June 2000
IN THIS ISSUE
Do You Know . . .
Who said, "Men occasionally stumble over the truth, but
most of them pick themselves up and hurry off as if nothing had happened"?
Answer on page 4.
If you own a vacation home that you sometimes use and
sometimes rent to others, special rules apply to the income you receive from
renting the home and to the expenses you incur from maintaining the home.
Generally, the rules require you to determine the percentage of personal vs.
rental use and divide your expenses between the two. If you qualify, those
expenses considered rental expenses will be deductible. However, the rules also
require you to determine if you used the home as a residence; if so, then
special rules will determine the deductibility of any expenses.
Amount of personal use determines tax treatment
Under the IRS rules, the extent to which you use your
vacation home for personal reasons affects its tax treatment. Generally, if you
only rent out your vacation home, and do not use it for personal reasons, you
include all of the income and can deduct all of the expenses associated with the
home. If you sometimes use the home for personal reasons, but don't meet the diminium
personal use test (defined below), all the income is taxable, and you must
allocate expenses between personal and rental. Either way, your deductible
rental expenses can be more than your gross rental income. However, your losses
may be limited under the passive activity rules.
But if your personal use meets the diminium test, i.e., your
personal use is considered significant, then a special rule applies; if you have
a net loss, you may not be able to deduct all of the rental expenses.
Dominium personal use test. A dwelling unit is considered a
residence during the tax year if you use it for personal purposes more than the
greater of: 1) 14 days or 2) 10% of the total days it is rented to others at a
fair rental price. (A fair rental price for your property generally is an amount
that a person who is not related to you would be willing to pay; it's not a fair
rental price if it is substantially less than the rents charged for other
properties that are similar to your property.)
The definition of a dwelling unit includes a house,
apartment, condominium, mobile home, boat, or similar property. It has basic
living accommodations, such as sleeping areas and cooking facilities. A dwelling
unit doesn't include property used solely as a hotel, motel, inn, or similar
type of establishment that is regularly available for rental and is not used by
the owner as a home.
Diminium rental use test. Just as there is a diminium rule
for personal use, the IRS also requires that the home be rented out a minimum
number of days in order for rental expenses to be deducted. If you use the
dwelling unit as a home and you rent it for fewer than 15 days during the year,
you can't include any of the rent in your income and can't deduct any of the
rental expenses.
Rental vs. personal use
Before you can determine which expenses are deductible, you
first need to determine the number of days used for personal and rental purposes
based on the following rules:
1) Any day that the unit is rented at a fair rental price is
a day of rental use even if you used the unit for personal purposes that day.
This rule does not apply when determining whether you used the unit as a
residence.
2) Any day that the unit is available for rent but not
actually rented is not a day of rental use.
3) Any day that you spend working on and repairing the
property is not counted as a personal use day. The work for that day, however,
must be substantially full-time.
Example: Your beach house was available for rent from June 1
through August 31 (92 days). Your family uses the house during the last two
weeks in May (14 days). You were unable to find a renter for the first week in
August (7 days). The person who rented the house in July allowed you to use it
over a weekend (2 days) without any reduction or refund of rent. The house
wasn't used at all before May 17 or after August 31.
1) The house was used as a rental for 85 days (92–7).
Therefore, it meets the minimal rental use test. The days it was available for
rent but not rented (7 days) are not days of rental use. For the July weekend (2
days), your use is considered rental use because you received a fair rental
price for the weekend.
2) The house was used for personal purposes for 14 days, the
last two weeks in May.
3) The total use of the house was 99 days (14 days personal
use + 85 days rental use).
4) The rental expenses are 85 days of rental/99 days of
total use, or 86% of the beach house expenses.
5) When determining whether you used the beach house as a
residence (diminimus personal use test), the July weekend (2 days) you used it
was personal use even though you received a fair rental price for the weekend.
Therefore, there were 16 days of personal use and 83 days of rental use for this
purpose. Because you used the house for personal purposes more than 14 days and
more than 10% of the days of rental use, you used it as a residence. Therefore,
if you have a net loss, you may not be able to deduct all of the rental
expenses.
Rule for vacation home used as residence
If you use a dwelling unit as a residence and rent it for 15
days or more during the year, you include all your rental income in your gross
income. If you had a net profit from the rental property for the year (that is,
if your rental income is more than the total of your rental expenses, including
depreciation), deduct all of your rental expenses. However, if you had a net
loss, your deduction for certain rental expenses is limited.
