Quickbooks Adjusting Accounts Receivable: Writing Off Over Payments and Bad Debts


Quickbooks  in Adjusting Accounts Receivable

If your business uses receivable accounts to track customer payments chances are you have a few customers that have over payed or refuse to pay for products or services. In either case these receivables will stay on the books unless they are cleared out.  Here is how to use Quickbooks in Adjusting Accounts Receivable.

Clearing out an over payment:

We will be using an invoice to zero out over an payment in a customer’s receivable account. The over payment will be written off into an expense account. It is recommended that you create an ‘Other Expense’ account specifically for this. This way if an adjustment needs to be changed or deleted it can found easily.

If you haven’t done so already create a new ‘Other Expense’ account:

1. Begin by opening the ‘Chart of Accounts’ window. On the top menu bar click on ‘Accountant’ and select ‘Chart of Accounts’ from the drop down.
2. Right click in the window and select ‘New’ to create a new account.
3. Select ‘Other Account Types’ at the bottom of the window. In the drop down next to this option select ‘Other Expense.’
4. Click ‘Continue’ in the bottom right corner of the window.
5. Name your new account. You will use to write off the overpayments. It is recommended to use a specific name like ‘A/R Adjustments.’
6. Finally click ‘Save & Close’ at the bottom of the window to finish creating the new account.

With your expense account created, make a new invoice item. This is the item that we will use to adjust customer accounts:

1. Begin by opening the ‘Item List’ window. On the top menu bar click on ‘Customers’ and select ‘Item List’ from the drop down.
2. Right click in the window and select on ‘New’ to create a new invoice item.
3. Select ‘Other Charge’ as the item type in the ‘Type’ drop down menu.
4. Give the item a descriptive name. Something like ‘Overpayment Adjustment’ is recommended.
5. Next choose the account this item will go against in the ‘Account’ drop down. Select the account created in the previous step or the account that you would like to use.
6. Finally click ‘OK’ in the top right corner of the window to finish creating the invoice item.

Now you are ready to zero out customer over payments:

1. Before you begin write down the information for the customer account you will be adjusting and the amount you will need to debit from their receivable account.
2. Begin by opening the ‘Create Invoices’ window. On the top menu bar click ‘Customers’ and select ‘Create Invoices’ from the drop down.
3. Select the customer’s account that you will be adjusting in the top left corner of the window with the ‘Customer Job’ drop down.
4. Next under the ‘Item’ field in the invoice select the invoice item you created to make accounts receivable adjustments.
5. It is recommended that you leave a detailed description of the adjustment in the ‘Description’ or ‘Memo’ fields to avoid confusion in the future.
6. Under the ‘Amount’ field enter the adjustment amount you wrote down earlier.
7. If you need to change the date the adjustment will take effect, change the ‘Date’ field to the required date.
8. Finally click the ‘Save & Close’ button in the bottom right corner of the window to finish creating the adjustment invoice.

The customer’s Accounts Receivable should now be zeroed. It is recommended that you check the customer’s receivable account to make sure the invoice was entered correctly and had the desired effect.

Clearing out a bad debt:

If your accounting is done on a cash basis or the uncollectible invoice amounts will not significantly affect your gross sales there are two simple ways to clear out bad debts. You can either issue a discount on the bad debt in question or mark as a bad debt.

Issuing a discount for an invoice:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Find and click on the customer’s name whose receivables account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. Insert a new item into the invoice and select ‘Discount’ for the item type.
5. Make sure to leave a specific description to avoid confusion in the futue.
6. Enter the amount being written off in the amount field.
7. Select ‘Save & close’ to finish editing the invoice.
8. Repeat these steps for any invoices that need to be written off.

Marking the Invoice as a bad debt:

1. Begin by opening the ‘Customers’ window. On the top menu bar click ‘Customers’ and select ‘Customer Center’ from the drop down.
2. Select the customer whose receivable account needs to be adjusted.
3. Find the invoice or invoices that are outstanding and double click on one to open the ‘Create Invoices’ window.
4. When the invoice opens, on the bottom left click on the ‘More’ button and select ‘Void’.
5. A window will pop up asking you to confirm voiding the invoice. Select ‘Yes’
6. Repeat steps 4 to 6 for each invoice you need to void.

Quickbooks in adjusting accounts receivable

It is recommended that you check the customers receivable account to make sure the adjustment had the intended effect.

