8, 2023 so that the returns may be completed by the original filing due dates.
It may become necessary to apply for an extension of the filing deadline if there are unresolved tax issues or delays in processing, or if we do not receive all of the necessary information from you on a timely basis. Applying for an extension of time to file may extend the time available for a government agency to undertake an audit of your return or may extend the statute of limitations to file a legal action. All taxes owed are due by the original filing due date. Additionally, extensions may affect your liability for penalties and interest or compliance with governmental or other deadlines.
To the extent you wish to engage our firm to apply for extensions of time to file tax returns on your behalf, you must notify us of this request in writing. Our firm will not file these applications unless we receive an executed copy of this Agreement and your express written authorization to file for extension. In some cases, your signature may be needed on such applications prior to filing. Failure to timely request an extension of time to file can result in penalties for failure to file tax returns, which accrue from the original due date of the returns, and can be substantial.
We are available to discuss this matter with you at your request. Additional charges will apply for such services.
PENALTIES AND INTEREST CHARGES
Federal, state, and local tax authorities impose various penalties and interest charges for non-compliance with tax laws and regulations, including, failure to file or late filing of returns, and underpayment of taxes. You, as the taxpayer, remain responsible for the payment of all tax, penalties, and interest charges imposed by tax authorities.
We rely on the accuracy and completeness of the information you provide to us in connection with the preparation of your tax returns. Failure to disclose or inadequate disclosure of income or tax positions may result in the imposition of penalties and interest charges.
PROFESSIONAL FEES
Our fees are based upon the complexity of the work to be performed, and our professional time, as well as out-of-pocket expenses. In addition, the fee depends upon the timely delivery, availability, quality, and completeness of the information you provide to us. You agree that you will deliver all records requested and respond to all inquiries made by our staff to complete this engagement on a timely basis. You agree to pay all fees and expenses incurred whether or not we prepare the income tax returns.
Amounts unpaid within 30 days of invoice will be subject to a late payment charge of up to 2% per month. If for any reason the account is turned over to an attorney for collection, an additional charge of 33.3% or the maximum allowable by law will be added to cover collection costs.
DISPUTE RESOLUTION
In the event of a dispute related in any way to our services, our firm and you agree to discuss the dispute and, if necessary, to promptly mediate in a good faith effort to resolve. We will agree on a mediator, but if we cannot, either of us may apply to a court having personal jurisdiction over the parties for appointment of a mediator. We will share the mediator’s fees and expenses equally, but otherwise will bear our own attorneys’ fees and mediation cost. Participation in such mediation shall be a condition to either of us initiating litigation. In order to allow time for the mediation, any applicable statute of limitations shall be tolled for a period not to exceed 120 days from the date either of us first requests in writing to mediate the dispute. The mediation shall be confidential in all respects, as allowed or required by law except our final settlement positions at mediation shall be admissible in litigation solely to determine the prevailing party’s identity for purposes of the award of attorneys’ fees.
* * * * * *
We appreciate the opportunity to be of service to you. Please date and execute the enclosed copy of this Agreement and return it to us to acknowledge your acceptance. Absent a signature, engagement of our services indicates agreement with the terms provided herein. We appreciate the opportunity to serve you.
Very truly yours,
William P. Burke
Managing Member
We value our clients and our staff and in keeping with our Core Values we have put in place the following Covid-19 Protection Protocol. We are asking that all clients requesting in-office visits affirm that they will comply with this procedure.
- All clients and staff will wear a mask which completely covers the individual ‘s nose and mouth at all times while in our office.
- Clients agree to have their temperature checked upon entry to our office before meeting with members of our bookkeeping or tax preparation staff.
- Clients and staff will maintain social distancing for the safe interaction of all parties involved in the meeting.
- Clients who have any of the published Covid-19 symptoms will notify our office 24 hours in advance to arrange for their appointment to be rescheduled.
For your reference, the WHO and CDC have recognized these symptoms of Coronavirus.
