All posts by Jamie Boulette

Thinking of starting a cannabis business in Maine? New laws will keep you on your toes. Part II- “Adult Use” Market

During 2018, the Maine Legislature passed two Bills dealing with the future of marijuana business in Maine that are to become effective this week. Both are designed to end the wild west nature of the industry but they have very burdensome tax and operating rules. This three-part series breaks down some of the business, accounting and tax issues surrounding the future of Medical and Adult use marijuana sales in Maine. Part I looked into the impact of the new rules on Dispensaries and Caregivers. Part II reviews the “adult use” market and Part III looks to the future of the cannabis industry.

Part II

This week the Marijuana Legalization Act becomes law. Tasked with helping Legislators through the maze of regulations is newly engaged Los Angeles consulting firm, BOTEC. The Portland Press Herald reported that BOTEC will likely finish writing the rules by the end of April 2019. Once implemented, license applications will be considered for marijuana retail stores, cultivation facilities, product manufacturing, testing facilities and social clubs. Only after the first licenses are issued will seeds be planted for the adult use market.

For now, the Marijuana Legalization Act is law but there is no mechanism for anyone to apply for licenses. The Act, as it exists, does make it clear that the initial owners of marijuana businesses will be residents of Maine, who have approval from local authorities to conduct marijuana business operations. If the business is incorporated, its officers, directors, managers and the majority of its shareholders are required to be Maine residents. All applicants, directors, employees or other closely related individuals will be subject to strict background check provisions ensuring that owners will not have past drug violations, outstanding court-ordered payments and are compliant with federal and state taxing authorities.

Up for grabs, each owner can have:

    • Cultivation facility licenses, up to 3 facilities with total plant canopy not to exceed 30,000 square feet. No single facility can exceed 20,000 sqft.
    • Marijuana store licenses, up to 4 stores with direct or indirect financial ownership.
    • Testing facility licenses, these owners can have no financial interest in any other type of marijuana establishment.
    • Manufacturing licenses, issued for the production, blending, infusing and other preparation, including extraction of cannabis.

So who is in charge? Just about everybody. Under section 104.3 the following have their hands in the mix: The Departments of, Alcoholic Beverages, Agriculture, Health, Labor, Audit and Financial Services and of course the Department of revenue. It is also very clear that none of these licenses will be granted without the approval of local municipalities.

Subchapter 4 of the Act states that when it comes to who licenses are granted to. “…a municipality may regulate marijuana establishments within the municipality…”. As set forth, those approved business owners will be granted a conditional license subject to local authorization.

On the accounting side, even though most transactions are conducted with cash, adult use marijuana licensees are required to keep complete business records that are open to inspection by the State. Seed to sale records must be kept for the current year, plus the two immediately preceding tax years. Like medical marijuana businesses, adult use businesses should pay particular attention as to how they set up their chart of accounts, so that costs of goods sold can be accurately accounted for.

Unlike the rules governing the medical side, which require a financial audit, the adult use licensee may be required to submit to an audit. The auditor would be selected by the Department with all costs billed to the licensee. It is curious to me that caregivers are required to be audited, while adult use business owners may be subject to audit.

Taxes on the adult use market include sales tax of 10% on sales to the consumer. It is made clear that it is the retailers responsibility to collect and remit sales tax. Excise taxes paid by growers will increase the overall cost to consumers with tax of up to $335 per lb. of flowering plant, $90/lb. trim, $1.50 on seedlings and $0.30 on seeds.

Adult use growers and manufacturers should waste no time in applying for sales exemption certificates. (The same sales tax exemptions exist for adult use agriculture and manufacturing operations as described in Part I for dispensaries and caregivers.) Note that courts have concluded that sales taxes should be netted against sales and not reported as an expense, so that they are not considered as part of a 280E adjustment.

Business owners will have to consider what entity type is best. It is likely that some form of corporate ownership will be most advantageous but it will vary depending on individual circumstances. Both the new 21% corporate tax rate and the 199A deduction for sole proprietors and flow through entities are applicable but the benefit of both are reduced by the burdensome impact of 280E. Interestingly enough, for Maine income tax purposes, the adult use market is not allowed to deduct normal operating expenses picked up under code section 280E. Needless to say it is wise to consult with a tax professional to decide which entity type is best and to carefully consider the implications of 280E.