If your business reports on an accrual basis voiding bad debts is a bit more complicated. The invoices have already been reported as income but are no not collectible. It is recommended that you talk to your accountant to find solution.

Form 8962 and Married Filing Separately

Form 8962 when filing Married Filing Separately (MFS)

If your health insurance was obtained through the government exchange and you estimated your household income was between 100% and 400% of the federal poverty line, then you got help in paying your insurance premium from the government. The Advance Payment of the Premium Tax Credit (APPTC) went right to the insurance company and you never saw that money, but you did get the benefit.

So now at the end of the year comes the time of settling up. For example if you said your were earning $XX dollars and the government advanced the health premiums based on that situation, and then it turns out your made $XXX + for the year, the IRS want some of the money back. Of course if you made more that the 400%, then the IRS wants all of it back. Or it can work the other way, if when you signed up for the Exchange you said $XXX was going to earned and you earned less, then the IRS is going to give you a credit.

You will be getting a 1095-A from the IRS. And in column C is the APPTC. This is the money the government sent to the insurance company to help pay your premium.

This is good except what happens if you decided to file a MFS tax return.

You don’t get the Premium Credit if you file MFS,  unless you meet the following exception.

1. You can file MFS if you were a victim of domestic abuse or

2.  your spouse abandoned you.
What happens when you were planing on filing Jointly and then events happen.

So let’s take an example.

When your family applied for the credit you were intending to file Married filing Jointly, but maybe circumstances change and your spouse wants a divorce, then one of the spouses may be able to filed Head of Household (HOH) living apart or Single living apart. The spouse filing HOH or Single is eligible for the premium tax credit.

So for example, maybe one spouse moved out of the house and took the child, and now qualifies for HOH. Then the remaining spouse is in the MFS category and barred from the Premium Tax Credit.

Let’s take another example. The family is living together, but the husband is a general contractor and his wife is concerned about the tax position taken on his Schedule C Sole Proprietorship. The wife does not want to be involved with a Joint tax return because of questionable deductions.

At then end of the year the 1095-A arrives, and it has your social security number and lists the covered individuals as you and your spouse and the 2 children. And in our example your spouse took both children as dependents.

You are filing MFS and are looking at the form 8962. You know you are not entitled to any credit and will have to repay your portion of the credit.

But how much and how to fill out the form?

You have to mark under Part II line 9 the YES box.

Next go to Part IV and the SS of the OTHER taxpayer – yes your spouse.

Now how much to included?
Going back to the instructions for Line 9, it talks about Your tax family and a Second tax family (your spouse and the 2 kids). In our example, we meet both conditions and so we would go to TABLE 3 of the instructions and follow the Allocation of Policy Amount.
TABLE 3 has 3 options

A. Divorced or legally separated.

B. Married at the end of the year and filing MFS

C. No Advanced payment was paid for the policy.

So our taxpayer is B.

Now we have to go to Allocation Situation 2.

If you find the Allocation Situation 2 it says 50% is to be reported on Part IV.
Then if you look at page 5 of the instructions, it tells you have to report 50% of the Advanced Premium Credit which confirms what the Allocation Situation 2 says also.

Then go part IV and put down 50%.

This is counter to what you might conclude that the husband filing MFS would report 25% and the wife with the 2 children would report 75%.

So for our example if the Advance Payment of Premium Credit reported on 1095-A- line 32 column C was 10,000, our MFS taxpayer would have to report 5,000 on line 46 of  the general contractor’s 1040.

Expensed vs. Capitalized

Repair vs. Capitalized

The question is what items can be expensed vs. capitalized?

The provisions are as follows.

1. De Minimis safe harbor. $2,500 per invoice or item (as substantiated by the invoice). If you have an audit done, then $5,000.

If the taxpayer arranges with the contractor to take the cost of a $10,000 new bathroom and have the contractor break it up into 4 invoices, does that qualify?

The IRS thought about that one.

26 CFR 1.263(a)-1(f)(6)Anti-abuse rule. If a taxpayer acts to manipulate transactions with the intent to achieve a tax benefit or to avoid the application of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, appropriate adjustments will be made to carry out the purposes of this section. For example, a taxpayer is deemed to act to manipulate transactions with an intent to avoid the purposes and requirements of this section if –

(i) The taxpayer applies the de minimis safe harbor to amounts substantiated with invoices created to componentize property that is generally acquired or produced by the taxpayer (or other taxpayers in the same or similar trade or business) as a single unit of tangible property; and

(ii) This property, if treated as a single unit, would exceed any of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, as applicable.