Most common symptoms include:
- Fever
- Dry cough
- Tiredness
Less common symptoms:
- Aches and pains
- Sore throat
- Diarrhea
- Conjunctivitis
- Headache
- Loss of taste or smell
- a rash on skin, or discoloration of fingers or toes
Serious symptoms:
- Difficulty breathing or shortness of breath
- Chest pain or pressure
- Loss of speech of movement
Seek immediate medical attention if you have serious symptoms.
Individuals must pay 25% of a “required annual payment” by Apr. 15, June 15, Sept. 15, and Jan. 15, to avoid an underpayment penalty. (When that date falls on a weekend or holiday, the payment is due on the next business day.) The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employer from their paycheck.
If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. The penalty is avoided if you meet certain specified exceptions or waivers, described below.
Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
The underpayment penalty doesn’t apply to you:
- if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
- if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;
- if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or
- for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.
In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
Reproduced under license © 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.
In 2016, Arizona voters passed Proposition 206, increasing the state-wide minimum wage and mandating paid sick time for all employees.
Employers who pay tipped employees are allowed to pay up to $3 less than minimum wage.
The initiative also guaranteed 40 hours of annual paid sick time to employees of businesses with 15 or more employees and 24 hours to those of businesses with less than 15 employees. The measure entitled employees to accrue one hour of paid sick time for every 30 hours worked. The measure permitted earned paid sick time to be utilized for an employee’s medical care, an employee’s need to care for a family member, a public health emergency, or addressing domestic violence.
All Arizona employers are required to pay unemployment taxes to the state of Arizona. The tax rate applied on the Determination of Unemployment Tax Rate is applied to the first $7,000 of wages.
The Department of Economic Security (DES) calculates this rate based on a “reserve ratio.” This reserve ratio is calculated by comparing wages paid during a base period (the prior 3 years ending June 30), with benefits paid out to employees. The higher the claims, the higher the rate.
Employers may be able to reduce the rate by pre-paying amounts into their accounts. This is generally beneficial when employers will have more employees in the current year than they had in the year previous. To calculate if the voluntary payment makes sense for you, use the following steps:
If you have any questions regarding payroll taxes, please let us know. To schedule an appointment, go to the ‘Quick Links’ at the bottom of this page and let us know you need some help!
Our fees are based upon the complexity of the work to be performed and our professional time, as well as out-of-pocket expenses. In addition, the fee depends upon the timely delivery, availability, quality, and completeness of the information you provide to us. You agree that you will deliver all records requested and respond to all inquiries made by our staff to complete this engagement on a timely basis. You agree to pay all fees and expenses incurred, whether or not we prepare the income tax returns.
Amounts unpaid within 30 days of invoice will be subject to a late payment charge of up to 2% per month. If for any reason the account is turned over to an attorney for collection, an additional charge of 33.3% or the maximum allowable by law will be added to cover collection costs.
Federal, state, and local tax authorities impose various penalties and interest charges for non-compliance with tax laws and regulations, including failure to file or late filing of returns, and underpayment of taxes. You, as the taxpayer, remain responsible for the payment of all tax, penalties, and interest charges imposed by tax authorities.
We rely on the accuracy and completeness of the information you provide to us in connection with the preparation of your tax returns. Failure to disclose or inadequate disclosure of income or tax positions may result in the imposition of penalties and interest charges.
The original filing due date for your tax returns is April 15, 2017 for federal and state. Due to the high volume of tax returns prepared by our firm, the information needed to complete the tax returns must be received no later than April 9, 2017 so that the returns can be completed by the original filing due date.
It may become necessary to apply for an extension of the filing deadline if there are unresolved tax issues or delays in processing, or if we do not receive all of the necessary information from you in a timely basis. Applying for an extension of time to file may extend the time available for a government agency to undertake an audit of your return or may extend the statute of limitations to file legal action. All taxes owed are due by the original filing due date. Additionally, extensions may affect your liability for penalties and interest or compliance with governmental or other deadlines.
