Beware of Lost Tax Savings

By Mark E. Battersby

Every metal roofing professional has a number of options when preparing the dreaded annual tax return: Prepare the return yourself, use one of the many software programs or Internet tax preparation sites, or place everything in the hands of a professional? Regardless of the path chosen, however, there are developments in the tax arena that might impact or, worse, be overlooked as the tax return is prepared. With the IRS admittedly targeting smaller businesses because of more positive audit results, their increased scrutiny of those calling themselves “independent contractors” combined with continued attempts to label money-losing small businesses as hobbies, review is necessary before beginning to prepare the annual tax return—by any method.

Do You Have a Hobby or a Business?
Will the IRS consider your money-losing activities to be a business? The Tax Cuts and Jobs Act (TCJA), passed late in 2017, eliminated many itemized deductions formerly claimed on personal income tax returns, including losses from “hobbies.” Fortunately, those operating their activity as a business can generally use the full amount of the activity’s losses to offset income from other sources.

Profits in three out of five consecutive tax years leaves it up to the IRS to prove an activity is a hobby. Fortunately, profits are not always necessary so long as there is a “reasonable expectation of profits”—not necessarily actual profits, only profit motivation.

Depreciation Final Rules
Regardless of how much or how little tools, equipment, or other assets are used in the metal roofing operation, the TCJA’s newly increased “bonus” depreciation can offset the operation’s taxable income by a full 100% of the amount spent. Making this deduction even more attractive, it now applies to both new and used business assets.

Because they were so late in releasing the guidelines for using the 100% write-off, in a related move, the IRS announced they will now allow anyone who failed to claim the 100% bonus depreciation for any tax year after the law’s passage, to retroactively claim it—or not.

Under the rules, bonus depreciation is something that must be opted out of. The metal roofing operation may not have the current income or, if future income looks higher, opting out might be in order. Ignoring bonus depreciation requires opting out on the annual tax return or on the amended return, and using the smaller annual depreciation deduction to offset income down the road.

Section 179 as Alternative
The Section 179 write-off for deducting similar expenditures for the tools, equipment, or other business assets placed in service during the tax year has been around for a while. The TCJA increased amount of the Section 179, first-year expensing write-off to $1 million (up from an inflation-adjusted $510,000). What’s more, the ceiling after which the write-off is reduced (dollar-for-dollar) now kicks in only when expenditures for expensing-eligible property exceed $2.5 million (up from $2,030,000).

Is it better to take the Section 179 write-off or the bonus depreciation deduction? Remember, unlike bonus depreciation, the Section 179 first-year expensing deduction cannot result in a loss for the metal roofing operation.

Record Keeping Essentials
Good records can help every metal roofing professional generate an accurate tax bill and ward off zealous IRS auditors. Although just what records a metal roofing business needs to keep, what records it should retain, and for how long, is unclear, as long as the records produce an accurate accounting of income and expenses, any system, whether manual, computer, or bookkeeper’s record, is acceptable.

Using Those Records for Write-Offs
One place where records are invaluable is with the deduction by the business of a metal roofing professional using part of their home as an office, shop, or for other business-related purposes. The home office expense is no longer an itemized personal deduction, but when claiming it on the business’s tax return, there are two options:

The first option, the “regular” method, requires figuring the business usage by dividing the expenses between business and personal use of the home. Direct expenses are, of course, fully deductible, while the amount of floor space devoted to the operation of the business determines the deductible portion of the other home expenses.

The second option, a “safe harbor” method, reduces the paperwork and record keeping burden by using a flat rate of $5 per square foot for the portion of the home used by the metal roofing operation. There is a maximum allowable deduction (based on up to 300 square feet) that places a ceiling on the total amount deductible as a home office expense at $1,500.