The Regulation at 26 CFR 1.263(a)-1(f)(7) gives various examples.

Let’s take an example. You buy a computer worth 2,600 and with that you buy a printer that costs $400, 2 items on one invoice. The printer qualifies, but not the computer.

A. A written accounting procedures that the firm is going to write off as an expense items of $5,000, but written procedures not required for the $2,500 limit.

B. The election must be made each year.

C. Even if you do not qualify for the election, that does not automatically mean you have to capitalize.

Let take a look at that example above where the computer costs $2,600. And change the facts so that the computer is sent to the local shop for work. Is the $2,600 of work a repair or an improvement.

It could be that the $2,600 was spent to replace a computer board that was defective and qualifies as a repair. So regardless of the the de minimis safe harbor rules the $2,600 would be deductible.

Before you address the various safe harbors you have the question is this item a Unit of Property “UOP”? Is the printer in our example above a unit of property? Is the printer dependent on another piece of property (for example the computer)? If the printer is dependent on the computer, then it does not qualify for the De Minimus safe harbor even though it cost under $2,500.

(e)Determining the unit of property – UOP

(1)In general. The unit of property rules in this paragraph (e) apply only for purposes of section 263(a) and §§ 1.263(a)-1, 1.263(a)-2, 1.263(a)-3, and 1.162-3. Unless otherwise specified, the unit of property determination is based upon the functional interdependence standard provided in paragraph (e)(3)(i) of this section.

(3)Property other than building –

(i)In general. Except as otherwise provided in paragraphs (e)(3), (e)(4), (e)(5), and (f)(1) of this section, in the case of real or personal property other than property described in paragraph (e)(2) of this section, all the components that are functionally interdependent comprise a single unit of property. Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer.

Special rules. However, special rules are provided for buildings (see paragraph (e)(2) of this section), plant property (see paragraph (e)(3)(ii) of this section), network assets (see paragraph (e)(3)(iii) of this section), leased property (see paragraph (e)(2)(v) of this section for leased buildings and paragraph (e)(3)(iv) of this section for leased property other than buildings), and improvements to property (see paragraph (e)(4) of this section). Additional rules are provided if a taxpayer has assigned different MACRS classes or depreciation methods to components of property or subsequently changes the class or depreciation method of a component or other item of property (see paragraph (e)(5) of this section). Property that is aggregated or subject to a general asset account election or accounted for in a multiple asset account (that is, pooled) may not be treated as a single unit of property.

Lets take a look at Buildings:

The building is in 2 parts: the Building System and the Building Structure.

A. Building Structure
B. Structural components/Building system: plumbing, electrical, HVAC, elevators, security systems, natural gas, and other components.
So once you have defined the UOP; Was the expenditure a repair or cap expenditure.


What is a capital expenditure?

1. Betterment – amount paid to fix a material condition or material defect, material addition or materially increase productivity.
Of course what does “material” mean.

2. Restoration – replace a major component or a substantial structural part. Then of course you have to write of the cost of the component replaced. So for example a new roof. If I capitalize a new roof, then I should write off the adjusted basis of the old roof.

So now the question is what is the cost of the old roof. You will need either a cost segregation study or a IRS accepted method to determine the adjusted basis.

3. Adaption to a new or different use.

2. Small taxpayer safe harbor for OWNED or LEASED building

So lets say the cost meets the definition of a building improvement. How does this safe harbor work?

1. Taxpayer must have gross receipts less than 10,000,000.

2. Cost of building (excluded land) is less than 1,000,000.

3. Total cost of repairs and improvements do not exceed:

The LESSER of 10,000 or 2% of the original basis of the building. So even if it is an improvement, you can expense the lessor of 2% or 10,000.

3. Safe Harbor for Routine Maintenance

Even if the item is an improvement, you do not need to capitalize if:

Recurring activity

To keep property in the ordinary operating condition

You expect to preform this activity

A. Every 10 years for a Building. A new roof would last longer than 10 years so this would not be routine maintenance.

B. For non building more than once during its tax life.

For example, if you had a copier and had the repair man come out and clean, and he had to replace a part that cost $3,000. Even though the De Minimis safe harbor, and the small tax payer do not apply, the Routine Maintenance safe harbor would.

