Can You Deduct Mortgage PMI On Your Tax Return?

If you own your own home, condo, apartment, or townhouse here is a heads-up on mortgage insurance that you may not have known about. Note the differences between residential and rental properties, we cover them below.

Personal Residence Mortgage Insurance

The deduction for mortgage insurance on a qualified residence ended on December 31, 2017.

But don’t give up on the deduction.

The personal residence mortgage insurance deduction is part of what is called “tax extenders,” and it’s highly possible that lawmakers will reinstate the deduction retroactively for all of 2018 and 2019. That’s the good news.

The bad news is that to claim the retroactive deduction your accountant will need to amend your 2018 tax return if they determine that the deduction will save you a substantial amount of money.

Rental Property Mortgage Insurance—IRS Mistake

Online at the IRS’ “Frequently Asked Rental Property Questions”, you will find the following incorrect question and answer: 

  • Question: Can you deduct private mortgage insurance (PMI) premiums on rental property? If so, which line item on Schedule E?

  • Answer: No, you can’t claim a deduction for private mortgage insurance premiums.

This is wrong!

The cause for the error comes from IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), where on page 1 in the “What’s New” section, the IRS states that the deduction for mortgage insurance premiums expired and you can’t claim that deduction for premiums after 2017 unless lawmakers extend the break.

The mistake that the IRS makes in its publication and FAQ is that the expiration of the mortgage insurance deduction applies to your qualified personal residence, not your rental property.

Rules for Rental Property Mortgage Insurance

You generally treat mortgage insurance on rental property loans and mortgages as an ordinary and necessary business rental expense that you deduct on Schedule E against the income from that rental property.

Depending on the type of loan, you could pay the mortgage insurance either in a lump sum or annually as you make your mortgage payments.

How you treat the mortgage insurance premiums depends on how the proceeds of the loan are used, rather than on the character of the property that you mortgage. For example, you could take a mortgage on your personal residence and use the proceeds from the loan for a rental property, an investment, or personal purposes.

A Tax Planning Note

You deduct the mortgage insurance on the rental properties over the period of benefit. For example, if you make a one-time payment, you amortize the mortgage insurance over the life of the loan.

If you make annual payments because of, say, a mortgagor requirement of a loan-to-equity ratio or other formula, you deduct the mortgage insurance premiums as you pay them (again, for your rental properties).

If you are considering converting your home into a rental property and would like my advice on the conversion, please contact me below.

Get a Free Tax Savings Consultation

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.

Converting Your Home Into a Rental Property: Tax Issues

Converting Your Home Into a Rental Property

The simple maneuver of converting your personal residence to a rental property brings with it many tax rules, mostly good when you know how they work.

The first question that arises when you convert a personal residence into a rental is how to determine the property’s tax basis for depreciation purposes during the rental period and for gain/loss purposes when you eventually sell.

Oddly enough, two different basis rules apply: 

  1. If, after conversion to a rental, you sell at a gain, your basis on the conversion date is the usual computed amount (cost of home plus improvements, minus depreciation—such as from a home office).

  2. If, after conversion to a rental, you sell at a loss, your basis on the conversion date is the lesser of the computed basis or the fair market value.

Once you’ve converted a former personal residence into a rental, you must follow the tax rules for landlords. Here is a quick summary of the most important things to know:

  • You can deduct mortgage interest and real estate taxes on a rental property.

  • You can also write off all the standard operating expenses that go along with owning a rental property: utilities, insurance, repairs and maintenance, yard care, association fees, and so forth.

  • Finally, you can also depreciate the cost of a residential building over 27.5 years, even while it is (you hope) increasing in value.

Rental Real Estate Losses

If your rental property throws off a tax loss, things can get complicated.

The so-called passive activity loss (PAL) rules will usually apply. In general, the PAL rules allow you to deduct passive losses only to the extent you have passive income from other sources, such as positive income from other rental properties or gains from selling them.

Eventually your rental property should start throwing off positive taxable income instead of losses, because escalating rents will surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up suspended passive losses in earlier years, you now get to use them to offset your passive profits.

