Tax Issues Related to Renting Your Vacation Home

Do you own a second home at the beach, in the mountains or another getaway location? Or are you thinking about buying one? If so, then you may have thought about the possibility of renting it out. Doing so can offset some of the expenses related to the property, and you may even reap a tax benefit at the same time. Whichever route you choose to go, knowing the applicable tax rules regarding designated second home can help you get the maximum financial benefit out of your asset and keep you from making tax filing errors.

If You Don’t Rent Your Property

Depending upon your individual tax situation, a designated second home’s acquisition mortgage interest may be eligible as an itemized deduction. However, there is a limit on the amount of acquisition debt for a taxpayer’s main residence and one additional home for which the interest is deductible. For a primary residence and second home acquired on or before December 15, 2017, that limit is $1,000,000 ($500,000 if married filing separately). After December 15, 2017, the limit is reduced to $750,000 (except that debt incurred prior to that date still falls under the $1,000,000 limit).

Real property taxes on your main and any number of additional homes are also deductible if you itemize deductions when figuring your regular tax, but not for the alternative minimum tax (AMT). However, even though itemized taxes include property tax, state income tax and certain other taxes, the total amount allowed per year is limited to $10,000 ($5,000 if you are married filing separately), so the deduction for some of your taxes may be limited.

If You Rent Your Property

­The tax implications of renting out your designated second home are largely dependent upon the amount of time that it is rented out during the year. Your home will fall into one of these three categories:

  • Rented 14 days or fewer: When you rent out a dwelling unit that you use as a residence–whether it’s your main home or a second home–for a period that is 14 days or fewer during the year, you do not report the income and cannot deduct any rental-related expenses. However, you are still able to continue writing off eligible mortgage interest and real property taxes as itemized deductions.
  • Rented 15 days or more, and personal use does not exceed 14 days or more than 10% of rental days: In this scenario, the home’s use would be allocated into two separate activities: a second home and a rental home. For example, if the home is used 5% for personal use, then 5% of the total interest and taxes would be treated as home interest and taxes that can be taken as an itemized deduction. The other 95% of the interest and taxes would be rental expenses, combined with 95% of the insurance, utilities and allowable depreciation, and 100% of the direct rental expenses. The result can be a deductible tax loss, which would be combined with all other rental activities and limited to a $25,000 loss per year for taxpayers with modified adjusted gross incomes (MAGI) of $100,000 or less. This loss allowance is ratably phased out when MAGI is between $100,000 and $150,000. Therefore, if your income exceeds $150,000, the loss cannot be deducted. Instead, it is carried forward until the home is sold or there are gains from other passive activities that can be used to offset the loss.
  • Rented 15 days or more, and personal use exceeds 14 days or more than 10% of rental days: For those whose personal use of the home is more than 10% of the amount of time that it is rented (or more than 14 days, whichever is greater), no rental tax loss is allowed. Let’s assume that the personal use of the home is 20%. As for the remaining 80%, it is used as a rental. The rental income is first reduced by 80% of the taxes and interest. If after deducting the interest and taxes, there is still a profit, the direct rental expenses (such as the rental portion of the utilities, insurance and any other direct rental expenses) are deducted, but no more than will offset the remaining income. If there is still a profit, you can take a deduction for depreciation of the building, furnishings, etc., but it is again limited to the remaining profit. End result: No loss is allowed, but any remaining profit is taxable. The personal 20% of the interest and taxes is deducted as an itemized deduction, subject to the interest, taxes and AMT limitations discussed earlier.

If You Sell Your Vacation Home

Even if you use your vacation home to generate rental income, it is still considered to be a property for your personal use, and that means that once you sell it, you are subject to taxation on any gains you realize. By contrast, if the sale results in a loss, you are not permitted to deduct any losses–at least not in the examples we’ve provided above. In some cases, a loss on a property can be broken down between the personal use (nondeductible) and the business rental portion (deductible).

If You Sell Your Home

When you sell your primary home, you are able to take advantage of what is known as the home gain exclusion, but this is not true of designated second homes. The gain from the sale of a second home is taxable, but eligible for favorable capital gains tax rates in most cases. The only exception to this rule is when the taxpayer has occupied the second home as their primary residence for at least two of the five years immediately before the sale takes place. At no time during that two-year period can the home have been rented. When this is the case, and the taxpayer hasn’t applied the home gain exclusion on the sale of another property in the previous two years, the taxpayer is able to take the exclusion. Doing so would allow married homeowners to exclude up to $500,000 of the home’s gain from their income, and single homeowners to exclude up to $250,000, except for depreciation of the home that has previously been deducted.