Safe Harbor for Routine Maintenance does not apply to improvements that are Betterments.
4. Facts and Circumstances – If the improvement does not qualify under the 2,500 exclusion De Minimus, nor the Small Taxpayer exclusion nor the Routine Maintenance, then look at the Facts And Circumstances.

Repair vs. Capitalized

What is a capital expenditure?

1. Betterment – amount paid to fix a material condition or material defect, material addition or materially increase productivity.

2. Restoration – replace a major component or a substantial structural part.
3. Adaption to a new or different use.

Even if you elect one of these simplfying provision it is possible that the safe harbor does not protect the entire cost.

You can elect to capitalize repair and maintenance as improvements.

Why you would want to do this, I am not sure. Possibly if you are not able to currently take the benefit of deducting the repairs and maintenance.

And the election has to be done each year.

5. Rehabilitation Plan.

Even if the cost is a repair, it may still end up being capitalized because it was part of an overall plan.

Say for example you buy a house and are going to rent it out. You decide to paint the home, patch the roof, clean the front walkway. Each of these item is a repair, but because it is part of a plan to Rehabilitate the house, then you have to capitalize. Does it matter that each of the items is separately invoiced? It certainly helps to make the case that the repairs were not part of an over Plan, but not if the overall Plan was decided before the start of the first repairs and the taxpayer is being billed as the work is completed.

How this is a better place than before the new IRS regs is hard to accept. This is a general discussion.

See you tax preparer for your particular situation  about whether a payment is a repair vs. capitalized item.

Recapture of Section 1231 ordinary losses

Recapture of Section 1231  ordinary losses

A client calls and says he is selling his rental property after owning the property for a number of years. He wants to know if he will get long term capital gains treatment. The normal answer would be “yes”.

The problem is that he sold a 2nd rental property 4 years ago at a loss. This loss was treated as a ordinary loss.

Let’s look at an example,

Say the loss on the second rental property was 60,000.

Now the long term capital gain on the current home he is selling is 100,000. The IRS says the 1st 60,000 is going to be taxed as ordinary income to “recapture” the benefit of the earlier ordinary loss, and then the remaining 40,000 is eligible for the lower long term capital gain rates.

Why is there this rule. Because the Congress did not want taxpayers selling their “loss” properties in one year and taking an ordinary loss and postponing the sale of gain property til a later year to take advantage of the long term capital gain rates.

SEE IRS publication 544 https://www.irs.gov/pub/irs-pdf/p544.pdf

Your nonrecaptured section 1231 losses are
your net section 1231 losses for the previous 5
years that have not been applied against a net
section 1231 gain. Therefore, if in any of your
five preceding tax years you had section 1231
losses, a net gain for the current year from the
sale of section 1231 assets is ordinary gain to
the extent of your prior losses. These losses are
applied against your net section 1231 gain beginning
with the earliest loss in the 5-year period.

This is not the only recapture possible. The rental property is consider IRC 1250 property and the depreciation expense taken over the years was an offset to ordinary income. Gain on the disposition of section 1250 property is treated as ordinary income to the extent of “additional depreciation” allowed or allowable on the property.

Additional depreciation is the amount over and above the amount that would have been taken using straight line depreciation. Now there are exceptions to having to recapture this additional depreciation.

Most likely the rental property in our example was place in service as a rental after July 31, 1986. If the property was placed in service after July 31, 1986, then no depreciation recapture. Why? Because after July 31, 1986, the straight line method was the norm.

Keep in mind you can have recapture of depreciation on personal property (IRC 1245) sold at a gain.

Getting back to the recapture of the 1231 loss taken 4 years ago in our example, it is hard to know how the taxpayer or the IRS would remember to offset the current year long term capital gain. Thanks to computer software that keeps a record of 1231 losses.

Make sure you see your tax preparer for your particular situation.

US Citizens who own Foreign Corporations

Issues for a US Citizen who owns a

Foreign Corporation

The general rule is that shareholders do not pay tax on corporate income until the income is distributed as a dividend.

1. FOREIGN PERSONAL HOLDING COMPANY Is your foreign corporation a “personal holding company”

The foreign corporation can be both a domestic personal holding corporation and a foreign holding corporation. Test for both basically the same.

A. Test for if the corp. is a FPHC.

1. More than 50% of the stock is owned by fewer than 5 people. (FPHC does not apply if 11 s/h own equal shares =9.99% each)

2. 60% of its adjusted GROSS ordinary income is from

Personal Holding Company Income

(1) Dividends, etc. Dividends, interest, royalties (other than
mineral, oil, or gas royalties or copyright royalties), and annuities.