Prior Losses Can Offset Future Positive Income

Another nice thing: positive taxable income from rental real estate is not hit with the dreaded self-employment (SE) tax, which applies to most other unincorporated profit-making ventures. The SE tax rate can be up to 15.3 percent, so it’s a wonderful thing when you don’t have to pay it.

One other good thing is that your net rental profits may qualify for the Section 199A deduction.

Another good thing is that if your rental property rises to the level of a trade or business, your rental profits avoid getting socked with the 3.8 percent net investment income tax (NIIT).

Taxes When Selling Rental Real Estate

When you sell a rental property that you’ve owned for more than one year, the profit (the difference between the net sales proceeds and the tax basis of the property after subtracting depreciation deductions during the rental period) is generally treated as a long-term capital gain.

Always keep in mind the good news here. You don’t pay the taxes on the property appreciation until you sell.

Remember those suspended passive losses we mentioned above? The suspended losses are ordinary losses. When you sell a rental, you can find two great benefits: 

  1. Gains are tax-favored capital gains.

  2. And then, to the extent of your gains, you release suspected passive losses that offset ordinary income.

Avoid Paying Taxes on Real Estate Capital Gains

And always keep this in mind: rental real estate owners can avoid taxes indefinitely using Section 1031 exchanges (named after the applicable section of our beloved Internal Revenue Code).

The tax code totally mislabeled the 1031 exchange. It’s absolutely not an exchange or a swap. It works like this:

  1. You sell your property.

  2. You buy a new, more expensive property.

  3. Your Section 1031 exchange intermediary (such as a bank) handles the paperwork, and that makes the taxes go away.

If you are considering converting your home into a rental property and would like my advice on the conversion, please contact me below.

Get a Free Tax Savings Consultation

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.

Is Your Trip a Deductible Business Expense?

Is Your Trip a Deductible Business Expense?

If you travel for business, you have probably heard that you can deduct the cost of your flight, hotel, meals, and entertainment. But before you go and do this…here are a few things to watch out for to determine which parts of your trip are REALLY deductible.

To help you understand business travel, consider this:

You planned a personal trip to Los Angeles, arriving on Friday afternoon and leaving on Sunday afternoon.

About a week later, you learn that a vendor you need to meet with is going to be in L.A. when you are. You arrange a dinner on Friday night to finalize negotiations on a large contract.

Can you now deduct 100 percent of your flight expenses to Los Angeles? How about meals?

Trouble Ahead: Business vs. Personal Travel

You must have business as your primary purpose for the trip.

In general, a business trip can involve two types of business days:

  1. Travel day. You count as business those days you spend traveling in a reasonably direct route to your business destination. (Again, note this is your business not your personal destination.)

  2. Presence-required day. If someone requires your presence at a particular place for a specific and bona fide business purpose, this counts as a business day. That “someone” could be any business associate, employee, partner, client, customer, or vendor.

This trip we created for you works like this:

  • Day 1, Friday, is a personal day. (You may deduct the cost of the business meal with the vendor whether you pay for it in total or go Dutch treat.)

  • Day 2, Saturday, is a personal day.

  • Day 3, Sunday, is a personal day.

How can you deduct the entire trip?

Let’s say you had this situation: You travel on Friday to meet with the vendor on Saturday and return home on Sunday.

Now, you may have a deductible trip.

Get a Free Tax Savings Consultation

If you are planning a trip that will involve both personal and business days and would like me to review your trip days for tax deductibility, give us a call.

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.

Make Tax Time Less Taxing with a Mid-Year Checkup

Death and taxes may be the only two certainties in life, but the latter can be almost as frightening as the former. If you still look back on last year's tax filing season with dread, you are in no hurry to repeat the process.

Even so, getting a jump on next year's filing can make your life easier and lower your stress level substantially. Now that tax filing season is in the rear-view mirror, there are things you can do to more future filings less taxing. Conducting a mid-year checkup on your finances and assessing your current tax situation is one of the best gifts you can give yourself. Here are some tips to help you get started.