The Act also begins to open a window to the future with provisions that expire in 2021 & 2022. What does the future hold? Will cannabis businesses be overwhelmed by federal restrictions? What impact will the Harborside Health Center US Tax Court ruling have on potential investors? Part III of this series will highlight my thoughts on the impact of these and where the industry is going.

James Boulette, CPA has been advising medial cannabis dispensaries in ME and MA since laws were enacted allowing for legal sales. He is one of New England’s leading experts in the application of 280E.  He can be reached at 207-873-1603.

Thinking of starting a cannabis business in Maine? New laws will keep you on your toes. PART I: New Rules

During 2018, the Maine Legislature passed two Bills dealing with the future of the marijuana business in Maine that are to become effective this December. Both are designed to end the wild west nature of the industry but they have very burdensome tax and operating rules. This three-part series will breakdown some of the business, accounting and tax issues surrounding the future of Medical and Adult use marijuana sales in Maine. Part I looks into the impact of the new rules on Dispensaries and Caregivers. Part II will review the “adult use” market and Part III looks to the future of the cannabis industry.

Part I: Dispensaries & Caregivers

The Act to Amend Maine’s Medical Marijuana Law allows both dispensaries and caregivers to continue to supply marijuana to registered “cardholding” patients. New rules increase the number of existing medical dispensaries from 8 to 14 and allow dispensary ownership to be set up as for-profit entities.

Registered Caregivers will be able to cultivate a total of 30 mature plants, 60 immature plants and unlimited seedlings, rather than have a dedicated amount of plants per patient as the old rules dictated. These caregivers may also transfer 30% of the mature plants grown during the year to other registered caregivers or dispensaries in wholesale transactions. The new law also allows caregivers to share a building with others, using separate and dedicated grow space, but it prohibits consortiums. (Multiple growers working together to grow co-owned crops). Caregivers will be allowed to manufacture marijuana products and concentrate for medical use, except that a caregiver may not manufacture food unless licensed to do so.

Both medical marijuana groups will face increased reporting requirements. Under section 2430-G 1.A.(3), registered caregivers, dispensaries, testing facilities and manufacturers will be required to undergo an annual audit of business transactions conducted by an independent 3rd party. At this point it is not clear if the legislature used the term “audit” loosely, or if they are actually requiring an independent CPA to issue an audit report on the company’s financial statements. If the latter is true, auditors will be partially hamstrung by the vast majority of cash transactions that are conducted. In addition to gaining an understanding of the seed to sale product tracking software, I anticipate that auditors will likely employ creative strategies, like testing cannabis production against fertilizer usage or energy consumption in order to issue an opinion.

From a tax perspective, dispensary and caregiver sales are subject to sales tax at rates of 5.5% for marijuana, topicals and paraphernalia, and 8% for prepared food products or “medibles”. Readers should be aware that the Maine sales tax bulletin #60 is a good resource for determining sales/use tax industry specifics and for highlighting that agriculture and manufacturing exemptions do exist. Once applied for, these exemptions can save thousands of dollars by reducing or eliminating sales taxes on fertilizer, grow lights, airflow systems, equipment, utility bills and other direct cultivation and manufacturing expenses.

Other highlights of the Medical Marijuana law include, a 7-year record keeping requirement, and a deduction for Maine income tax purposes of the amount disallowed by the IRS under Federal 280E for both individuals and corporations. Dispensaries no longer need to be a Maine Not-for-profit corporation taxed as a C corporation. This opens the door for other types of entity formations (S-Corp, LLC etc), provided that all officers or directors are residents of ME.

The future of the Maine medical cannabis may well float on the implementation of the adult use market. Part II of my report will outline the Maine adult use market.

James Boulette, CPA has been advising medial cannabis dispensaries in ME and MA since laws were enacted allowing for legal sales. He is one of New England’s leading experts in the application of 280E.

 

Where Does All Our Money Go?

This weekend, I had two things to accomplish; get my tax return in order and begin to shop for a new truck. Given that this is a very busy time of the year for me, I decided to quietly shop on-line for that new pickup while she got all of her tax documents together.

Since I am the financial professional of the household, I decided to make preparing our return and buying a new truck a simple two-step process.

Step one: Review our gross income to begin tax preparation while getting a better handle on our finances. Step two: Convince my wife that there was still time this afternoon to go kick a few tires. Surely, given our income level, a new truck is affordable.

