Additional information on returns relating to mortgage interest.
Sec. 6050H is amended to require new information on the mortgage information statements that are required
to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be
required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address
of the property securing the mortgage, and the mortgage origination date. This change applies to returns and
statements due after Dec. 31, 2016.
The short-term highway funding extension passed by the Senate on Thursday contains several important tax
provisions. The bill modifies the due dates for several common tax returns, overrules the
Supreme Court’s Home Concrete decision, requires that additional information be reported on mortgage
information statements, and requires consistent basis reporting between estates and beneficiaries.
Due date modifications
For partnership returns - the new due date is March 15 (for calendar-year partnerships) and the 15th day of the
third month following the close of the fiscal year (for fiscal-year partnerships).
For C corporations – the new due date is the 15th day of the fourth month following the close of the
The new due dates will apply to returns for tax years beginning after Dec. 31, 2015. However, for C
corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning
after Dec. 31, 2025.
Softness in Manufacturing and Transportation;
Construction in Good Shape
Raleigh, N.C., June 19, 2014 - According to the latest quarterly analysis of private-company financial statements by Sageworks, U.S. businesses are growing sales and expanding profit margins at a healthy and consistent pace over the last year. Strength in construction has contributed to overall private-company results, but a few key sectors, like the manufacturing and transportation industries, are seeing slower growth than previous periods. Sales for private companies on average are increasing at an annual rate of 8 percent as of June. The average privately held company is also making more than 7 cents of profit for each dollar in sales (a 7.2 percent net profit margin).
Despite warning signs from the Census Bureau that the post-2009 housing boom and recovery may be slowing, privately held construction companies continue to grow sales at a double digit pace, even increasing their rate of growth in the most recent period. Net margins for these companies continue to climb, currently sitting at a five year high of 5.1 percent.
The manufacturing sector, badly bruised by the recession, has recovered significantly over the past five years. According to figures from the White House, output for manufacturing companies has climbed 30 percent since the end of the recession. Privately held manufacturing companies in particular have recovered with a great deal of strength since the recession: At this point two years ago, these companies were outpacing a very robust private-company average sales growth rate of nearly 10 percent by growing sales at a rate of 14 percent. Two years later, they’re growing sales at a rate half the size.
As the President indicated earlier this month with his promise to allocate several billion dollars in manufacturing equipment for U.S. businesses, manufacturing remains a key indicator and crucial part of the economy’s continued expansion. “Hopefully,” says Sageworks Chairman Brian Hamilton, “the slowdown in sales we’re seeing for manufacturing is a minor blip and not an indication of broader softness in the economy.”
More than 93 percent of companies within the trucking industry have 20 or less trucks, according to the American Trucking Associations. “This is an industry composed, for the most part, of privately held players,” explains Abbas. “These are not huge organizations individually, but together they play a large role in the industry.” In an analysis of the financial statements of these private trucking companies, Sageworks found that the average growth rate for trucking companies is 7.7 percent. While that’s a solid growth rate, it’s significantly lower than the 14 percent growth these companies were seeing two years ago. “It makes sense that the trucking industry is seeing its growth rate slide, when you look at what’s going on in manufacturing,” said Abbas. “If fewer orders are being placed from manufacturers, trucking companies will not be increasing the amount of business at the same rate as they were in 2012.”
IRSTargetsThousandsOf Small BusinessesForExtraScrutiny – In 3 Parts
Part I – What the IRS is doing.
The IRS has always been able to match individual tax returns against information statements and propose under reporter adjustments that come in the form of CP2000 notices. ?? But things are changing, and a new era at the IRS is upon us. ?? Now, the IRS is using information statements to find under reporting on business returns.
Thetaxagencyisdoingsome targetingofitsown,fingeringatleast 20,000smallbusinesses. Andthatnumber willgrow. Thescrutinyonthisgroupandinthisway isalittlefrightening. Smallbusinesspeople acrossAmericaarereceivingIRSnotices. Morewillbecoming.TheIRSgathersdata frommanythirdparties-including credit cardcompanies-toseeif youpickedup everynickelofincome. Remembertorecordandpay
tax on all transactions?