Locate Your Tax Records

Whether you store them in a file folder, a shoebox, your hard drive or your cloud account, knowing where your tax returns are will help you sleep easier at night. Now is the time to find your prior-year tax return, including supporting documents, schedules, and PIN codes.

You will need your self-created IRS PIN code if you plan to file electronically next year, and not having it could slow your refund and ramp up your stress level. Be sure you store everything in a safe place, so you will have all the information you need when you need it most.

Educate Yourself on Tax Law Changes

The 70,000 page U.S. tax code is not set in stone; in fact, it is always changing and evolving. Few tax laws are ever settled for good, and Congress is constantly making changes and updating the tax code to help one special interest group or another.

While this means that you as a self-employed individual either need to keep up with the tax code yourself or engage an accounting firm to help you - But in any case - You should be educated on the general concepts that impact your business and personal financial situation.

Some examples of the tax overhaul starting with the 2018 and the Tax Cuts and Jobs Act include QBI, meals & entertainment deduction changes, and changes to the individual and corporate tax rates.

Now is the time to learn about those changes so that you can take advantage of new tax savings, loopholes, and other money-saving opportunities.

The middle of the year is the perfect time to check up on your taxes. As June turns into July and the summer starts to heat up, the tax filing deadline is now in the rearview mirror, but next April 15 will be here before you know it. A mid-year checkup now can make filing your next tax return that much easier.

Learn About Business-Specific Tax Savings Strategies

If you have access to a 401(k) plan, 403(b) program or similar workplace retirement plan, increasing your contributions mid-year could reduce your taxes and ramp up your refund. The year may be half over, but there is still time to increase your contributions and reduce your tax bill for the remaining months.

The middle of the year is also the perfect time to open that IRA or make your annual contribution. If you are eligible for a health savings account, making a mid-year contribution could reduce your tax bill, so you can enjoy a bigger refund when filing season arrives.

There are also a number of strategies including income shifting, depreciation, loopholes, exemptions, and tax credits that you may qualify for that can help you save thousands per year in your taxes.

What do you qualify for?

Get a Free Tax Savings Consultation

Pinewood Consulting’s CPAs will help you assess your tax savings potential through a free consultation. Book yours today with Chad Pavel, CPA.



Three Cloud Accounting Apps to Streamline Your Finances

As you start or grow your business you will soon be looking for ways to streamline, automate, and add quality controls to your daily finance workflow.

Trust us, the tedious tasks of expense recording, reimbursements, paying bills, running payroll, and digitizing paper receipts and bills will soon become a headache and a waste of your time as the business owner.

With cloud-based accounting software and add-on cloud apps you can connect numerous systems through the cloud and automate many processes that used to be manual.

Here are our three favorite cloud-based accounting apps.

#1 T-Sheets: Time Tracking Software

T-Sheets is a product from the makers of Quickbooks (Intuit), and offers cloud-based time tracking software for businesses with hourly staff or consultants.

T Sheets Software 1.png

We use T-sheets ourselves for time tracking and find that our clients in construction, consulting, home services, and professional services also like the app for its ease of use, GPS navigation and geotagging, and integration into billing systems.

If you require your staff and consultants to track their time, T-Sheets can be a good fit for you.

#2 Bill.com Bill Payment Software

Paying your bills the old way requires manual step by step processes and duplicate and manual data entry.  You have to take the paper invoice out of the envelope, scan it, upload it, create the bill in Quickbooks, mark it as paid, and write a paper check or submit to your bank’s bill pay function to get the check out the door.  

Bill.com makes all of this MUCH much simpler.

With Bill.com, you can email forward your bills to be paid to your secure inbox where you can then code, store, and submit payment for approval by your business partner, CFO, or CEO. Bill.com will send paper checks or eChecks automatically for you and draw the money from your account.

literally, Bill.com saves us hours per week across all of our clients.