To the extent you wish to engage our firm to apply for extensions of time to file tax returns on your behalf, you must notify us of this request in writing. Our firm will not file these applications unless we receive an executed copy of this Agreement and your express written authorization to file for extension. In some cases, your signature may be needed on such applications prior to filing. Failure to timely request an extension of time to file can result in penalties for failure to file tax returns, which accrue from the original due date of the returns, and can be substantial.
We are available to discuss this matter with you at your request. Additional charges will apply for such services.
We will provide you with an income tax organizer to help you compile and document the information we will need to prepare your income tax returns. You must complete the income tax organizer with accurate and complete information. Income from all sources, including those outside the U.S., is required.
We rely upon the accuracy and completeness of both the information you provide in the income tax organizer and other supporting data you provide in rendering professional services to you.
Documentation
You are responsible for maintaining adequate documentation to substantiate the accuracy and completeness of your tax returns. You should retain all documents that provide evidence and support for reported income, credits, and deductions on your returns, as required under applicable tax laws and regulations. You are responsible for the adequacy of all information provided in such documents. You represent that you have such documentation and can produce it, if needed, to respond to any audit or inquiry by tax authorities. You agree to hold harmless our firm and its partners, principals, shareholders, officers, directors, members, employees, agents, or assignees with respect to any additional tax, penalties, or interest imposed on you by tax authorities resulting from the disallowance of tax deductions due to inadequate documentation.
Personal expenses
You are responsible for ensuring that personal expenses, if any, are segregated from business expenses and that expenses such as meals, travel, entertainment, vehicle use, gifts, and related expenses are supported by necessary records required by the IRS and other tax authorities. At your written request, we are available to provide you with written answers to your questions on the types of supporting records required.
State and local filing obligations
You are responsible for determining your tax filing obligations with any state or local tax authorities, including, but not limited to income, franchise, sales, use, property or unclaimed property taxes. You agree that we have no responsibility to research these obligations or to inform you of them. If upon review of the information you have provided to us, along with information that comes to our attention, we believe you may have additional filing obligations, we will notify you of this responsibility in writing and ask you to contact us. If you ask us to prepare these returns, we will confirm this representation in a separate engagement letter.
Record retention
It is our policy to keep records related to this engagement for 3 years. However, we do not keep any of your original records, so we will return those to you upon the completion of the engagement. When records are returned to you, it is your responsibility to retain and protect the records for possible future use, including potential examination by governmental or regulatory agencies. By engaging our services, you acknowledge and agree that upon the expiration of the 3 year period, we are free to destroy our records related to this engagement.
U.S. filing obligations related to foreign financial assets
As part of your filing obligations, you are required to report the maximum value of specified foreign financial assets, which include financial accounts with foreign institutions and certain other foreign, non-account investment assets that exceed certain thresholds. You are responsible for informing us of all foreign assets, so we may properly advise you regarding your filing obligations.
Foreign filing obligations
You are responsible for complying with the tax filing requirements of any other country. You acknowledge and agree that we have no responsibility to raise these issues with you and that foreign filing obligations are not within the scope of this engagement.
Ultimate responsibility
You have final responsibility for your income tax returns. We will provide you with a copy of your electronic income tax returns and accompanying schedules and statements for review prior to filing with the IRS and state and local tax authorities (as applicable). You agree to review and examine them carefully for accuracy and completeness.
You will be required to verify and sign a completed Form 8879, IRS e-file Signature Authorization, and any similar state and local equivalent authorization form before your returns can be filed electronically.
In the event that you do not wish to have your income tax returns filed electronically, please contact our firm. Additional procedures will apply. You will be responsible for reviewing the paper returns for accuracy, signing them, and filing them timely with the tax authorities.
Unless otherwise noted, we will perform our services in accordance with the Statements on Standards for Tax Services (“SSTS”) issued by the American Institute of Certified Public Accountants (“AICPA”) and U.S. Treasury Department Circular 230 (“Circular 230”).