(2) Rents The adjusted income from rents; except that such adjusted income shall not be included if—
(A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income,
(B) the sum of dividends paid and deemed and consented paid > than X. X = PHCI – (10% X OGI)

For example,

PHCI is 40,000 and OGI is 30,000

Dividends have to be paid > 7,000 (40,000-33,000)

(3) Mineral, oil, and gas royalties
(4) Copyright royalties
(5) Produced film rents
(6) Use of corporate property by shareholder
(7) Personal service contracts

(A) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and
(B) amounts received from the sale or other disposition of such a contract.
(8) Estates and trusts


The foreign corporation is PFIC if either:

A. 75% or more of its gross income is from passive income
(Dividends, Interest, Rents)


B. 50% or more of the average value of the corporate’s ASSETS during the year: 1. produce passive income

2. or held for the production-of passive income. (for example holding raw land)

The asset test is met if 50% or more of the foreign corporation’s average assets (as defined in the IR Code) produce, or could produce passive income, or are assets (such as cash and bare land) that produce no income. The test is applied based on the foreign corporation’s adjusted basis, for U.S. tax purposes, of the assets, or at the election of the particular shareholder, fair market values of the assets.

Look-thru of 25% subsidiaries: Interests in 25% or more owned foreign corporations are treated similarly to partnership interests (i.e., looked through) for the income test and the asset test.

NOT PFIC income

1. Rents from an active business

2. Banking income

3. Dividends or interest received from a related person
Incorporated in the same country as PFIC

Can be subject to these rules even if you own just one share.

Indirect shareholder of a PFIC must report. Generally, a U.S. person is an indirect shareholder of a PFIC if it is:

A 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC,

A shareholder of a PFIC where the PFIC itself is a shareholder of another PFIC,

A 50%-or-more shareholder of a domestic corporation where the domestic corporation owns a section 1291 fund, or

A direct or indirect owner of a pass-through entity where the pass-through entity itself is a direct or indirect shareholder of a PFIC. For more information on determining whether a U.S. person is an indirect shareholder, see Temporary Regulations section 1.1291-1T(b)(8) and Notice 2014-28.

For purposes of these rules, a pass-through entity is a partnership, S Corporation, trust, or estate.


But when distributions are made taxed at highest rate + interest.

Can avoid by making election to include % of income even though not distributed.

A taxpayer may avoid the regime by purging the PFIC taint by a deemed sale election, a deemed dividend election, or by means of two alternative elections: (1) the qualified electing fund (QEF) or (2) the mark-to-market election. If a QEF election is made, a taxpayer usually includes in income each year its pro rata share of the PFIC’s ordinary earnings and its pro rata share of the PFIC’s net capital gain. Taxpayers holding marketable PFIC stock may make the mark-to-market election to include annually in gross income the excess of the fair market value over the PFIC stock’s adjusted basis


I Ownership Test.

A. 10% rule Must have one US shareholder who owns 10% of voting power

(CFC does not apply if 11 US shareholders own equal shares =9.99% each)

Is John Smith a shareholder in any corporation where a US shareholder has 10% interest.

And voting means can the 10% or more s/h elect in 10% or more of the Board of Directors.

10% count includes shares owned by family members, TRUST, stock thru intermediate corporations

John Smith owns 50% of F1 and F1 owns 30% of F2, John Smith is deemed to own 15% of F2.


B. More than 50% of corp owned by US Shareholders.

II. Type of Income Test,

If CFC does the CFC have Income that is a problem

1. Foreign Personal Holding Company Income

2. Foreign Base Company Sales Income

US corp sets up overseas corp F that buys and sells to customers around world to take advantage of low tax rates for corp F.

3. Foreign Base Service Income

F Corp provides services for a related person (US parent for example) And services not perform in the country where F is located.

4. Foreign Base Shipping Income

5. Foreign Base Oil Income

We will ignore 2,3, 4, and 5.

Remember No “Deemed Distribution if CFC has no earning and profits.”

Additional RULE

If the CFC has passive assets = 25% of total assets, then
DEEMED DIVIDEND for excess passive assets.

GOOD NEWS only “US Shareholder” – 10% voting has “Deemed Distribution”

See your tax advisor before using this Memorandum.

Elections for 1st Year Real Estate Projects


When preparing the initial tax return here are the elections for 1st year real estate projects to consider.