In September, the IRS started its first information return-matching program for business return Forms 1120, 1120S and 1065. This program matched business return incomes to the total amounts reported on all information returns. ?? That would include merchant reporting of credit cards and third party network payments and cash reporting.
This year, business taxpayers also started receiving Form 1099-K, Merchant Card and Third-party Network Payments, reporting amounts received from payment settlement entities (from debit/credit cards and third-party network payers such as PayPal). To avoid taxpayer burden, the IRS stated in a to the National Federation of Independent Business on Feb. 9 that it will not require taxpayers to separately report amounts from Forms 1099-K on returns, and has no plans to in the future. ??
Wait a minute; not everyone is convinced. One Congressman, Sam Graves (R Mo), Chairman of the House Committee on Small Business, notes that the IRS’s first sentence begins, “Your gross receipts may have been underreported.” Says Congressman Graves that sounds like the IRS is looking for more than just additionalinformation. It soundslikeitcouldmeanmoretaxes,penalties andinterest,Sam Graves wroteinthislettertothe agency.
Mr.Gravessuggeststhattheletterscouldintimidate businesses.Hesaysthatasmallbusinessowner receivingthisnoticemaybealarmedandfeel threatened. TheIRSnoticegoesontosayyour receiptsareofffromanIRSaverage. Within30 days,pleaseprovidedocumentationtoprovewhy yournumbersdon’tfallwithinIRS’sstandard,the IRSasks.
whatthestandardisorwhereitcamefrom. It soundslikeyouarebeingaskedtoprovethat youdidn’tunderreportyourincome. That’s provinganegative,andcouldrequireextensive correspondenceanddocumentation.
AsaresultofForm1099changesandtheever-increasingwebofreporting,theIRSreceives detaileddataaboutcredit-anddebit-card transactions. TheIRSminesthedataandmaythink thatahighpercentageofcardtransactionsmay meanyouarenotreportingall thecashyoureceive.
‘Pleaseexplain,’theIRSmayask. – go to Part II
As simple as it may sound, the ex- act required down payment for a U.S. Small Business Administration (SBA) loan is often a source of confusion for commercial mortgage brokers, borrowers and lenders alike. The reasons vary, but many industry professionals have long relied on hearsay when it comes to the required amount of down payment for SBA requests. Commercial mortgage brokers must keep themselves informed about the guidance provided by the SBA regarding the required down payment for each of its programs — the SBA 7(a) and SBA 504, in particular — as well as relevant industry practices.
A frequent source of confusion stems from the SBA 7(a) program’s requirements regarding borrower down payment versus lenders’ requirements. Although SBA has oversight on credit and eligibility decisions on 7(a) loan requests, lenders often have their own credit criteria geared toward SBA lending. As a result, lenders may decline a loan request for any number of reasons that may not necessarily be related to SBA requirements.
When it comes to the required borrower down payment on 7(a) loans, it is beneficial to know what SBA exactly mandates. According to a document titled “Lender and Development Company Loan Programs” published by the SBA in 2009, “The lender must determine if the equity and the pro forma debt-to-worth are acceptable based on the factors related to that type of business, experience of the management and the level of competition in the market area.”
“The lender must include in its credit analysis a detailed discussion of the required equity and its adequacy,” it adds.
With this in mind, it is clear that lenders rather than the SBA are usually the actual decision makers on the amount of required equity. The SBA typically will raise questions if the amount seems light given the industry or nature of the transaction, but often lenders’ down payment requirements are what borrowers have to meet.
Many lenders typically will require a 10 percent down payment on the purchase of fixed assets. They also will ask for more than 10 percent to be injected if the request is made by a startup or for business acquisition, which reflects prudent lending standards because the risk profile of these requests is higher, meaning that more equity is required to mitigate that risk.
Commercial mortgage brokers also should advise their clients about the possibility of rolling the closing costs into the total loan amount, which may not be the case with conventional loans. For example, if a property is purchased at $1 million and the closing costs are $30,000, many lenders will allow these costs to be financed along with the purchase price. In this case, if a borrower provides a 10 percent down payment on a fixed-asset purchase of $1 million, the loan amount will be $930,000 and the total out-of-pocket equity down payment from the borrower will be $100,000.