Step one started on a high note, both of our W-2 forms showed that we earned more money than we had in 2016. Should I get the white or the black, 5.7L 4×4 Toyota Tundra?

Step two was about to begin when my wife, who is not an accountant, asked a very simple question, “Why doesn’t it feel like we make this much money?” Followed by the second more difficult question, “Where does all of our money go?”

Being an accountant, I thought I would summarize our gross income, reduce it by our taxes withheld and then detail our household expenses to best illustrate how we spend our money.

My project got cut short when we began reviewing the difference between gross and net pay. I felt the purse strings start to tighten, and rationalized that a gently treated preowned Tundra might be just as good. Thanks to the Current Tax Payment Act of 1943, this upper-middle income family had 47% of our income taken off the top for Federal, State, Social Security and Medicare taxes. Tax withholdings aside, that still left us with plenty for a used truck, right?

Slowly my wife crossed her arms and asked about our 401(k) deductions. I reviewed with her the benefits that I was sure that she already knew about and explained that that too can directly off the top. Given the dollars that come directly from our gross pay, she suggested that it might be wise if we budget our expenses for the new year.

I am a CPA; I could surely whip up a budget before the dealership closed. We proceeded to draft our 2018 budget, while I closely monitored the time.

With 53% of our after tax and retirement savings left to budget, the numbers quickly unfolded; deduct 18% for housing, 8% for auto, 7% for food, 6% for healthcare, 5% to charity, 5% to savings, that left 4% for everything else. I thought we were done; I’ll take the 2014 black 4×4 Tundra please. “Did you budget for our after tax season trip to the Bahamas?” she asked.

It was then that I realized, my 2007 Toyota worked just fine.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

Tax Cuts & Jobs Act Is Good For Business

As I write this article, Congress is about to vote on major corporate tax reform, namely the “Tax Cuts and Jobs Act”. Supporters of the bill believe that corporate tax reform will more readily allow US corporations to keep taxable earnings in the US and that those earnings will spur new economic growth. Others protest that reform puts more money in the hands of the rich. Likely, both sides are correct. What the Act will not do, is simplify taxation for small business owners.

Clearly these tax changes will mean an increased bottom line for Corporate America. Wall Street has reacted to the anticipated change with double digit gains in many stock market indexes. And though I do not represent any of the Fortune 500 companies who will benefit most from the reform, my retirement assets are invested in those companies.

The tax cuts will undoubtedly have a significant impact on many of our local businesses as well. The final draft of the legislation gives a 20% deduction to many of those who receive business income. The Act defines trade or business income as it relates to any “qualified” trade or business of the taxpayer. For local C-Corporations, of which there are very few, the tax rate will be a flat 21%. C-Corporations with income in excess $75,000 will likely see a benefit. The more common business enterprises, such as S-Corporations, Sole Proprietors and Partnerships, will pass tax benefits along to the owners in the form of a 20% deduction on qualified business income. There are many conditions and hoops to jump through, but my reading of the bill suggests that the majority of local companies will benefit.

As an example, take the local retailer with $80,000 of income from her S-Corporation. Provided conditions are met, the $80,000 will generate a 20% deduction, or $16,000, from her taxable income. Her anticipated new tax rate will also be reduced to 22%. My estimate is that she will see an additional $3,500 in her pocket next year as a result of the business change alone. What she will do with the anticipated tax savings is anyone’s guess. Hopefully, she will spend it locally on other goods and services. Undoubtedly, she will pay a tax preparer more money to complete her tax return.

After reviewing the proposed changes, I have concluded that the majority of small businesses are likely to see tax savings. From a jobs perspective, the changes will at the very least be a major jobs act for the accounting profession. Unfortunately, Congress must have thought the same and has exempted accountants and lawyers, working in their profession, from benefiting from this deduction. Call it karma I guess.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

Time is running out to make your state income tax payments and still be provided a deduction on your Federal income tax return.

Unless you have been hiding under a rock, you are aware that both the House and Senate have passed legislation to update the tax code. Both plans are calling for a repeal of the deduction for state and local income tax expense. Although we are not yet sure of the final outcome of the tax legislation, we are strongly urging all clients who pay state income taxes to be prepared to pay any state tax due before December 31, 2017.

