Tax

Opportunity Zone Guidance Finalized

Final regulations were recently issued regarding details about investment in qualified opportunity zones (QOZ) that modified and finalized proposed regulations for QOFs and QOZ businesses that were previously issued on October 28, 2018, and May 1, 2019.

The final regulations provide additional guidance for taxpayers who are eligible to make an election to temporarily defer the inclusion in gross income of certain eligible gain. The final regulations also address the ability of such taxpayers’ eligibility to increase the basis in their qualifying investment equal to the fair market value of the investment on the date that it is sold, after holding the equity interest for at least 10 years.

Here’s what it means for taxpayers investing in qualified opportunity zones:

The statute permits the deferral of all or part of a gain that would otherwise be included in income if corresponding amounts are invested into a QOF. The gain is deferred until an inclusion event or Dec. 31, 2026, whichever is earlier.

Furthermore, the final regulations provide a list of inclusion events and provide guidance that allows taxpayers to determine the amount of income that must be included at the time of the inclusion event or December 31, 2026.

Also addressed are the various requirements that must be met to qualify as a QOF, as well as the requirements that an entity must meet to qualify as a QOZ business. Specifically, how an entity becomes a QOF or QOZ business and the rules regarding the requirement that a QOF or QOZ business engage in a trade or business.

The final regulations also retain the general approach of the proposed regulations while providing additional guidance and clarification regarding the rules regarding QOZ business property.

Related forms, instructions, and other information taxpayers need to take advantage of this update are available in January 2020. For more information about this and other TCJA provisions, please contact the office for assistance.

• By Leon Clinton
• January 22, 2020

Standard Mileage Rates for 2020

Starting January 1, 2020, the standard mileage rates for the use of a car, van, pickup or panel truck are as follows:

• 57.5 cents per mile driven for business use, down one half of a cent from the rate for 2019
• 17 cents per mile driven for medical or moving purposes, down three cents from the rate for 2019, and
• 14 cents per mile driven in service of charitable organizations.

The business mileage rate decreased one half of a cent for business travel driven and three cents for medical and certain moving expense from the rates for 2019. The charitable rate is set by statute and remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

Prior to tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than five vehicles used simultaneously. Please call if you need additional information about these and other special rules.

If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office.

• By Leon Clinton
• January 18, 2020

Starting a Home-Based Business

More than half of all businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based business people.

And, with technological advances in smartphones, tablets, and iPads as well as rising demand for “service-oriented” businesses, the opportunities seem to be endless.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:

• Can you describe in detail the business you plan on establishing?
• What will be your product or service?
• Is there a demand for your product or service?
• Can you identify the target market for your product or service?
• Do you have the talent and expertise needed to compete successfully?

Before you dive headfirst into a home-based business, you must know why you are doing it and how you will do it. To achieve success your business must be based on something greater than a desire to be your own boss and involves an honest assessment of your personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan for the long-term and be willing to make improvements and adjustments along the way.

While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

• Are you a self-starter?
• Can you stick to business if you’re working at home?
• Do you have the necessary self-discipline to maintain schedules?
• Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction. For more information see the article, Do You Qualify for the Home Office Deduction? below.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

• Work certificate or a license from the state (your business’s name may also need to be registered with the state)
• Sales tax number
• Separate business telephone
• Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment, and promotional expenses. In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services, and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.

Projecting Income

One of the most important skills you will need is knowing how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate the initial sales volume.

Determining Cash Flow

Working capital – not profits – pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

If a home-based business is in your future, then a tax professional can help. Don’t hesitate to call if you need assistance setting-up your business or making sure you have the proper documentation in place to satisfy the IRS.

• By Leon Clinton
• January 16, 2020