In addition, remember that lenders typically consider the totality of the request (credit scores, historical repayment ability, collateral, management experience, etc.) in determining their comfort level with the down payment amount that borrowers are required to inject. As a result, lenders’ decisions can vary and a decline by one lender does not mean necessarily that the request is not suitable for SBA approval. Similarly, lenders may vary in their down payment requirements.
The SBA 504 program is more direct regarding required down payments. This program typically provides as much as 90 percent funding — a conventional first mortgage equaling 50 percent of the total project, and a below-market, 10-year or 20-year fixed-rate second mortgage for as much as 40 percent of the project provided by an SBA certified development company (CDC). The borrowers’ down payment will be about 10 percent to 20 percent.
In the 504 program, which can be used only to purchase fixed assets such as commercial real estate or equipment, the SBA requires that borrowers inject 10 percent as a down payment on the total project inclusive of closing and soft costs. If the business is a startup, an additional 5 percent is required, increasing the down payment to a minimum of 15 percent. If the business is for the purchase of a special-use facility (ice-hockey rink, hotel, car wash, etc.), an additional 5 percent also is required.
When an additional 5 percent equity down payment is required, the amount typically reduces the second mortgage. For example, if the loan request is for a $1 million startup car wash, the bank makes a 50 percent first mortgage, SBA funding provides a 30 percent second mortgage and the borrower injects $200,000 as a down payment.
The SBA provides CDCs with some latitude in determining whether a business is considered a startup. Many CDCs will consider the business a startup only if it has been operating for two years or less, however. Finally, commercial mortgage brokers should know that payments made upfront by borrowers toward soft and closing costs — if documented — can be counted toward equity requirements if these were explicitly used for the project being submitted to the SBA.
Commercial mortgage brokers should look for new ways to help their clients and clarify the areas in the loan process that can be sources of confusion. Kruse and Crawford can provide advice on down payment requirements and assist in determining the right loan source for your business funding.
As published in Scotsman Guide’s Commercial Edition, July 2013. By Jim Noone
Jim Noone is vice president at Prudent Lenders. Prudent Lenders provides U.S. Small Business Administration 7(a) loan processing, closing and portfolio servicing to community banks across the country with speed and efficiency and the added peace of mind that it has been “done right.” http://prudentlenders.com/ Reach Jim Noone at (610) 768-7792 and firstname.lastname@example.org.
As either a commercial property owner or a commercial property tenant you may take advantage of qualified leasehold improvements before midnight December 31, 2013.
What will the qualified leasehold improvements mean for you in 2013 and 2014?
In 2013, you’ll be able to take a 15-year depreciation, a Section 179 deduction of up to $250,000 and a 50% bonus depreciation.
In 2014, you’ll be able to take a 39-year depreciation.
$1,000,000 in leasehold improvements applied to 2013 tax year’s 15-year schedule rather than 2014’s 39-year schedule allowing a $24,610 deduction confers these huge savings:
1. $250,000 deduction straight from the top
2. $375,000 bonus depreciation
3. $12,488 additional via IRS’s first year midyear convention on the 15-year depreciation
Adding it all up, you’ll be writing-off $637,488 versus $24,610!
What sort of leasehold improvements qualifies under the 2013 rules?
1. The improvement is made under or pursuant to a lease by the lessee (or sublessee) of the building’s interior portion, or by the lessor of that interior portion.
2. The interior portion of the building is to be occupied exclusively by the lessee (or sublessee) of that interior portion.
3. The improvement is placed in service more than three years after the building was first placed in service by anyone.
Under Section 168(k)(3)(B), the qualified leasehold improvement property does not include any expenditures:
. To enlarge the building
. To any elevator or escalator
. To any structural component benefiting a common area
. To the internal structural framework of the building
Improvements qualifying under the 2013 rules include among others these:
. Pipes and Fittings
. Plumbing Fixtures
. Fire Protection
. Permanent Interior Finishes
. Permanent Floor Coverings
. Millwork and Trim
Other qualifying improvements include movable partitions or carpeting that is not part of the property’s structure. Such improvements will not qualify as leasehold improvements under 2014’s 39-year rules and are generally depreciable over five to seven years.
Cost-segregation is a good way to look at faster depreciation deductions for qualified leasehold improvement property. These depreciations are tax law-approved.