For those individuals who generally pay Alternative Minimum Tax (AMT) a prepayment may not benefit you. However, taxpayer’s who are scheduled to make January 15th, 2018 estimates and those who suspect that they will owe state tax on April 15th, are likely to benefit by making tax payments before December 31st.

If you have questions about how the state income tax deduction impacts you, please give us a call at 207-873-1603 or swing by one of our two locations: 259 Front Street, Bath or 46 First Park Drive Oakland.

 

Marijuana Sales and the Monster Hiding in the Tax Code –How To Minimize the Damage of Section 280E

Marijuana is currently legal in some form in 30 States, Washington DC, Guam and Puerto Rico. It is quickly becoming a major economic driver in many states as reflected in Colorado. Through September, the Cannabis industry in Colorado alone has surpassed the one-billion-dollar mark. Despite the overwhelming support of legalized cannabis, the federal government continues to enforce tax policy that will, if not change, tax the industry out of business.

The simple solution would be for Congress to pass legislation that would remove Marijuana from the list of Schedule 1 drugs. There are currently a host of bills that attempt to do just that. The most promising and straight forward is H.R. 1810 – Small Business Tax Equity Act of 2017. H.R. 1810, introduced by Carlos Curbelo (R- FL), is co-sponsored by 38 other members of the House from both sides of the isle. H.R. 1810 simply states that Section 280E of the Internal Revenue Code would not be applicable to “marijuana sales conducted in compliance with State law”.

Unfortunately, nothing seems that simple for our elected officials. Few members of Congress, even those members whose states have legalized cannabis, are willing to take a stand against those who are against Marijuana reform- namely big pharmaceutical and big alcohol companies.

Courts continue to strictly interpret code Section 280E by disallowing all deductions for trade or business expenses in connection with listed Schedule I & II drugs. Deductions from gross income are allowed for costs of goods sold (COGS). The IRS has taken the position that the definition of COGS is defined by code Section 471. Those businesses that both produce and distribute marijuana can take guidance from the Regulations found in section 1.471 of the code. Under these Regulations, includable costs consist of production facility: rent, maintenance, utilities, direct materials, tools, supplies, testing, production wages and production overhead. Specifically excluded costs include: general and administrative, marketing, selling, advertising, distribution, and other expenses not associated with production.

So how can cannabis companies afford to stay in business?

Let’s look to a few critical cases to better understand the constraints of Section 280E.

Review of the 2007 CHAMPS v Commissioner., 128 TC 173 case is critical in helping us to better understand that only those trade or business expenses related to marijuana trafficking should be disallowed under Section 280E. CHAMPS established that businesses can have multiple activities and that those not involving “trafficking” are not precluded by Section 280E. CHAMPS charged a fee for extensive caregiving services and provided a set amount of medical marijuana. The court concluded that the taxpayer had not one but two businesses and therefore, those business expenses not related to “trafficking” of a controlled substance were deductible. The court allowed the proration of costs between the two “businesses”

The second direction giving case is the 2012 Martin Olive v Comm., 139 TC 19, also known as the Vapor Room case. Quite the opposite from the facts presented in the CHAMPS case, Mr. Oliver kept inadequate records and was not able to establish that he conducted more than one business. The court concluded that in order for a taxpayer to establish multiple businesses, it must be engaged in these other activities with a profit motive. Simply giving away free munchies, coffee and advice did not escalate to a spate business unit. The case did, however, give guidance to an acceptable cost of goods sold percentage of roughly 75%.

In the most recent cannabis case decision released on October 23, 2017(Feinberg v. Comm., TC Memo 2017-211), the US Tax Court decided in favor of the IRS with respect to costs disallowed under Section 280E. The IRS victory in this case hinged mainly on the taxpayers’ inability to support its deduction as it related to cost of goods sold. The court concluded that the taxpayers did not “maintain sufficient reliable records to allow the Commissioner to verify the taxpayer’s income and expenditures.” The court did not rely on post audit reclassification of cost of goods sold items. Alas, there is no substitute for good record keeping.

As a Certified Public Accountant (CPA) who specializes in the industry and has represented clients through multiple IRS audits, my take away is simple: It is foolhardy for one to believe that by some magical process, Section 280E will go away or will be retroactively repealed. Until legalized cannabis is exempt from Section 280E provisions, industry businesses should make every effort to direct the predominance of their expenses into production. CEO’s, CFO’s and specialists should concentrate their time and resources on production, manufacturing and inventory controls. Multiple business units should be established, each with its own written plan for profitability. Job descriptions should indicate which positions have inventory production, control or monitoring responsibilities. CPAs familiar with cannabis can play an important role in helping business owners set up a chart of accounts, identify business units and develop strong internal controls needed for success.