Other Issues

There are certain situations involving designated second homes that are particularly complex, such as homes that are converted from an investment property to a primary residence, or those acquired by tax-deferred exchange. In these instances, it is essential that you consult with your tax advisor in order to ensure that all appropriate planning is done to provide you with the most benefit.

If you rent out your property and provide additional services such as maid service, or rent it out for short-term stays, the IRS may view that activity as a business operation rather than a rental. When this is the case, the tax ramifications are entirely different. Because of this and many other complicating factors and exceptions, we encourage you to contact our office to review the tax impact of your real estate transactions.

Employee Spotlight – Kaylan Hudson

Employee Spotlight – Kaylan Hudson

What year did you join Slattery & Holman?
2019

Tell us a little about where you attended college and the degree(s) you earned? Any special accomplishments.
Indiana University Kokomo, where I double-majored in Accounting & Business Management.  I’m the only child to graduate from college in my immediate family thus far.

What is your favorite thing about living in Indiana?
The change of seasons.

Tell us a little about your family.
I come from a blended family with a total of 5 kids (3 girls, 2 boys) ranging from age 16 – 30.  The majority of my immediate family resides in north-central Indiana.

If you didn’t have to sleep, what would you do with the extra time?
What wouldn’t I do?  Exercise and do yoga every day, meal prep better and cook every day, and spend more time with family & friends.

IRS Extends COVID-19 Relief Leave Donations

As part of the emergency disaster declaration made by President Trump on March 13, 2020, it became possible for employees to donate their unused paid sick, vacation or personal leave to qualified charities that provided COVID-19 relief in 2020.

The IRS recently extended leave donations through 2021. This is a great opportunity to provide sorely needed help in the ongoing COVID-19 pandemic without any cost to you. Check with your employer to see if they are participating and for more information. If your employer is unaware of this program, refer them to IRS Notice 2020-46 and 2021-42.

Here is how it works: if your employer is participating, you can relinquish any unused sick, vacation or personal leave for cash payments which your employer will donate to COVID-19 relief charitable organizations. The cash payment will not be treated as wages to you, and your employer can deduct the amount donated as a business expense. However, since the income isn’t taxable to you, you will not be allowed to claim the donation as a charitable deduction on your tax return. Even so, excluding income is often worth more as tax savings than a potential tax deduction, especially if you generally claim the standard deduction or are subject to AGI-based limitations.

This special relief applies to all donations made before January 1, 2022, giving individuals plenty of time to forgo their unused paid leave and have the cash value donated to a worthy cause.

If you have questions related to donating leave time for COVID-19 relief efforts, or other charitable contributions, please contact our office.

Entrepreneur Success Story: How Canva Reached a $15 Billion Evaluation and Made Its Young Founders Billionaires

Human beings are visual learners. They always have been, and they always will be.

A big part of this has to do with the way the human brain works. According to one recent study, when people hear information, they generally only remember about 10% of it. If that information is paired with relevant visuals, such as a video or static content like a photo or infographic, they remember an average of 65% of the information. In fact, it’s estimated that between 51% and 80% of all businesses in every industry will rely heavily on visual content in 2021–a trend that shows no signs of slowing down any time soon.

That, in essence, is what Canva is all about.

Canva is a graphic design platform which can be used to create visual content like social media graphics, presentations, posters and more. The app includes templates that make it easy to create the stunning content you need.

The platform itself is available for free, although it does offer paid subscriptions through its “Canva Pro” and “Canva for Enterprise” tiers that unlock additional features. Not only can users create content that immediately exists online, but they can also pay for physical products to be printed and shipped to customers, allowing brands of all types to make meaningful connections with their target audiences.

In April 2021, Canva reached a $15 billion valuation, simultaneously making its co-founders Melanie Perkins and Cliff Obrecht billionaires. This came less than a year after securing a $6 billion valuation in spite of the COVID-19 pandemic.

But what may seem like an overnight success was, for those co-founders, anything but. The development of Canva wasn’t easy, but it is an inspiration to entrepreneurs and businesses professionals everywhere.

Canva: The Story So Far

The idea that would go on to become Canva began in January 2012 in Perth, Australia. It was then that Perkins, Obrecht and a third co-founder, Cameron Adams, saw a market that was in desperate need of being filled.