#3 Expensify for Employee Expense Reimbursement

Employee reimbursement processes can also be demanding and time consuming. If you don’t have a reimbursement policy setup, Expensify can save you tons of time.

Expensify Software.png

Employees scan pictures of their receipts or invoices and submit them to the app, then code the expenses to the proper account where you can approve and submit a payment to send back to the employees, making them whole.

The process has built in controls to make your life easier and prevent any rogue employees from abusing the system.

Book a Consultation

Cloud-based accounting apps can save you lots of time and make your employees lives much easier.

Book a consultation to learn more about how cloud-based accounting software and apps can improve your profits.

Should You Acquire A Business Or Start One From Scratch?

Most of the "startup advice" out there is wrong, risky, and DANGEROUS.

All day you hear things like:

❌"Quit your day job and pour your life savings into your business idea!"

❌"Don't worry if you mess up, you'll bounce back!"

and I love this one...

❌ "Jump from the airplane and find your parachute on the way down!"

Unfortunately, more than 50% of new businesses fail within five years...leaving the owners stressed, in trouble, or even RUINED.

They simply run out of time and money because they can't figure out how to build their new idea into a profitable business - And they shut it down.

Well...what if you could bypass the riskiest part of owning a business: Starting it?

Skip the risky startup phase altogether?

And step into an established and profitable business that pays you a salary on day #1?

I'm talking about BUYING a business that already has customers, employees, systems in place, and hundreds of happy customers willing to pay you every single day...and they're already there.

* Bypass the risk.

* Skip the sleepless nights.

* Don't try to reinvent the wheel...or invent anything at all.

Best of all, you don't need a ton of capital to get this business started, since you can finance up to 90-100% of the deal with a bank or outside investors.

Through 10+ years as a CPA and M&A advisor, I've seen a lot of reasons why businesses get acquired...and even more reasons why they DON'T.

And even more entrepreneurs who were better of stepping into a management/owner role rather than starting something completely from scratch.

In 2019 we want to help a handful of entrepreneurs "skip the line" and take over a cash flowing business of their own.

No “lean startup” models

No sleepless nights

No wondering if you will ever find that magical investor.

Book a consultation if you want to learn how to acquire a business.



[Startup CEO] How Jeff Liebov Launched a SaaS Product While Running a Successful MSP

[Startup CEO] How Jeff Liebov Launched a SaaS Product While Running a Successful MSP

Jeff is an MSP owner from New Jersey and recently launched a SaaS product that he built to solve his own needs. Frustrated by complicated service, ticketing, and billing systems, Jeff built EZBilling360.

Want To Buy Or Sell A Business? Here Are Three Websites Where Small Businesses Change Hands

Want To Buy Or Sell A Business? Here Are Three Websites Where Small Businesses Change Hands

Owning a business can mean being your own boss and having greater flexibility about when and where you work. It can also mean added stress as you work toward growing your business and answering to your customers. Whether you’re looking to buy or sell a small business, there are three main websites that can help you.

5 Celebrity startup founders and their companies

5 Celebrity startup founders and their companies

Explore 5 celebrity businesses that are wildly successful.

Guiding questions for startup founders: Preparing to meet with VCs

Meeting with a VC can be daunting, but if you prepare properly, you stand a better chance of getting the funding you need to grow your business. Follow along as we take you through some critical questions that will help you best represent your company’s strengths.

Figure out what makes your company valuable 

Before you can start asking for funding, you need to have a realistic understanding of your company’s value. And not just how much you think your business is worth—it should be grounded in some sort of reality. To get you started down this path, first, it helps to honestly reflect on your company’s strengths and weaknesses.

Major factors to consider:

Strength of the management team
•    What experience does the management team bring? 
•    Past successes? 
•    What makes your team special?

Size of the opportunity 
•    What is the value of your target market? 
•    What is the addressable market size for your company?

Product/Technology/Service 
•    How unique, valuable, or interesting is your product?
•    Is your IP well defined?
•    Do you have any traction yet?

Competitive Environment 
•    How tough is the competition?
•    What are the challenges or barriers to entry?