1. Accrual of real estate taxes IRC 461(c) with the election included the following information as required by 1.461-1(c)(3)(i)

2. Start up expenses IRC 195(b)

3. IRC 709 Amortization of Organizational Expenditures.

4. De Minimis Safe Harbor Election 1.263(a)-1(f)

For the average taxpayer the amount of an item than can be expensed rather than capitalized is $2,500 1.263(a)-1(ii)(D).
An average taxpayer here is one who does not have audited financial statements.

If you use the de minimis safe harbor, do you have to capitalize all expenses that exceed the $2,500?

No. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren’t subject to the de minimis safe harbor election. Therefore, the safe harbor doesn’t require you to capitalize all amounts paid for tangible property in excess of the applicable limitation. If an amount doesn’t qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.

5. Amounts paid to improve tangible property – Election to Capitalize Repair and Maintenance Costs. 1.263(a)-3(n)

A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under § 1.162-4) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the taxpayer’s trade or business and if the taxpayer treats these amounts as capital expenditures on its books and records regularly used in computing income (“books and records”)

6. Adoption of the method of accounting recurring time exception for accrual basis tax payer. 1.461-5(d)(1)

The election to adopt the as part of the method of accounting for the first taxable year in which that type of item is incurred.

Generally an accrual taxpayer can take a deduction in the taxable year in which all the event has occurred.

A. All events test,

All events have occurred that determine the fact of there being a liability.

The liability can be determined reasonably accurately.

B. Economic performance has occurred.

The Exception is to meeting B. – the economic performance
is granted IF

1. The economic performance does finally occur within 8 and ½ months of the year end.

2. The liability is recurring in nature.


The amount of the liability is not material


The accrual in the present tax period is a
“better match” with the related income for the
present period than when economic performance
actually occurs.


1. De Minimis Safe Harbor Election 1.263(a)-1(f)(5)

A taxpayer makes the election by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which these amounts are paid. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-1(f) de minimissafe harbor election” and include the taxpayer’s name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimissafe harbor election under § 1.263(a)-1(f).

2. Election to capitalize repair and maintenance costs – 1.263(a)-3(n)

n(2)Time and manner of election. A taxpayer makes this election under this paragraph (n) by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which the taxpayer pays amounts described under paragraph (n)(1) of this paragraph. Sections 301.9100-1 through 301.9100-3 of this chapter provide the rules governing extensions of the time to make regulatory elections. The statement must be titled “Section 1.263(a)-3(n) Election” and include the taxpayer’s name, address, taxpayeridentification number, and a statement that the taxpayer is making the election to capitalize repair and maintenance costs under § 1.263(a)-3(n).

3. Amounts paid to improve tangible property -. 1.263(a)-3

(h)Safe harbor for small taxpayers –

(1)In general. A qualifying taxpayer (as defined in paragraph (h)(3) of this section) may elect to not apply paragraph (d) or paragraph (f) of this section to an eligible building property (as defined in paragraph (h)(4) of this section) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty does not exceed the lesser of –

(i) 2 percent of the unadjusted basis (as defined under paragraph (h)(5) of this section) of the eligible building property; or

(ii) $10,000.

So if the item is lessor than 2% of the building basis or 10,000 the taxpayer can expenses under the Safe Harbor.

For example if you have a rental property with a unadjusted basis of 400,000 then 2% would be 8,000 and that would be your cut off to aggregate amount that could be expensed.

Time and manner of election. A taxpayer makes the election described in paragraph (h)(1) of this section by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the taxable year in which amounts are paid for repairs, maintenance, improvements, and similar activities performed on the eligible buildingproperty providing that such amounts qualify under the safe harbor provided in paragraph (h)(1) of this section.


1. For those of you who have a retail establishment or a restaurant and are wondering if your remodeling cost should be capitalized or expensed. The IRS offers a SAFE HARBOR of taking all of the costs of remodeling and allocating 75% to repairs and 25% to Capital improvement. Rev. Proc. 2015-56.

The incredible part is that you have to have an audited financial statement. However the audit fee could be well worth the cost to be able to write of 75% of the remodeling costs.

Late S Corporation election for year 2016

Late S Corporation election for year 2016

Do you need to make a late election for your C corporation to be a S Corporation for 2016?

1. Fill out the 2553.

2. Sign and date the 2553 and the following example. Make sure you see a qualified tax preparer to make sure the following form is sufficient for your situation.