The company began simply enough: They wanted to “make design accessible to all.” It didn’t matter what you needed those design services for–logos, business cards, presentations or something else entirely.

When Perkins and Obrecht were in college in Perth, the duo would earn side income by teaching other students various design programs. After determining that some of the platforms offered by companies like Microsoft and Adobe had too much of a learning curve, they thought there had to be a better way.

But when they couldn’t find it, they decided to create the “better way” themselves.

The duo–now a couple–started an online school yearbook design business that was then called Fusion Books. They immediately launched a website that let users collaborate and build their profile pages, articles and other content for those online school yearbooks. Perkins and Obrecht would then print the yearbooks, after which they would deliver them to schools across the country.

The business was a success, but the pair didn’t want to stop there. They wanted to go bigger, and they had ideas on how to do it.

In 2010, Perkins had an encounter with an investor from Silicon Valley who saw the potential in such an idea. That investor introduced her to a few contacts, at which point they began to develop their idea even further. With the help of a few technology advisors, and after the close of their first funding round, Canva was born.

One year after launching, Canva had more than 750,000 active users. Now focused on marketing materials, its revenue increased from an already impressive $6.8 million to an enormous $23.5 million during the 2016-2017 fiscal year alone. In 2018, the company had raised more than $40 million from various investment firms and was already valued at $1 billion.

The takeaway from Canva’s story is there is truly no idea too small (or too niche) to make an impact. Melanie Perkins and Cliff Obrecht were tired of spending time teaching complicated graphics programs to fellow students, so they decided to create a platform of their own to eliminate as much of the “hard work” as possible. That simple idea turned into something much larger than either of them could have imagined.

Employee Spotlight – Karen Keinsley

What year did you join Slattery & Holman?
2007

Tell me a little about where you attended college and the degree(s) you earned? Any special accomplishments.
I attended IU Southeast in New Albany, IN.  I majored in business with a concentration in accounting.

What is your favorite thing about living in Indiana?
The people.  Hoosier hospitality really does make a difference.

Tell me a little about your family.
I have been married for 40 years to a wonderful man who is the most patient person I know.  We have two grown sons who are married and have blessed us with 5+ grandchildren.  Number 6 is due in November 2021.  We live on 13 acres in Madison County.  I grew up on a farm, so I enjoy being outdoors and everything Mother Nature has to offer.

If you didn’t have to sleep, what would you do with the extra time?
I don’t sleep much, so there’s not much extra time.

What is a new skill that you would like to master?
Sign Language

What’s the farthest you’ve ever been from home?
3,644 miles – Fairbanks, Alaska

What question would you most like to know the answer to?
What do I want to be when I grow up?

What is the most impressive thing you know how to do?
I know how to ballroom dance.

What was the best compliment you’ve ever received?
A friend told me I was the nicest person they had ever known.

What is your favorite smell?
Lilacs

If you had a clock that would countdown to any one event of your choosing, what event would you want it to countdown to?
My last day on the earth.  Every day is precious, so I don’t want to waste them.

What’s the most unusual thing you’ve ever eaten?
Groundhog or raccoon

What was your first job?
Hostess at IHOP

If you could have any super power, what would it be?The power to help others know they are loved and that you don’t have to follow the crowd. It’s ok to just be yourself.

Big Increase in Child Tax Credit For 2021

An increased child tax credit is part of President Biden’s stimulus package to help tackle the coronavirus pandemic and stimulate the economy. This stimulus package, known as the American Rescue Plan Act, was passed by Congress on March 10, 2021, to provide lower-income parents with financial assistance and support various other efforts to stimulate the economy. Although the benefit of a tax credit traditionally isn’t available until after that year’s tax return has been filed, for 2021, the IRS will pay a portion of the credit in advance in the form of monthly payments from July through December. Details are as follows:

Additional Credit Amounts – Normally, the credit is $2,000 per eligible child. For 2021, it has increased to $3,000 for each child under age 18 (normally under age 17) and $3,600 for children under age 6 at the end of the year.

Refundability – A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the child tax credit is nonrefundable, but for 2021, it is fully refundable.

High-Income Phaseout – The credit is designed to only provide parents of lower incomes with a tax benefit. Thus, the credit phases out for higher-income taxpayers at a rate of $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds the threshold.