Limit on deductions. If your rental expenses are more than
your rental income, you cannot use the excess expenses to offset income from
other sources. Any excess expenses can be carried forward to next year and will
be subject to any limits that apply next year. You can deduct the expenses
carried over to another year only up to the amount of your rental income for
that year, even if you do not use the property as your residence for that year.
Rental income
Whether you used the home as a residence is the first step
in determining how you will be able to treat your expenses. Next, you need to
calculate what your actual income and expenses from renting are for the year,
and whether you have a net gain or loss. Below is a list of what forms of
payment should be included when determining rental income.
Canceling lease payments. Any payments you receive from a
tenant for canceling a lease.
Any property or services received. If you receive property
or services in lieu of rent, include the fair market value of the property or
services in your rental income. If the services are provided at an agreed-upon
or specified price, that price is the fair market value, unless there is
evidence to the contrary. For example, you have a tenant who is a painter and
offers to paint the rental home, instead of paying two months' rent. You include
in your rental income the amount the tenant would have paid for two months'
rent. You can also include that same amount as a rental expense for painting
your property.
Lease with option to buy. If the rental agreement gives the
tenant the right to buy your rental property, the payments you receive under the
agreement are generally rental income. If, however, your tenant exercises the
right to buy the property, the payments you receive for the period after the
date of sale are part of the selling price.
Rental expenses
You can deduct your rental expenses in the year you pay or
incur them, and include the following.
Repairs and improvements. You can deduct the cost of repairs
that you make to your rental property, but not the cost of improvements.
Improvement costs can be recovered through depreciation.
The difference between a repair and improvement is that a
repair keeps your property in good operating condition. It does not materially
add to the value of your property or substantially prolong its life. Repairs
include painting your property inside or out, fixing gutters or floors, or
plastering. If you make repairs as part of an extensive remodeling or
restoration of your property, the entire job is considered an improvement.
An improvement, on the other hand, adds to the value of your
property, prolongs the property's useful life, or adapts it to new uses. If you
make an improvement, the cost must be capitalized, and generally can be
depreciated as if the improvement were separate property.
Insurance premiums. You can deduct insurance premiums you
pay for rental property. If you pay a premium for more than one year in advance,
you cannot deduct the total payment in the year you paid it. You can deduct only
the part of the premium payment that applies to that first year.
Interest expense. The mortgage interest you pay on your
rental property is deductible.
Charges for services. You can deduct charges you pay for
services provided for your rental property, such as water, sewer, and trash
collection.
Travel and local transportation expenses. You can deduct the
ordinary and necessary costs of traveling away from home or local transportation
expenses if the primary purpose of incurring the costs was to collect rental
income or to manage, conserve, or maintain your rental property. For travel
costs, you must allocate your expenses between rental and non-rental activities.
For local transportation, you can deduct the expenses using the actual expenses
or the standard mileage rate.
Condominium costs. If you rent your condominium, you can
deduct depreciation, repairs, upkeep, dues, interest, taxes, and assessments for
the care of the common parts of the structure. You cannot deduct special
assessments you pay for improvements, but these costs may be recoverable through
depreciation.
Cooperative fees. If you rent your co-op, you can usually
deduct all the maintenance fees you pay to the co-op. You can't deduct a payment
ear-marked for a capital asset or improvement, or a cost charged to the
corporation's capital account, such as a new roof.
Conclusion
Vacation homes that you use and sometimes rent, have special
rules that apply to the tax treatment of income and expenses related to the
home. The deductibility of the rental expenses will depend on whether you used
the dwelling unit as a "residence," and whether you had a loss. If you
used the vacation home as a "residence" for part of the time and also
had a net profit from renting it during the year, you can deduct all of your
rental expenses. However, if you had a net loss, your deduction for rental
expenses is limited to the amount of rental income for that year.
The National Association of Forensic Economics publishes two
journals with articles of interest to economists, accountants, and finance and
business professionals. On its Web site, it has included some lessthan-stellar
courtroom questions and answers in its resources section entitled "Great
Moments in Courtroom Testimony."
Q: Could you see him from where you were standing?
A: I could see his head.
Q: And where was his head?