3. Mail to the IRS Service Center: either Cincinnati OH or Ogden UT. I would suggest sending certified mail.

4. The IRS should send you notification one way or another is accepted or rejected.


ABC Inc.
Late S Corporation Election

IRB 2013-36

Section 4 .03 General Procedures

1. Properly filled out form 2553 with “Filed Pursuant to Rev. Proc. 2013-30″ written across the top of the Form.

2. Statement of Reasonable Cause/ Inadvertent Statement

The Taxpayer’s failure to file Form 2553 timely was inadvertent; due to a miscommunication regarding the filing deadlines. As soon as the Taxpayer discovered that the 2553 was not filed, the Taxpayer file this 2553.

Under penalties of perjury, I declare that I have examined this election, including accompanying documents, and, to the best of my knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete.

___________ ___________________
Date                             Carol Smith
President ABC Inc.

Section 5 .02 Supplemental materials

3. Shareholder Statement of Consistent Treatment

As the sole 100% shareholder from the Effective date of the election, January 1, 2016, through today I have and will on subsequent tax returns, 1040s, report my income consistent with the S corporation status.

Under penalties of perjury, I declare that I have examined this election, including accompanying documents, and, to the best of my knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete.

__________ _____________________
Date Carol Smith
Sole Shareholder

2016 Year End Tax Planning for Businesses


Some points to consider as we come to the end of 2016.

1. RETIREMENT PLANS – a great opportunity to reduce your taxes.

A. 401K plans, Defined contributions, Defined benefit plans.

1. Need to be set up before the end of the year.

2. But you have til the due date of the 2016 return (could be extended to 9/15/17 for corps and partnerships) to fund the 2016 liability.
B. Tax credits for setting up retirement plan 1st year start up 50% of startup cost.  At least one person in the plan must be a non highly comp employee.
For example,   you pay 2,000 to ADP to start your 401K plan. But max credit is $500.

C. The SEP retirement plan can be established and funded in 2017 by the due date of the tax return including any extension.


2. EQUIPMENT – If you need new equipment, this is a good time to buy.

A. 179 expense personal property

New and used property is eligible

B. Bonus depreciation 50% write off

New property only
3. RECORDS. Good record keeping is critical to making sure you capture all of the deductions allowed.

A. Capture your deductions.

1. Checking account business (separate from personal)

2. Credit Card accounts (don’t mix and match)

3. Out of pocket costs cash purchases ( post office staples)

4. Mileage for auto + parking +tolls + actual costs (insurance repairs gas )

5. Office in the home

6. Equipment (desk, phone, lamp) purchased as personal item now used in business.

4. ACCELERATE EXPENSES AND DEFER INCOME.  Defer billing in December with the idea that the delay will cause the receipt of payment until 2017.
6. AUTO RULES – two methods.
A. Standard 54 cents a mile + parking + tolls. If you want to use standard must elect first year. So your 2000 Ford Taurus needs a new transmission and air conditioning – you can switch to actual.
B. Actual

Once you elect Actual you cannot switch back to standard.

Car tax
Interest expense


1. New car 50% Bonus Depreciation max 1st year 8,000 (bonus) + = 11,160

2. Used car not eligible No 50% bonus
Standard depreciation 3,560.

3. 179 New and Used car qualifies (used more than 50% in business)

If your car weighs over 6,000 lbs, eligible for a $25,000 write off

If you car weights under 6,000 lbs then 1st year combined = 3,160 limit.

The Small Business Health Care Tax Credit helps small businesses pay for health care coverage they offer their employees. You’re eligible for the credit if:

1. You buy the insurance thru SHOP Marketplace.

2. You have fewer than 25 employees who work full-time, or a combination of full-time and part-time, with average wage < 50K.

3. Pay at least 1/2 of premium.

4. The maximum credit is 50 percent of premiums paid for small business employers.

OID Coupon vs OID bond on a US Strip Treasury

OID Coupon vs OID bond on a US Strip Treasury

How is a US Strip Treasury OID taxed for Coupon and Bond portions.

I am looking at a Schwab statement that has as description “US Treasury Strip O%26” and in box 8 of the 1099 INT is $3,037. So the idea is that some bright financier has purchase the whole bond and strip it into 2 components. The annual interest portion or the “Coupon” bond and then a second part the “Principal” bond.

For example: Bond pays 2.5% interest for 10 years before being split.

