Category Archives: Accounting

Mortgage Interest Tax Deduction: It’s not what it used to be.

Per the US Census Bureau, over half of U.S. homes are occupied by the owner. Of those homeowners, over half have a mortgage that they pay interest on. For most, having a mortgage is part of owning a home and people often spend a significant portion of their life making payments on their mortgage. Before the recent change the US Tax Code section 163 specifically provided for a deduction for mortgage interest and home equity interest as an itemized deduction. This deduction has allowed taxpayers that can itemize to save tax dollars while they pay down their debt.

With the recent passing of the Tax Cuts and Jobs Act, the deduction for mortgage interest has undergone two significant changes that will impact many.

Here is what will change in 2018:

Under the prior law, taxpayers have been allowed to deduct interest on home equity indebtedness up to $100,000. In 2018, this deduction is eliminated and there will no longer be a tax benefit for interest paid on an equity loan.

The second significant change is that taxpayers were allowed to deduct mortgage interest on mortgages up to $1,000,000. The Tax Cuts and Jobs Act now allows taxpayers to deduct interest on mortgages up to $750,000 for all mortgages originated after December 14, 2017.

What happens if your refinance? Taxpayers will be allowed to keep their higher threshold of $1,000,000 if they refinance a loan that was established before December 14, 2017 as long as the new debt doesn’t exceed the amount refinanced. In other words, you will fall under the new rules if you refinance your mortgage and increase the loan amount.

While there are only a small percentage of taxpayers that have a mortgage over $750,000 in the State of Maine, there are a lot of taxpayers that have been deducting the interest on their home equity loans. If these taxpayers still itemize deductions in 2018, they will no longer be able to take advantage of the equity interest deduction.

It is important to understand that the law continues to allow the mortgage interest on a second home. This law has not changed from previous years and taxpayers may benefit from a deduction of mortgage interest on their first and second home, provided that the total indebtedness does not exceed the $750,000 threshold.

I encourage everyone to take some time and read or speak to a tax advisor about the changes under the new tax law and how it will impact you specifically.

“An investment in knowledge pays the best interest.” -Benjamin Franklin

Alison Royall, CPA is a Director at Perry, Fitts, Boulette& Fitton CPAs. She works with people and businesses to prepare tax returns and help them plan their short and long-term goals. She is a multi-state tax specialist, with clients in many other states including international clients. She works with the audit department and prepares compiled and reviewed financial statements for businesses, as well as personal financial statements for high net worth individuals. She can be reached at alison@pfbf.com or 873-1603.

CHANGES IN ACCOUNTING FOR LEASES

Whether you are a small startup organization just getting off the ground or are well-established with years under your belt, chances are you have leased a piece of equipment, office space or property. These leases have been treated as either operating or capital leases on your books. All that is about to change.

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The ASU on leases will take effect for public companies for fiscal years beginning after December 15, 2018 (calendar year 2019) and for all other organizations, including not-for-profit organizations, for fiscal years beginning after December 15, 2019 (calendar year 2020).

A few of the improvements that the FASB is seeking through the new lease standards are:

• More faithful representation of a lessee’s rights and obligations arising from leases
• Fewer opportunities for organizations to structure leasing transactions to achieve a particular outcome on the balance sheet
• Improvements in the understanding and comparability of a lessee’s financial statements
• Additional information about lessors’ leasing activities and exposure to credit and asset risk as a result of leasing

There are many key requirements to the standard that will need to be addressed, but the biggest changes for your organization are as follows:

• If you are the lessee, you will recognize most leases on your balances sheet (statement of financial position for not-for-profit organizations). If your lease term is greater than 12 months you will be recording both a right of use (ROU) asset and a lease liability. This differs from current treatment of operating leases as currently you are expensing your lease cost on a monthly basis, thus only effecting your “bottom line” and not assets or liabilities.
• There will be expanded quantitative and qualitative disclosures by both lessees and lessors.
• Organizations will need to review each lease and other arrangements to determine if still meet the criteria under the new definition.

Beyond financial reporting, the standard impacts other aspects of operations:

• Moving operating leases onto the organization’s balance sheet could make a significant difference in the numbers the organization is reporting (to creditors, board members, etc.), affecting loan covenants for example.
• Larger organizations with multiple leases may need to spend additional time and resources to identify all leases and gather the data needed to apply the new standard.

We encourage you to start the process early, meet with your management, board, lenders, donors, other users of your financial statements and your accountant to discuss the standard and the impact on your organization.

About the Author: Danielle D. Martin, CPA is a Senior Audit Manager at Perry, Fitts Boulette & Fitton CPAs with 24 years of experience in the accounting world. She can be reached at danielle@pfbf.com or 873-1603.