A: Just above his shoulders.
* * *
Q: . . .and what did he do then?
A: He came home, and the next morning he was dead.
Q: So when he woke up the next morning he was dead?
* * *
Q: Mrs. Jones, is your appearance this morning pursuant to a
deposition notice which I sent to your attorney?
A: No. This is how I dress when I go to work. I was doing an
autopsy!
* * *
Q: . . .any suggestions as to what prevented this from being
a murder trial instead of an attempted murder trial?
A: The victim lived.
* * *
Q: What is your relationship with the plaintiff?
A: She is my daughter.
Q: Was she your daughter on February 13, 1979?
* * *
Q: Now, you have investigated other murders, have you not,
where there was a victim?
* * *
Q: Are you qualified to give a urine sample?
A: Yes. I have been since early childhood.
Many businesses, large and small, make mistakes when it
comes to spending money on office furniture or equipment. These businesses may
be spending money unnecessarily, when they could be saving substantial amounts
by taking a few simple steps.
Take inventory. Prior to making any purchases, a business
should determine what its needs are, take inventory of what is on hand, and
determine whether any current equipment meets those needs. Often, a current
piece of equipment may suffice, but it just needs repair or minor upgrading.
Ask around. When shopping, a business often asks a
salesperson what piece of equipment, software, etc. would work best for its
needs. This can be a good starting point if the businessperson has no previous
experience with the piece of equipment and needs information. On the other hand,
don't just take the salesperson's word. Ask employees who use or will be using
the equipment what model they prefer and/or features they think are necessary.
Look to the future. Also consider what features you may
need, not only today, but perhaps down the road as well. You don't want to spend
money on equipment that may become quickly obsolete. On the other hand, don't
fall for the "just a few more dollars" temptation by spending
additional money on features and extras that you are not likely to use.
Consider the whole package. Price should not be a business'
only focus. Service and support for the equipment should be considered as
important a factor.
Weigh leasing vs. buying. Buying and leasing office
equipment each has its advantages. Buying is less expensive, but leasing
generally includes a service agreement that is better than the one that comes
with a purchase. Leasing may also be a better option for equipment that is based
on fast-changing technology it may be easier to upgrade. And leasing may be
better for a large or cumbersome piece of equipment, since the business won't be
saddled with the problem of disposing of the equipment when it becomes obsolete.
Whether you consider buying or leasing, ask several vendors
for quotes and ask each of them the following: 1) what are the maintenance and
performance statistics for the model you are considering (for example, copier
"z" is in operating condition 95% of regular office hours); 2) what is
the response time for a service call; 3) what is the price to upgrade the
equipment if a new model becomes available.
If you are thinking of leasing, also ask for a breakdown of
the monthly lease cost. The monthly lease fee should allocate a portion for the
equipment portion of the lease, another for service, etc. Pay close attention to
the equipment portion, and calculate what the list price is, based on this lease
price. It may be higher than the average street price. You can then choose to
purchase or ask for a lower monthly payment for the equipment portion of the
lease.
June 12
Employees who work for tips. If you received $20 or more in
tips during May, report them to your employer.
June 15
Individuals. Make a payment of your 2000 estimated tax if
you are not paying your income tax for the year through withholding (or will not
pay in enough tax that way). Use Form 1040-ES. This is the second installment
date for estimated tax in 2000.
Corporations. Deposit the second installment of estimated
income tax for 2000.
Employers. For Social Security, Medicare, withheld income
tax, and non-payroll withholding, deposit the tax for payments in May if the
monthly rule applies.
July 10
Employees who work for tips. If you received $20 or more in
tips during June, report them to your employer.
July 17
Partnerships. File a 1999 calendar-year return (Form
1065).This due date applies only if you were given an automatic three-month
extension.
Employers. For Social Security, Medicare, withheld income
tax, and non-payroll withholding, deposit the tax for payments in June if the
monthly rule applies.
July 31
Employers. For Social Security, Medicare, and withheld
income tax, file Form 941 for the second quarter of 2000. Deposit any un-deposited
tax. (If the total is less than $1,000 and not a shortfall, you can
pay it with the return.) If you deposited the tax for the quarter in full and on
time, you have until August 10 to file the return.
For federal unemployment tax, deposit the tax owed through
June if more than $100.
Answer from page 1: Winston Churchill
|