Frequent-Flier Beware: The IRS May Come Calling
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Last month thousands of Citibank customers received “1099-Misc” forms informing them “that miles they received for opening accounts last year (2011) produced taxable income.”
The 1099-Misc forms were met by surprise and furor by many of the recipients. The Wall Street Journal reported :
“The tax issue was only hinted at in the offer,” says Keith Sipos, a retired music teacher in San Diego who received a 1099 with $750 of income for 30,000 miles. “When I asked to have the miles rescinded, Citibank said I should have asked by the end of 2011. But I didn’t know about the tax until I got the form.”
Unfortunately for many of the 1099 recipients Smart Money reported that according to analysts, “the actual trips booked with the miles can be worth less than the amount of income reported by the credit card company.”
Are your frequent-flier miles taxable? Here’s a brief run down on what types of frequent-flier miles are taxable according to the Wall Street Journal article “Frequent-Flier Tax Traps.”
Taxable
- Miles awarded as prizes.
- Miles awarded for opening an account, such as a bank account.
- Miles awarded for putting money into a mutual fund.
Non Taxable
- Miles awarded by the airline for flying with them.
- Miles awarded for credit card use.
- Miles awarded for business travel.
Bottom line, consumers should concentrate their efforts on accruing frequent-flier miles through credit card purchases or through traveling and steer clear of mileage rewards by opening new accounts.
What is a 10% Purchase Option Lease?
A 10% Purchase Option Lease, sometimes referred to as a finance lease, is often selected by businesses who want to keep their options open to purchase the leased equipment at the end of the lease. This lease is most appropriate for businesses that aren’t ready to make a purchase decision at the beginning of their lease.
Here are three things to know about a 10% Purchase Option Lease:
1. The lessee usually may purchase the equipment at the end of the lease at a fixed price equal to 10% of the original price.
2. The monthly lease payment will be lower than the $1 Purchase Option Lease but may be higher than the Fair Market Value Lease.
3. Provides additional financial benefits that may include depreciation and interest expense benefits for tax purposes.
Not sure which type is best for your business? Please contact us and we will walk through the options with you.
What is a $1 Purchase Option Lease?
A $1 Purchase Option Lease is one of the two most common leases that businesses use to acquire equipment today. The other is a Fair Market Value Lease . Each type of lease is useful, depending on the type of equipment and the type of anticipated use. A $1 Purchase Option Lease is often used by businesses or schools when they know they will still be using the equipment for an extended period after the end of the lease term.
Here are three things to know about a $1 Purchase Option Lease:
- Provides businesses the ability to purchase the equipment for a $1 at the end of the lease term.
- Monthly payments are higher than a Fair Market Value lease because the lessee is now financing 100% of the equipment cost.
- Provides additional financial benefits that may include depreciation and interest expense benefits for tax purposes.
Not sure which type is best for your business? Please contact us and we will walk through the options with you.
U.S. Manufacturers Looking Homeward
U.S. companies, especially manufacturers, are looking homeward in the face of slowing growth in China and the continued uncertainty in Europe the Wall Street Journal reported this week. What does this mean for U.S. businesses?
For United Rentals Inc., it means that the “world’s largest equipment rental company’ is increasing its spending by nearly a third in 2012 as more of its customers in construction and industrial choose to rent instead of purchasing their own equipment. For Carlisle Companies it means they are opening new plants in the U.S. and moving their tire production back from China.
For Union Pacific it means that the locomotive giant plans to “buy twice as many locomotives this year, spending upward of $400 million.”
United Rentals CFO William Plummer told the WSJ, “It is an environment that feels like it is building momentum. We are coming out of the depth of the recession and are starting to build momentum on the upside.”
U.S. manufacturers’ investing at home is more encouraging news for the U.S. economy.
U.S. Businesses Stepping Up Spending
According to the Wall Street Journal, American businesses stepped up their spending going into the New Year, propelled by an economic upswing that has yet to lift much of the housing market.
New orders for U.S. durable goods—those lasting longer than three years, such as automobiles and kitchen appliances—rose 3% in December from November, the Commerce Department said. The data suggest that business spending on equipment climbed for the first time in three months, indicating renewed confidence among companies.
While the housing market has much ground to regain, corporations are poised to boost production in coming months, powering the U.S. recovery as other parts of the world slow down. Several factors are at play. Demand for automobiles has taken off as Americans who put off purchases during the recession and early in the recovery are now replacing cars and buying new ones. In addition, manufacturers—who saw business slow over the summer—say demand is picking up.
The durable-goods numbers, along with indicators of a brighter outlook among employers, signal pockets of strength in the American economy even as Asia loses momentum and the euro zone teeters toward recession. There were gains in every major category, from primary metals to machinery, with the exceptions being electrical equipment and defense products. Orders for nondefense capital goods excluding aircraft—a proxy for business spending—rose 2.9%, after two months of declines.
Overall, good news for the recovery.
Should Your Company Be Thinking Like a Startup
If “startups are hothouses for creativity and innovation, while large corporations are too jammed up with bureaucracy” is it time for companies of all sizes to “think like a startup”?
In Emily Heyward’s article for Fast Company this month “How Any Company Can Think Like a Startup,” she takes a look at what startups are doing right that businesses of all sizes can learn from. Heyward finds that:
- Startups are flatter. Heyward believes this is an important trait because in a startup the people at the top are more engaged in the creative process and are “collaborating with us on strategy.” This is important because everyone is “on board that there’s never a question of whether or not the best ideas will move forward.” However, in a larger business, the higher ups generally are not as involved in the creative process and may shoot down ideas that have been closely worked on only to have to start again.