It is clear to me that IRS audits in this industry will not go away any time soon. Every company should prepare themselves for this eventuality. For now, good accounting records and well thought out business units will reduce the strain of Section 280E and allow all involved to keep their heads above water. To survive the long term, however, the industry must get Congress to remove marijuana from the grips of Section 280E. It will be beneficial if all involved give their representatives in Washington, DC a heads up that H.R. 1810 – Small Business Tax Equity Act of 2017 is the simplest solution.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com

 

Will Taxes Mean the End of Marijuana Reform?

Last November, Maine voters approved the legalization of recreational marijuana. Since then, entrepreneurs in the industry have begun gearing up now for what will become a real growing frenzy. Warehouse space is being gobbled up by speculators looking to participate in what is already a multibillion-dollar industry. However, all parties should be wary of IRS Code Section 280E.

The states that have legalized marijuana impose sales or excise taxes which are generally passed directly to the consumer of between 10% and 30%. Colorado alone is expected to report sales in excess of $1,000,000,000 with a tax structure that includes a 2.9% sales tax, a special recreational sales tax of 10% plus a 15% excise tax. Needless to say, State and local governments in Colorado are cashing in. What is not so widely known is that the federal government is also cashing in and the entire industry is at risk.

By my count, 23 states now allow for medical or recreational use but the federal government has made no headway in removing marijuana from its list of Schedule 1 controlled substances. The significance of this categorization is important because IRS Code section 280E denies most deductions incurred by businesses trafficking any substances listed on Schedule 1. Since the Maine tax code piggybacks the federal code, it also disallows trafficking/selling related expenses. Currently, corporations in Maine face a federal and state tax rate of 45% on its gross profit. Without the ability to deduct ordinary business related expenses, the industry could see effective tax rates between 80-90% of income.

So how does Congress protect Maine’s marijuana industry? The fix is simple. Congress should remove marijuana (sold legally under state law) from the list of Schedule 1 drugs. To a limited degree, many bills addressing parts of this issue have been put forth and sit in committee somewhere, each seemingly stonewalled. The most recent bill introduced into the House, “States’ Medical Marijuana Property Rights Protection Act” gives some insight to the magnitude of the problem of using your property to grow marijuana. The bill removes real estate from the list of items that can be forfeited as a result of a violation of the Act.

The Controlled Substances Act currently imposes forfeitures which include, among other things, the forfeiture of “All real property, including any right, title, and interest… any lot or tract of land and any appurtenances or improvements, which is used…a violation of this subchapter…”. The aforementioned bill only sets out to remove from the penalty section the forfeiture of real property but does not remove Marijuana from the list of Schedule 1 substances.

This should be a reminder to all, even those merely renting warehouse space, that until the federal law removes legal marijuana from its Schedule 1 list, the life of the industry is on the line.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

 

Business Owners: On Your Mark, Get Set, Go!

The start of the New Year marks the beginning of the IRS  informational reporting season that will keep most business owner’s heads spinning. None are overbearing or difficult unless, of course, you don’t get them right the first time. Failure to correctly file W-2 and 1099 forms could get 2017 off to a not-so-happy start.

Wage reporting statements:

W-2 forms must be furnished to employees and filed with the Social Security Administration no later than January 31, 2017. It is possible to request a 30 day extension by submitting Form 8809. If errors are made with the initial filing, W-2c forms can be used to correct them. My advice is to work with your tax professional to make sure that you get them right the first time.

The IRS list the most common mistakes such as omitting decimal points and cents, using a font that is too small or large, (12-point Courier font is recommend), and incorrectly checking the “Retirement plan” box.

My experience suggests that a more careful look into the numbers that make up taxable wages will save you both time and money. Here are our top suggestions to correctly file W-2 forms:

    • Incorporated businesses filing form 1120S are required to include fringe benefits into > 2% shareholder’s taxable income. Fringes include: health insurance, HSA plans, and personal use of company owned vehicles. You should contact your payroll provider to make sure they have the information needed.
    • Employee business expense reimbursements made under an accountable plan are generally not required to be included on form W-2. Payments made as part of a non-accountable plan must be reported as taxable wages. Be sure to communicate any reimbursement plans to your payroll and tax providers as the substantiation requirement are very strict.
    • Employers Earned Income Credit notice. All employers must notify employees who have no income tax withheld that they may be able to claim an income tax refund as a result of the Earned Income Credit (EIC)

Penalties for failure to correctly file W-2 forms by the due date can range from $50 to $260 per W-2.

