One of the new rules under the Tax Cuts and Jobs Act (TCJA), that is effective for 2018 going forward, concerns 1031 exchanges, or more specifically, the trade-in of vehicles and equipment.
Under the prior tax law, trade-ins deferred the tax on any gain from the disposition of the vehicle or equipment. By deferring any gain, the tax basis of the new equipment was reduced by the deferred gain.
Under the NEW TAX LAW, 1031 exchanges are only allowed for real estate. Trade-ins of vehicles or equipment will be treated as a sale and any gain on the transaction will be recorded in the year of trade. This may not be all bad, as you may have the ability to use the special (bonus) depreciation and/or Section 179 rules to expense the new vehicle or equipment at a much faster rate or even all in the year of purchase.
The Protecting Americans from Tax Hikes Act of 2015 made several tax incentives permanent. Among the most beneficial for businesses is the Section 179 expensing limitations and phase-outs. The new thresholds allow $500,000 of immediate expensing of qualified business equipment, with a phase out of $2,000,000. If you are planning on making some big equipment purchases by year end, you will be able to write-off the entire purchase (or any portion) on your 2016 income tax return.
A separate provision allows 50% of the cost of improvements to be written off under “bonus depreciation”. This provision was extended for five years.
And, another permanent change allows retailers and restaurants to depreciate remodeling and other improvements to their stores over 15 years, rather than the previous standard of 39 years.
The IRS often audits returns for the following reasons:
- The IRS matches the W-2s and 1099s (Interest, Sale of securities, Dividends, and Miscellaneous Income). Taxpayers are generally contacted if they have not reported a 1099 or W-2.
- The Intemal Revenue Code requires who, what, where, when and why of all travel, meals and entertainment. The IRS wants to see the hotel bill not just the credit card receipt. This is a prime audit target.
- Can be suspicious if disproportionate to your income.
- Deductions are often claimed by taxpayers who do some work at home but don’t qualify for a home office.
- The IRS is more likely to audit returns of businesses dealing in cash.
- enerally, only losses Hom a bona lide business are deductible.
- The IRS is pursuing Lmreported income from offshore accounts.
What are your chances of an IRS Audit?
According to figures recently released by the IRS, approximately 1.11% of all 2010 individual tax returns were audited in 2011, the same as in 2009. The rate has hovered around 1% for several years.
The IRS audit rate is 1.02% for taxpayers with income of less than $100,000. For those with income of $200,000 or more the audit rate increased to 3.93%. or roughly one out of every 25 returns. Audits jumped to about one out of eight for income above $1 million.
Your responsibility to prove
The responsibility to prove (substantiate) income, deductions, and statements made on your tax returns is known as the "burden of proof." Records such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit must be kept, but you may choose any record keeping system that clearly shows your income and expenses.