Principal Bond portion of Strip 80,000 (2016 FMV) —– 100,000 (2026 payout)                     OID is 20,000.

Coupon portion 20,000 (2016 FMV) —– 25,000 (2026 payout)            OID is 5,000.
Keep in mind  with the Coupon portion you dont actually get 2,500 in cash each year, rather you get 25,000 in cash 10 years from now.

So the Schwab statement says the OID is $3,037 but I have no idea if the client owns the coupon bond portion of the Strip or the principal bond portion of the Strip. And I have concluded it does not matter.

If you look at IRS publication 1212 you get the following info:

“If you strip one or more coupons from a bond and then sell or otherwise dispose of the bond or the stripped coupons, they are treated as separate debt instruments issued with OID. The holder of a stripped bond has the right to receive the principal (redemption price) payment. The holder of a stripped coupon has the right to receive an interest payment on the bond. The rule requiring the holder of a debt instrument issued with OID to include the OID in gross income as it accrues applies to stripped bonds and coupons acquired after July 1, 1982.  So the OID rule applies to both stripped bond portion and stripped coupon portion of the bond.”
The IRS goes on in Pub 1212,
“The amount shown in box 8 of the Form 1099-OID you receive for a stripped bond or coupon may not be the proper amount to include in income.”   The IRS is confusing in its instructions.  You can have US stripped bonds,  state and city stripped bonds, and private stripped bonds. If you include in Box 8 then this is for state and city OID.  In other words box 8 is  for state and city bonds with OID that  are tax exempt at the federal level but taxable at the state level if the bond is not a bond from your state ( an out of state bond).  However interest on a federal obligation like a US Treasury Bill or Note or US Strip Treasuryies are  taxable at the Federal level, but not at the state level.  So the US OID has to be entered in Box 3.
I am going to pick up the OID as taxable federal and not taxable state. The question comes to mind why not just buy a treasury bond? Why would I want to recognize interest income and have no cash to show for it?

The other thought is that this US Strip Treasury bond is in a child’s name and with the time I spend figuring out the Kiddie tax form on 2 children’s 1040s and my cost and time does it really do the family any benefit investing in these US Strip Treasury obligations.  The Kiddie tax on the 1st $1,050 of income is $0, so the savings in not including the US Strip Treasury interest is the parents rate at 25% or $262.50.  The child’s rate is used on the interest income from $1,050 to $2,100 so that rate is 10% vs the parent rate leaves a savings of $157.50.  On any income earned on the instrument from $2,100 to $3,037 is tax at the parents rate and so no benefit.  So the total benefit is $420 and I charged $400 to do the child’s return.

Now IRS form 8814 allows the parent to elect to report the children’s interest and dividends on their tax return and thus avoid having to prepare a separate return and related cost for the child’s tax return preparation.   The problem here is that once there is a stock or bond sale of one of the child’s investment a schedule D is required and then the parent cannot elect to use the 8814 form reporting of income and the child has to have a separate tax return prepared on their behalf.


Here is an example from Wikepedia:


Example Original Issue Discount

Bond Issuance Price $7,462
Bond Redemption Price $10,000
Original Issue Discount $2,538

Most loans require interest payments. Loans that require inadequate or no interest payments bear original issue discount. Whether interest is adequate is determined with reference to the applicable federal rate (AFR). Under the Internal Revenue Code, original issue discounts on debt instruments are taxed each year, even though the debt may not be repaid until a later date. The tax system will impute an interest rate on the loan. The rules for calculating the original issue discount utilize a compounding interest formula, with the principal recalculated every six months. Section 1272(a) of the tax code requires that the Original Issue Discount is includible in the lender’s taxable income at the end of each tax year, or part of the tax year if the loan was not owned for the full year.

The daily portion of the discount uses a compounded interest formula with the principal recalculated every six months. The following table illustrates how to calculate the original issue discount for a $7,462 bond with a $10,000 repayment and a three-year maturity date:

Period Adjusted Issue Price Yield Original Issue Discount
1 $7,462 .05 $373
2 $7,835 .05 $392
3 $8,227 .05 $411
4 $8,638 .05 $432
5 $9,070 .05 $454
6 $9,524 .05 $476
Redemption $10,000

This is a general tax discussion.  You need to consult your own tax preparer before taking any action on this discussion above.  I hope this has been helpful on OID Coupon vs OID bond on a US Strip Treasury treatment.