Informational returns:

Warning, this is not for the faint of heart! There are over 30 informational returns that a business might be required to be file including payments for: interest, dividends and rents. Reporting is also required for payments to: foreign persons, crew members of fishing boats, and attorneys.

1099 MISC Forms that report nonemployee compensation are required to be filed for all non-incorporated service providers, not considered to be employees, who have been paid more than $600.

Many business owners consider these filings as trivial and not worth the effort. Sound familiar? Please heed my warning, these informational returns are essential to the U.S. Treasury that failure to correctly file them can and carry penalties ranging from $50-260 per informational return. Small Business Owners do have the special privilege of having the penalty capped at $1,064,000 per year.

As you look to start 2017 on the right foot, I suggest that you take the time to meet with your tax professional and payroll provider to make sure that your informational returns are filed right the first time.

About the Author: Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

 

IT’S BETTER TO GIVE THAN TO RECEIVE

Since moving to the Mid-Coast area a few years ago, my wife and I have been called upon many times to help a number of local charities. We are very strong believers that it is our obligation to make our community stronger during our brief stay in this wonderful world so we choose to help where we can. We ask all readers to support their favorite local charities as they are the heartbeat of society, making a difference in all of our lives.

Two of our favorites include the Bath YMCA and Big Brothers Big Sisters. For over 150 years, the Bath YMCA has promoted healthy living and provided youth with a safe place to grow. BBBS has been creating nurturing relationships for children facing adversity since 1904. Clearly both organizations make a positive impact on the lives of youth in our area. What they also have in common is that they are both qualified charitable organizations defined under the IRS Code.

As most already know, donations to nonprofit groups like the YMCA and BBBS are tax deductible if you itemize deductions. By definition, a donation is voluntary and is made without getting, or expecting to get, anything in return. To be deductible, a donation must also meet other strict criteria as outlined in IRS Publication 526.

Most of you reading this column have a good handle on what is deductible. Donations to the annual appeal at church, the building fund at the hospital and expenses paid when you volunteer at the museum are all examples. What you cannot deduct are the cost of raffle tickets bought to benefit a charity, the value of your volunteer time, the value of your blood given at the local blood drive, political contributions or the cost of your girl scout cookies. (…sigh)

Donations can get a little sticky when goods or services are received as a result of the contribution. Take for example, the local fundraising silent auction that you pay $1,000 to stay a beach house. If the fair value of that stay is $1,000, you have not made a contribution and no deduction is allowed. If, however, you pay $1,500 for the same stay you could be entitled to a $500 deduction.

For those who think that there is a safe amount that can be deducted be warned, the IRS has many strict rules for deducting charitable contributions. The rule that impacts most people is the requirement that individual contributions of $250 or more be backed with a written acknowledgement from the qualified organization. The acknowledgement must be in your possession before you file your return, include a description of the gift and a statement as to whether you received any goods or services as a result of the contribution.

My wife and I firmly believe that we all have an obligation to give back. Giving back is the life blood for local charities, and the tax deduction feels good too. The next time you attend a charity auction, bid high and bid often.

THE MANY FACES OF TAXABLE INCOME: GAMBLING & LOTTERY WINNINGS

Code Section 61 defines gross income, “except as otherwise provided,…gross income means all income from whatever source derived,” Regulation 1.61-1 further states that Gains from wagering transactions are included in gross income.

I suspect that most households participate in one way or another in the gambling industry. We purchase lottery tickets, enjoy an afternoon at the casino, a day at the race track, a night out for beano or maybe a little fantasy football. When we have a lucky day, how should the winnings be reported on a tax return?

Like much of the Code, gambling income and loss deductions are generally misunderstood. Gambling gain is defined as winnings less the cost of the winning bet. Gain transactions are included on line 21 on the front page of the 1040 and add to adjusted gross income. Substantiated gambling losses however, are allowed only to the extent of gambling gain transactions and must be reported on Schedule A. If you do not itemized deductions there is no benefit realized from the loss deduction.