- Startups have tighter timelines. Startups don’t have time to waste and belabor or second guess decisions. Tight timelines can help move the creative process along and ensure everyone is meeting their targets.
- Startups value disruption. According to Heyward, the “best ideas, the ones that everyone remembers, are always disruptive.” Heyward argues that businesses can learn a lot by startups by embracing and valuing disruption.
Could your business benefit by acting more like a startup?
Fed Agrees Economy Improving
Yesterday was another good day for the economy with the Federal Reserve announcing that it intends to keep rates low until 2014. The stock market responded by gaining 83 points. CNNMoney.com reported, “Keeping it at historic lows as the Fed has done since 2008, is meant to stimulate spending by lowering interest rates on everything from mortgages to car and student loans.”
In addition to today’s news from the Fed, 2012 has begun with a flourish of economic stories reporting that the economy is picking up. Business Week is reporting that “Manufacturing in the U.S. grew in December at the fastest pace in six months.” A further sign of the economy’s growing momentum came from the Institute for Supply Management (ISM) that reported its factory index rose to 53.9 in December up froom 52.7 in November again beating expectations of economists. Any reading over 50 indicates expansion.
This week Suzanne Sataline reported for American Express Open Forum that most small businesses surveyed by the Manta SMB Wellness Index, a quarterly index of the state of small businesses, responded that 2011 was a successful year for their businesses. Among the findings of the survey that Sataline reported:
Small business owners tend to be optimists. Nearly three-quarters of those surveyed said the small business economy would improve this year. These folks are a determined lot: 62 percent ranked growing their business as their top New Year’s resolution–ahead of improving relationships with their family, working out more and eating healthier.
According to Pamela Springer, president and CEO of Manta:
Small businesses are the lifeblood of the national economy, and while things have been difficult in 2011, we see every day that small business owners are committed and hard-working and don’t take no for an answer. In fact, our survey shows that 90 percent of small business owners are optimistic about their company’s growth in 2012.
Question is, what gains are you seeing in your business?
What is a Fair Market Value Lease?
A Fair Market Value Lease is one of the most common leases that businesses select in part because of its flexibility. Businesses often select a Fair Market Value lease if the equipment they are acquiring, such as technology equipment, rapidly loses its value once it is placed into operation.
Here are three things to know about a Fair Market Value (FMV) Lease:
- Offers the lowest monthly payments. An FMV lease is ideal for businesses that want the lowest possible payments and are unsure if they want to acquire the equipment at the end of the lease.
- Provides tax incentives. Businesses may be able to deduct the monthly lease payments as an operating expense deduction.
- Provides the greatest flexibility at lease end. At the end of a FMV lease a business can decide to return the equipment, continue to pay for and use the equipment per your agreement with the lease finance company, purchase the equipment or upgrade it with newer equipment.
If you have any questions regarding the Fair Market Value Lease, please contact us.
Eight Overlooked Tax Deductions
Each year millions of taxpayers overlook money saving deductions and credits resulting in overpaying their taxes. Here are eight tips so you won’t become one of the statistics.
Section 179 Deduction. If you own a small or midsize business and acquired assets for your business in 2011, you may be eligible to deduct up to $500,000. For more information about this deduction, you can read our recent post “End of Year Tax Tips” as well as the IRS publication “Bonus Depreciation and Increased Section 179 Deduction under the American Recovery and Reinvestment Act”.
Reinvested Dividends. Although this isn’t a deduction or tax credit, according to Kiplinger this is an “important subtraction that can save you a bundle.” If your mutual fund dividends are automatically used to buy extra shares, your tax basis in the fund is increased with each new reinvestment. Kiplinger advises that investors be careful not to forget including the reinvested dividends in your tax basis—failing to do so may result in double taxation of the dividends.
Additional Bonus Depreciation. If you are a business owner, don’t forget you can write off 100%of qualifying new (not used) assets—including most software, vehicles, and equipment in general.
American Opportunity Credit. Do you have a child in college? Then don’t forget to claim the higher education tax credits. Under the credit, taxpayers can get a reduction in their tax bill of up to $2500 per student provided the tax filers have an adjusted gross incomes of less than $80,000 a year (if single) or $160,000 (if they file jointly). An eligible family with two kids in college could get a tax credit of $5,000. Best part about the credit is that it covers all four years of college. In order to get the credit, you will need to fill out IRS form 8863.The tax credit is set to expire at the end of 2012.
Student Loan Interest. If you are paying back your child’s student loan, and your child is no longer a dependent, your child is eligible to deduct up to $2500 of student loan interest you paid. However, parents can’t claim the interest deduction since they are not liable for the student loan debt.
Medicare Premiums for Self Employed. If you own your own business and are qualified for Medicare, you can deduct the premiums for Medicare Part B and Medicare Part D as well as supplemental Medicare (medigap) policies. According to Kiplinger, “you can’t claim this deduction if you are eligible to be covered under an employer-subsidized health plan offered by your employer.”
Retirement Accounts. Taxpayers have till April 17, 2012 to set up a new IRA or add to an existing IRA and have it count for your 2011 tax return.
Small Business Health Care Tax Credit. Small businesses that pay at least half of your employees’ health insurance premiums may be eligible for a tax credit of up to 35 percent of the premiums paid. You can find more information at the IRS web site.