Do-It-Yourself Online or With Software
Among the benefits of using one of the many software programs on online-based tax preparation sites, are the reminders and prompts for deductions that might be missed or overlooked. But which program is right for your business?

www.taxact.com/business-returns: A metal roofing professional in need of an affordable solution might turn to a software program called TaxAct. TaxAct for Business Income Tax Returns, a web-based program, is one of the less expensive options available, although it offers fewer bells and whistles than other programs. Tax returns handled include self-employment as well as investment income.

turbotax.intuit.com: For sole proprietors (the Schedule C filers), TurboTax offers several options based on the type of business and whether online or a downloaded/CD version is needed. Because TurboTax and its developer, Intuit, are so popular, they are somewhat expensive. However, paying top dollar means you get a program that can search more than 350 tax deductions and credits.

www.hrblock.com/tax-software: Another staple, H&R Block’s Premium version, does almost everything that TurboTax does, but at a slightly lower price tag. H&R Block offers online tax preparation for small businesses with their “Self-Employment Online” version, including Schedules C and SE (self-employment income tax).

www.jacksonhewitt.com/file-taxes-online: Less expensive than H&R Block and TurboTax is Jackson Hewitt’s tax software. Jackson Hewitt’s Premium program can handle complex tax situations, but with fewer prompts and explanations.

Among other software programs, online, downloadable, or on CD (in no particular order) are:

www.creditkarma.com/tax: Credit Karma can handle all major IRS schedules and forms.

www.libertytax.com/online: Liberty Tax Online is suitable for more experienced filers.

www.freetaxusa.com: FreeTaxUSA has thousands of top-rated reviews.

Or, Find a Pro
Despite the availability of software programs to accomplish tax return preparation, a metal roofing professional might prefer more hands-on assistance. That might mean enlisting the help of a tax professional, hopefully one familiar with the business or industry as well as the more complex business transactions of S corporations, Limited Liability Companies (LLCs), partnerships, or regular “C” corporations.

Many of those offering tax preparation software also have advisors. H&R Block and Jackson Hewitt, for example, have hundreds of offices around the country.

When it comes to help with tax preparation or tax questions, the Internal Revenue Service offers free advice—but all too often it is free advice at a price. The IRS will not advocate aggressive tax solutions, nor can their answers be taken as gospel. In fact, the IRS will not stand behind incorrect advice or even its own erroneous interpretation of its own rules.

Generally, the experts suggest that it is best to find a professional focusing on clients that mirror your situation. Smaller tax return preparers and national chains such as H&R Block tend to focus on individuals, professionalism and smaller-size businesses. Medium-size CPA firms usually specialize in mid-to-large scale regional businesses and high-income individuals. National CPA firms are geared to servicing very large companies and their top employees.

Typically, attorneys specializing in tax law are not ardent disciples of tax return preparation. Such legal professionals are most often confined to complex transaction issues and document preparation.

The best way to find someone to prepare the metal roofing operation’s tax returns or to render needed tax advice is a referral from business associates, the business’s banker, or the business’s attorney. If more options are needed, every state has professional associations or branches of national organizations, such as the American Institute of Certified Public Accountants.

Find Out More on the Web
www.irs.gov: As mentioned, the IRS provides free guidance. They also publish many of their guides, rulings, and regulations that can be accessed by anyone with a computer and internet.

Other reference sources, in addition to Google, include:

turbotax.intuit.com/tax-tips/small-business-taxes: Articles from TurboTax related to small businesses and taxes.

www.hrblock.com/tax-center/small-business: A compilation of H&R Block’s news, tips, and articles for small businesses.

www.sba.gov/business-guide/manage-your-business/pay-taxes: Business management and tax info from the U.S. Small Business Administration.

www.nfib.com/business-resources: The National Federation of Independent Business offers resources and guides.

www.justanswer.com/sip/tax: Chat online with a tax professional at Just Answer (this one is fee-based).

www.1800accountant.com/learning-center: Resources and tax tips from 1-800Accountant.

Finally, Those Deadlines
We’re all familiar with the April 15 deadline for filing tax returns, but it’s not a date that applies to everyone—or every business. Partnerships and S corporations are, for example, required to file their tax returns (Form 1065) and (Form 1020S) by March 16, 2020. Sole proprietors and regular “C” corporations must file by the April 15 deadline.

So-called “pass-through” entities such as partnerships and S corporations don’t pay taxes, instead passing income and losses to owners, partners, and shareholders. Thus, when the pass-through entity files its tax return, income and losses are passed on via a Schedule K-1 for each owner, partner, or shareholder for them to report those amounts on their personal returns.

Mark Battersby has more than 35 years of experience in small business issues, tax, and financial matters. Contact him at 610.789.2480 or mcbatt12@earthlink.net.