What does the term gain “transactions” mean? I know, you all think that you learned the term in grade school; one bet is one transaction, right? Fortunately, that is not always the case. When it comes to a horse race or the lottery, a transaction is a single bet. It is not so clear when it comes to one hand of a poker game or one pull of a slot machine lever. Rather than define a transaction as a single pull of the lever, the definition is broadened to include all pulls until the winnings or tokens are cashed out for the “session”. Major relief, you can net gains and losses during a session, but what the heck is a session?

Notice 2015-21 helps gamblers better understand. The Notice takes no less than eight pages and seven examples to define a “session” of play. The abridged version is this: A session of play begins with the first wager of the day and ends with the last wager on the same type of game but not later than the end of the calendar day. Winning sessions are reported as gross income while losing sessions are deducted on schedule A.

A weekend of winning $20,000 on Saturday followed by losses of $20,000 on Sunday (two separate sessions), lead to increased gross income of the entire $20,000 with a deduction of $20,000 on Schedule A. Who cares? Well you might if you collect Social Security, receive advanced premium credits or take other deductions which might be limited when adjusted gross income exceeds certain thresholds.

Who would ever imagine that a breakeven weekend at the casino could cost thousands of dollars in income tax? Quit while you’re ahead. All the best gamblers do.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com

WHO SHOULD PREPARE MY TAXES?

If you read my last blog on Getting Organized for Tax Time,  you remember that over 150,000,000 Americans will file a tax return this year. Tax preparers and software vendors will dominate advertising space over the next few months. They want to convince you that using their product or service will net you the largest refund, or make filing your taxes easy. Recent ads suggest that you would have to be an idiot to not be able to figure out how to file your return. To top it off, most products even advertise Free filing.

To get a better feel for “Free” tax filing, I logged on to a number of online tax services and found that “Free” is only for the very simplest of returns 1040EZ/A. Once on their website you generally find that they offer other, not so free, products that “Maximize” deductions or guarantee accuracy. (Understand that they guarantee the accuracy of the calculations that their software provides and not the accuracy of your input.) Many online products offer audit defense insurance at a price that is just as expensive as the tax filing fee. I suggest that you weigh your risk of audit and the likelihood that changes could be made against the additional cost of defense insurance before clicking that box.

If after preparing your returns online you are still anxious, don’t feel alone. Each year I have a handful of clients who ask me to check over their self-filed returns. The majority need some tweaking, not because the people are not smart but because they do not understand the tax code and do not know what the outcome should look like. They check a box here or there and click “Next” without really understanding the underlying tax code. If this fits your description, I suggest that you schedule an appointment with a Volunteer Income Tax Assistance program (VITA) or professional tax preparer.

By professional, I mean someone who is credentialed as an Attorney, CPA or EA. These people have passed rigorous exams to practice before the IRS and have annual education requirements to give them a better understanding of the tax code. Never engage a person to prepare your return who guarantees you a refund or who is not willing to sign it.

How do you find a professional that will be a good fit for you? Do a little homework before scheduling an appointment; visit a few websites, ask your attorney, banker or investment advisor who they suggest. Finally, set up an appointment to make sure that the relationship will be a good fit for you. A good preparer should have years of experience with your personal situation and be willing to give you an estimate of their fees before you make a commitment.

A good professional understands your personal situation and the tax code, and should be able to help you to pay the lowest amount of tax allowed under the law without sleepless nights worrying about the IRS.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 207-873-1603.

Getting Organized for Tax Time

“…in this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin.

Though Mr. Franklin understood clearly that paying taxes was a certainty, he could not have imagined just how complex tax filing would become.  The U.S. tax code is a daunting 75,000 pages and I suspect that the 150,000,000 Americans that file tax returns rely heavily on professional preparers or tax preparation software to get it right.

This year we know with certainty that April 19th will mark the end of tax season.  That is correct, April 19th for Maine and Massachusetts residents.  April 15th falls on a Friday which is Emancipation Day, a legal holiday in DC.  Monday, April 18th is Patriots’ Day, with holiday status in Maine and Massachusetts, so you procrastinators get an extra four days to file.