2021 MAGI PHASEOUT – CHILD TAX CREDIT
Filing Status Threshold
Married Filing Jointly $150,000
Heads of Household $112,500
Others $75,000
  • Example 1: Jack and Jill have two children: Ella, age 4, and Joe, age 8. Their child tax credit for 2021 before the phaseout will be $6,600 ($3,600 + 3,000). They file a joint return and their MAGI is below $150,000, so they are entitled to the full $6,600. However, if their MAGI for 2021 were $170,000, they would have to reduce (phase out) the credit by $1,000 ($50 x [($170,000 – $150,000)/1,000]). Therefore, their child tax credit would be $5,600. 

Note: This phaseout only applies to the increase in the child tax credit. Families that aren’t eligible for the higher credit would still be able to claim the regular credit of $2,000 per child subject to the normal phaseout thresholds of $400,000 for married couples filing jointly and $200,000 for others.

  • Example 2: Using Jack and Jill from Example 1, they qualified for a credit of $6,600 before phaseout. If their MAGI had been $220,000, they would be completely phased out of the additional 2021 credit, but would still qualify for the normal $2,000 per child credit. Since their MAGI is below the regular $400,000 phaseout threshold, their credit for 2021 would be $4,000 (2 x $2,000).

Advance Payments – Under a special provision included in the new tax law, the Secretary of the Treasury has been charged with establishing an advance payment plan to get the credit benefit into the hands of taxpayers as quickly as possible. Under this mandate, those qualifying for the credit would receive monthly payments equal to 1⁄12 of the amount the IRS estimates the taxpayer would be entitled to by using information on the 2020 return. If the 2020 return has not yet been filed, 2019 information is to be used. If the 2019 return is used to determine the advance payments, the amount of the payments can be altered (either reduced or increased) when the 2020 return is filed. Initial advance payments are scheduled to arrive after July 1, 2021, and monthly payments will end in December 2021. Any balance of the credit due to a taxpayer would be claimed on their 2021 tax return.

  • Reconciliation on the 2021 Tax Return – The advance payments will reduce the child tax credit claimed on the tax return, but not below zero. If the aggregate amount of the advance payments to the taxpayer exceeds the amount of the allowable credit, the excess must be repaid unless the taxpayer qualifies for the safe harbor provision.
  • No Repayment Safe Harbor – The amount of the excess advance repayment is eliminated or reduced based on a safe harbor provision that applies to lower-income taxpayers. Thus, families with a 2021 MAGI below the applicable income threshold (see table below) will not have to repay any advance credit overpayments that they receive.
SAFE HARBOR APPLICABLE MAGI
Filing Status Threshold
Married Filing Joint $60,000
Heads of Household $50,000
Others $40,000

Child’s Death – A child isn’t taken into account in determining the annual advance amount if the death of the child is known to the IRS as of the beginning of the calendar year for which the estimate is made.

Online Portal – The Secretary of the Treasury will establish an online portal for taxpayers to elect to not receive advance payments or provide information that would affect the amount of the advance payment, including the birth of a qualifying dependent, change in marital status or significant changes in income.

It will take the Treasury some time to initiate the advance payments, but if you have questions about the child tax credit, please give our office a call.

Entrepreneur Success Stories: Zapier

Success leaves clues.

Zapier is a software company founded in 2011 by Wade Foster, Bryan Helmig and Mike Knoop. Zapier provides a service that helps end users automate the integration of online applications. Let’s take a look at how this software integration company has taken the industry by storm.

HOW ZAPIER GOT THEIR START

Before becoming a company valued at over $5 billion, Wade Foster (CEO) and Bryan Helming (CTO) were members of a jazz quartet, playing gigs together in their hometown of Columbia, Missouri. In addition to their love for music, they discovered that they both had a passion for creating web applications and began working on projects together.

In September 2011, they came up with an idea that would change the course of their lives. They decided to start a company that helped end users integrate two different software applications. To help get their idea off the ground, they enlisted a third co-founder, Mike Knoop (CPO), and went to work.

They created the first iteration of their software application (known then as API Mixer) and entered a local start-up competition. Their idea won, and they knew they were onto something.

They continued to develop their idea and submitted it to Y Combinator, where they were initially rejected. However, Foster, Helmig and Knoop refused to take no for an answer and continued submitting their application to Y Combinator until they were finally accepted in 2012. At that time, the project included integrations with 34 applications. Today, that number is over 3,000 integrations, and they have more than 300 application partners.