We will prepare your tax returns based upon your filing status (single, married filing jointly, married filing separately, head of household or qualifying widow[er] with dependent child) as reflected in your income tax returns for last year. If your filing status has changed, you wish to change your filing status, or you have questions about your filing status, please contact us immediately.
Bookkeeping assistance
We may deem it necessary to provide you with accounting and bookkeeping assistance solely for the purpose of preparing the income tax returns. These services will be performed solely in accordance with the AICPA Code of Professional Conduct. We will request your approval in writing before rendering these services. Additional charges will apply for such services.
Estimated tax payments
You may be required to make quarterly estimated tax payments. We will calculate these payments for the 2017 tax year based upon the information you provide to prepare your 2016 tax returns and have no obligation to update recommended payments after the engagement is completed. If you ask us to update your estimated tax payments, we will confirm this in a separate engagement letter.
Tax planning services
Our engagement does not include tax planning services. During the course of preparing the tax returns identified above, we may bring to your attention potential tax savings strategies for you to consider as a possible means of reducing your taxes in subsequent tax years. However, we have no responsibility to do so, and will take no action with respect to such recommendations, as the responsibility for implementation remains with you, the taxpayer. If you ask us to provide tax planning services, we will confirm this representation in a separate engagement letter.
Government inquiries
This engagement does not include responding to inquiries by any governmental agency or tax authority. If your tax return is selected for examination or audit, you may request our assistance in responding to such an inquiry. If you ask us to represent you, we will confirm this representation in a separate engagement letter.
Third-party verification requests
We will not respond to any request from banks, mortgage brokers or others for verification of any information reported on these tax returns.
We often have clients asking how the depreciation deductions for an automobile used in your trade or business are determined.
In fact, special limitations apply, which may result in it taking longer for you to depreciate a car than it would other business property.
First of all, note that a separate depreciation allowance for a car only comes into play if you choose to determine the cost of its business use by the “actual expense” method. If, instead, you use the standard mileage rate (53.5¢ for 2017 per business mile driven, and 54¢ for 2016), a depreciation allowance is built in as part of the rate.
If you are using the actual expense method in calculating the depreciation allowance, an automobile is treated as an asset with a 5 year recovery period. Under the regular depreciation tables, the cost of an automobile is actually depreciated over a 6 year span according to the following percentages: Year 1, 20%; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. Six years are involved because depreciation is deemed to start in the middle of Year 1 and end in the middle of Year 6. (These percentages are not available for cars used 50% or less for business purposes. For these, straight-line depreciation is required.)
However, under additional limitations applicable to cars, you are limited to specified depreciation ceilings under “luxury automobile” rules. These ceilings, which are indexed for inflation, operate to extend depreciation beyond the sixth year for cars costing more than what the total depreciation allowance would be over the six years. For most cars first put in service in 2015 (and 2016), the ceiling is $3,160 for that year. The annual ceiling amounts for later years are $5,100 for the second year, $3,050 for the third year, and $1,875 for all later years. Slightly higher ceiling amounts apply for certain light trucks and vans (passenger autos built on a truck chassis, including minivans and light SUVs) first placed in service in 2015 (or 2016).
You cannot avoid these limitations via an election to “expense” the car (a Code Sec. 179 election). With the limitations applying, it may take longer than the regular six years to depreciate the entire cost of the car, if it is not disposed of sooner.
If the car is used partly for business purposes and partly for personal purposes, the limits are reduced to the business percentage. For example, the maximum depreciation deduction for a qualified automobile first placed in service in 2015 (or 2016) and used 75% for business is $2,370 (75% of $3,160) for the first year. The “personal” 25% portion ($790) is disallowed.
What is the impact of these limitations from the standpoint of the business decisions you must make? They raise the “after-tax” cost of automobiles used in your business. That is, the true cost of regular equipment used in the business will be its actual cost reduced by the tax benefits enjoyed via depreciation deductions. To the extent these deductions are reduced (deferred to future years, actually), the tax benefits are less and the true cost is higher. It may be advisable to consider this factor in deciding how much to spend on automobiles used in your business.