I know that it is early February, but what else have you to do on these cold dark nights other than to gather your tax information?  I recommend that you get started this weekend.  Begin by looking over last year’s return or tax organizer.  If you are like 80,000,000 Americans and have a professional preparer, make some notes for him/her on any changes that that might have taken place during the year.  Be sure to note, address changes, marriage or divorce, kids going off to college, job changes, real estate sales or home improvements, to name a few.  If you have provided bank account information for direct deposit or automatic tax payment, be sure to communicate any changes in banking information.  Remember, your tax professional may have a great understanding of the code but how it is applied can change, if your personal circumstances change.

Finally, it is important to organize your information.  Sometimes the most challenging part is to get clients to open their mail.  All of those envelopes stamped Important Tax Information should be opened and reviewed for accuracy.  Round up the W-2s, 1099s, Social Security statements, health care forms, college tuition information and mortgage interest.  Review your checking account for charitable contributions, estimated tax payments, excise taxes and medical expenses.  If you squirreled this important information to an ultra-safe place but can’t remember where that place is, most tax forms are readily available on line.

For many the real challenge of Tax Time is just facing the fact that preparing them is inevitable and best done early. Regardless of how well versed your tax professional is, it is not possible for them to correctly prepare your return unless you provide all of the necessary information.  Thus, I encourage you to get organized and start today.

Jamie Boulette has 30 years of tax experience and is the Managing Director of Perry, Fitts, Boulette & Fitton CPAs (PFBF CPAs) with locations in Oakland and Bath.

Protecting Americans from Tax Hikes Act 2015 – Its effect on the Timber and Wood Products Industries.

Kudos to congress for passing legislation and protecting the timber industry from a bevy of tax increases.  Importantly, the Act extends, and in some cases makes permanent, many provisions that will allow businesses more tax savings opportunities.

The PATH act, signed by the President on December 18, makes tax planning considerably easier and grants a few new tax breaks that will greatly enhance industry write-offs.

Paul Ryan R-Wis suggests “…we are ending Washington’s days of extending tax policies one year at a time.”  Let’s hope Mr. Ryan’s words are true.

EXTENDERS IMPACTING THE TIMBER HARVESTING & WOOD PRODUCTS INDUSTRIES

Code Sec. 179: Expensing

The Act makes permanent an annual expensing limit of $500,000 with an overall investment limit of $2,000,000 (both amounts are now indexed for inflation).  The new law also adds increased expensing of qualified leasehold improvement property.

Bonus Depreciation

The Act extends Bonus Depreciation for all new equipment placed in service through 2019.  The percentage of allowed bonus is reduced from 50% through 2017 to 40% in 2018 and 30% in 2019.  After 2015, Bonus Depreciation will include qualified improvement property without regard to whether the property is subject to a lease or if it is placed in service more than 3 years after the date that the building was first placed in service.  Also, the Act included language that eliminates AMT adjustments for assets that are elected out of Bonus Depreciation placed in service after 2015.

Combined with the enhanced repair regulations, the above expensing provisions will significantly increase tax savings for our Timber Harvesting and Wood Products clients.

Timber Gains

C corporations are subject to a reduced tax rate of 23.8% for qualified timber gains.  Qualified timber gains means net gain described in Code Sec. 631(a&b) for the year, taking into account only trees held more than 15 years.

Research Credit is permanently extended, and for eligible small businesses the credit may be claimed against alternative minimum tax.  Qualified small business may even claim the credit against FICA tax liabilities.

S-Corp recognition period for Built-In Gains Tax is permanently extended.  The recognition period is now 5 years.

Work Opportunity Tax Credit Extended and Expanded.

The WOTC allows employers who hire targeted individuals to receive a credit against income tax for the first year wages, up to $6,000 per employee.  The credit also applies to employers who hire qualified long-term unemployed individuals (40% of the first $6,000 of wages).  The Act extends the WOTC so that it applies to eligible veterans and non-veterans who begin work by Dec. 31, 2019.  In light of recent mill closures, we might expect to see more people eligible for the WOTC.

If you have questions about how these changes will impact your business, please do not hesitate to call us at, 207-873-1603.

Your choice of entity can make a difference…

Too often professionals do not take the time to consider the impact to the client when recommending the proper choice of entity. The trend in the last five years or so has been to make most new entities LLCs taxed as sole proprietorships or partnerships. The attorney has a brief conversation with the client and LLC documents are drafted, filed, and a tax identification number is applied for. So what’s wrong with that? Continue reading Your choice of entity can make a difference…