During their early stage, they were able to secure $1.3 million in Series A funding from investors, and within two years, they reached profitability. This was the only venture capital funding that they’ve accepted thus far, though they have received numerous offers. Zapier went on to be named the #1 company in the early-stage category as evaluated by top venture funds in the industry.

KEYS TO SUCCESS

Building a $5 billion company within a decade is no easy feat. Zapier’s success can be attributed to many of the decisions that the founders have made along the way.

Building Relationships with the Zapier User Base

Zapier believed that building relationships was crucial to helping cultivate their user base. Foster, Helmig and Knoop started by visiting online forums of larger software applications such as Dropbox and Basecamp, seeking users who were frustrated with their inability to use the functionality of one application along with another, often having to repeat the same tasks across applications. The Zapier team would reach out to these users and offer to help them resolve their issues. In the early stages of the company, this was how they generated their first customers. Customer service continues to be a foundational part of Zapier as a company.

Customer-Centric Values

As an employee of Zapier, each team member participates in the customer support function. Whether an employee is in HR or IT, the founders believe that hearing first-hand about how customers are experiencing the product and understanding their frustrations will help create a better product and experience.

Teamwork is Key

Zapier has been a remote company since its founding. With employees across the globe, it is important for them to be able to communicate with one another so that each team member is on the same page. They do this by sharing information across multiple channels and at multiple times to ensure that important ideas are communicated. Transparency is one of their keys to success.

Tell the Customer’s Story

Zapier has been very deliberate in how they reach out to current and potential customers. One part of their marketing efforts is sharing the success stories of their clients through their blog. Zapier interviews customers, identifies pain points that have been resolved through the application and uses this as a guide to assist other customers who might be experiencing the same issue.

Zapier’s attention to detail in addressing customer concerns has helped the company grow from its first customers in 2012 to its current user base of over 600,000. Their success demonstrates how dedicated client focus can have a huge impact on the bottom line.

If you have any questions about how to turn your business into a success story, please contact our office for more information.

SBA Raises Loan Limit For COVID-19 EIDL Loans to $500,000

As U.S. businesses continue to recover from COVID-19’s economic devastation, the U.S. Small Business Administration (SBA) is expanding loan opportunities. The agency announced that beginning in April, nonprofits and small businesses will be able to borrow up to $500,000 for up to 24 months. This expansion of the COVID-19 Economic Injury Disaster Loan (EIDL) program more than triples the existing limit of six months and maximum loan amount of $150,000.

In a news release announcing the change, SBA Administrator Isabella Casillas Guzman said, “More than 3.7 million businesses employing more than 20 million people have found financial relief through SBA’s Economic Injury Disaster Loans, which provide low-interest emergency working capital to help save their businesses. However, the pandemic has lasted longer than expected, and they need larger loans.”

Businesses that have already applied for a COVID-19 EIDL loan need not worry about reapplying, as all applications in process will automatically be considered for the increased amounts. Similarly, instructions will be published to allow those who have already been approved for a loan to apply for the expanded limits. A loan increase can be requested via SBA.gov, and an email will go out to all previously approved borrowers containing this information.

The COVID-19 EIDL program has been extremely successful, with over $200 billion in loans already approved by the SBA. Small businesses, including independent contractors and sole proprietors, have been provided 30-year maturity loans at a 3.75% interest rate, while nonprofits will pay 2.75% in interest.

Additionally, the SBA announced on March 12th that borrowers for all disaster loans, including the COVID-19 EIDL loans, would be provided extended deferment periods. Although payments are not required until 2022, interest will still accrue on all outstanding loan balances, so borrowers may elect to begin making payments during the deferment period.

If you have any questions about the EIDL loan limit expansion and how it could affect your business, please contact our office.

New Tax Credit Covers Paid Leave for COVID-19 Vaccinations and Recovery

The American Rescue Plan Act (ARP) expands the tax credits available under the Families First Coronavirus Response Act (FFCRP). The ARP Act does not mandate that employers provide paid family or sick leave; however, tax credits for employers that choose to continue providing Emergency Paid Sick Leave (EPSL) or Emergency FMLA (EFMLA) are available through September 30, 2021. The ARP extends a tax credit to employers who pay for leave taken by employees to receive COVID-19 vaccinations and recover from vaccination-related side effects.

For more details, click here to read the full IRS release. As always, we encourage you to reach out to us with any and all questions regarding this credit.