Using cost-segregation, you’ll first pay the cost-segregation fees necessary to obtain the cost-segregation study. The study will show whether or not your cost-segregation passes IRS muster. Qualified leasehold property improvements require no such study and it’s relatively easy to identify property qualifying for the tax breaks.
Putting qualified leasehold improvements in practical terms, imagine the case of a lessee who’s made improvements to the HVAC serving a stand-alone commercial building used for retail sales. The improvements serve only the space occupied by the lessee and the HVAC improvements:
1. Do not benefit a common area.
2. Are not part of the building’s internal framework and structure?
3. Do not enlarge the building.
4. Placed in service more than three years after the building first entered service.
Per the IRS, the HVAC improvements qualify as either 39-year property or as tax-favored 15-year qualified leasehold improvements. Neither the IRS nor the lessor put forward an accelerated five-year personal property depreciation claim on the HVAC improvements.
Per the IRS, the HVAC improvements do not qualify as leasehold improvements made by the lessor as they’re located on the building’s rooftop and are not located within the building’s interior.
The taxpayer in the example above unfortunately undertook the costly HVAC improvements without good tax advice. Had the taxpayer received knowledgeable advice first, he’d have perhaps considered installing the HVAC upgrades within the leased space.
Landlords and tenants: Remember to take a good look at qualified leasehold improvements. Keep in mind the property in question must have been in service for at least three years and the improvements must be in service before midnight December 31, 2013
Call Kruse and Crawford to assure you get this done correctly.
Some businesses make the mistake of bringing a product or service to the market without fully understanding the total costs involved and the prices they can charge. As a result, they discover they can’t sell enough of the product or service to make a profit.
One of the most important tools you can use to make better business decisions is the break-even analysis; it enables you to determine with great accuracy whether or not your idea is a profitable one. Best of all, you can use this tool to evaluate every product or service you offer.
A break-even analysis is a simple way to determine how much of the product must be sold to generate a specific level of profitability. Keep the following in mind:
•Each business has certain fixed costs that must be paid every month, whether or not any sales take place.
•Each product or service has variable costs that are incurred when the product is produced and sold.
•There are semi-variable costs that go up or down depending on the level of business activity.
After all costs attributable to bringing that product to market are deducted, each product or service yields a certain amount of profit. This profit contribution can then be divided into the “fixed costs” to determine how many units must be sold to break even.
Here’s a simple example of the break-even model:
The total costs of operating the business each month are $10,000. Each product the company produces can be sold for $1,000. Each product costs an average of $800 per unit to produce, sell and deliver. The profit contribution per unit is therefore $200 each. The amount $200 is divided into $10,000 to determine the break-even point. Next, $10,000 divided by $200 equals 50 units. The company must therefore sell 50 units per month to break even, or approximately two units per business day. Only after the company has sold 50 units in one month does it begin to earn a profit of $200 per unit.
Conducting an accurate break-even analysis requires a careful examination and study of costs and prices in your business. You must know what your product or service costs in total to deliver to the final customer, as well as the price you can charge for the product or service. Include and deduct all miscellaneous expenses involved in operating your business.
To get started, analyze every product or service you produce and sell on a regular basis. Make a list of these products or services, starting from the largest volume seller. Next, calculate the average sales price of each unit, and then calculate the total cost of each unit. Then, calculate the net profit that you earn on the sale of each unit, and calculate the cost of the investment to produce and sell each unit. Determine the percentage of return/profit that you earn from the sale of each unit.
It’s important to organize each of your products and services by priority, in terms of their contribution to profitability. The analysis should be done on each of your important products or services. Get started by determining:
•Your single most profitable product or service.
•The volume of sales of each product.
•The total profit per unit of each product sold, after deducting every direct and indirect expense.
•The total profit contribution to the company of each product.
Businesses may decide to completely discontinue a product or service after conducting this kind of analysis. They immediately see it would be better to invest time and money in producing and selling something else.
As market conditions change and consumer desires evolve, you may find that a product or service that was once popular and profitable is no longer successful. It will then be time for you to begin offering a product or service that is easier to sell, sells at a higher price and yields a better profit.
Questions? Need help, call Kruse and Crawford and we’ll do just that.