Please note that these limitations cannot be avoided by leasing a “luxury” car instead of buying it. Although the mechanics of the tax rules are different with leases, essentially your taxable income is increased to mirror the tax savings you would have lost had you bought the car. (These rules do not apply to car rentals for less than 30 days.)
If you have any questions or would like to discuss this topic further, please contact our office.
Reproduced under license © Thomson Reuters/Tax & Accounting. All Rights Reserved
It is very important that you know what you’re supposed to be tracking and why.
To prove you have a business expense, the IRS and the state require the following:
- Date (When)
- Payee (Who)
- Description (Why & how is it connected to the business)
- Amount (How much)
- Payment Method (What account, cash, check, credit, barter, etc.)
This is required for every single transaction. You may recognize the Who-What-When-Where idea from school and storytelling. We have to use your financial transactions to tell the story of your business.
Some clients give us a “lump sum” amount simply called “expenses.” While we do understand you are paying expenses, we classify them (cost of goods, postage, office supplies, meals & entertainment) and we have to know the source of the payment (what you paid it with – checking account, credit card, etc.)
We hope this helps you in knowing what and how to track your business expense. We are not attempting to audit your books, but without this information, we’re playing a guessing game.
The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent is not charged.
If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial the amount). On the other hand, you can only deduct property taxes and mortgage interest—no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)
If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to the following rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days of use). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible where (as is the case here) the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
If the rental income exceeds these allocable deductions, then you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.
If you rent the property out for more than 14 days, you must include the rent you receive in income. However you can deduct part of your operating expenses and depreciation, subject to the following rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days of use). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible where (as is the case here) the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.
If the rental income exceeds these allocable deductions, then you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house for personal purposes.
Here’s the test: if you use it personally for more than the greater of (a) 14 days, or (b) 10% of the rental days, you are using it “too much,” and you cannot claim your loss. In this case, you can still use your deductions to wipe out the rental income, but you cannot go beyond the income to create a loss. Any deductions you cannot use are carried forward and may be usable in future years. If you are limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: (1) interest and taxes, (2) operating costs, (3) depreciation.
If you “pass” the personal use test (i.e., you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)
Example: You rent a vacation home for 60 days and use it personally for 20 days. You are paid rent of $8,000. Expenses are $6,000 in interest and taxes, $3,600 operating costs, and $4,800 depreciation, for a total of $14,400. Personal use is 25% (20 out of 80 total use days). So 75% of expenses are allocated to rental ($14,400 × 75% = $10,800). There is thus a rental loss of $2,800 ($8,000 income, $10,800 expenses). However, personal use (20 days) exceeds the greater of (1) 14 days and (2) 10% of rental days (6). The loss is thus disallowed. You can deduct only $8,000 of expenses (up to the rental income). You must first deduct the rental portion (75%) of the interest and taxes ($4,500 (75% of $6,000)), then 75% of the operating costs ($2,700 (75% of $3,600), which totals $7,200 ($4,500 plus $2,700). You can then deduct only an additional $800 of depreciation.
Example: You rent a vacation home for 60 days and use it personally for 20 days. You are paid rent of $8,000. Expenses are $6,000 in interest and taxes, $3,600 operating costs, and $4,800 depreciation, for a total of $14,400. Personal use is 25% (20 out of 80 total use days). So 75% of expenses are allocated to rental ($14,400 × 75% = $10,800). There is thus a rental loss of $2,800 ($8,000 income, $10,800 expenses). However, personal use (20 days) exceeds the greater of (1) 14 days and (2) 10% of rental days (6). The loss is thus disallowed. You can deduct only $8,000 of expenses (up to the rental income). You must first deduct the rental portion (75%) of the interest and taxes ($4,500 (75% of $6,000)), then 75% of the operating costs ($2,700 (75% of $3,600), which totals $7,200 ($4,500 plus $2,700). You can then deduct only an additional $800 of depreciation.
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Reproduced under license: Thomson Reuters/Tax & Accounting
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