Marketing/Sales Channels/Partnerships 
•    Do you have a captive beta audience?
•    Have you worked with any notable partners? 
•    Any early wins or success stories that validate your organization?

Need for Additional Investment
•    Is there anything else that is working for or against you? 
•    Do you have very positive existing customer feedback? 
•    Do you have a competitive advantage because of your location?

Think critically about how your business stacks up to the competition in each of these areas. In what areas do you excel? Where might you want to improve? One major point of this exercise is to help you determine where your business falls in the continuum of startup valuations—do you belong at the top, middle or bottom? Having more awareness about how you stack up can help you make your best case for why you deserve funding.

Coming to terms with the term sheet

Now that you’ve considered your company’s relative place in the market, it’s time to focus on more concrete topics. Before you walk into a meeting with a VC, you should already have a clear strategy for the term sheet. One of the key components of your initial discussions—and overall VC relationship—is getting this critical document agreed on. 

You can think of the term sheet as a sort of roadmap that outlines the basic terms and conditions of a VC partnership—which will also be the start of any legally binding paperwork that comes later. At its core, the term sheet is about setting up protections for each party and establishing who gets what. 

Before you meet with a VC, here are some questions you should consider:

Equity and options
•    How much equity are you willing to give up?
•    How much should you set aside for the option pool?

VC track record and past performance 
•    What is the VCs track record? 
•    How successful are they? 
•    What do they invest in? 
•    Do they invest in companies like yours? If so, how much do they typically invest?

Competitive impact 
•    Have they invested in a competitor or potential competitor? 
•    Has a competing VC invested in a company like yours? 
•    Are they missing out on a growing new segment? 

Additional considerations
•    Are there potential opportunities for additional cross-collaboration—have they invested in companies or technologies that may be beneficial to you? 
•    Similarly, could your company provide additional benefit to companies they are already investing in?

As important as it may seem to get the highest possible valuation right out of the gate, the term sheet is just a starting point down a much longer road. Everything that is negotiated will significantly impact your business now and in the future—so be very thoughtful in your approach. Though there will still be a lot ahead of you, some honest reflection on your prospects is a great place to get things started. 

Source: Pitchbook.com

About Pinewood Consulting

Do you need outsourced accounting services for your business in Connecticut or New York? Call Pinewood Consulting at (203) 286-8719 to get a quotation for bookkeeping, taxes, acquisitions, and other financial related matters. Chad Pavel is a Stamford CT and New York CPA.

This Small-Town Tech Entrepreneur Sold His Billion Dollar Unicorn By Age 32: Here’s How He Did It

If you are an entrepreneur, business owner, or thinking of starting your own business, this article is for you.

On Thursday, 10/26/17, Datto, Inc. announced its plans to sell to Vista Equity Partners and merge with Autotask, a related Information Technology company.  This acquisition deal, which is surely valued at over $1 billion is big news for M&A, venture capital, the technology services industry, and entrepreneurs around the world.

I worked at Datto’s Norwalk, CT headquarters for three years as a sales rep. And now I am a Datto customer and advocate to my clients. You can read Austin’s interviews all around the internet, but here’s what I learned from having the privilege of working for Datto.

Datto History

Austin McChord started Datto in 2007 in his father’s office basement using his curiosity, ability to build things, and a few personal credit cards to build his first data backup product.

TL:DR Version: Austin McChord the Founder:

  • Started in a basement at age 22

  • Assembled first computer products with glue + legos

  • Struggled to find revenue for over two years

  • Had to fire (then rehire) friends

  • Ran up credit card debt for parts and marketing

  • Made sales to scrape by

  • Faced product returns

  • Almost shut down

  • Didn’t pay himself

  • Got sued multiple times

After two years of working to find meaningful sales (and temporarily laying off a few of his friends) Austin had his first break weeks before closing up shop when a tech blogger embraced Austin’s dozens of emails and phone calls and reviewed the Datto product for his readers. It worked, and Austin sold enough to stay in business and turn a profit.

Through many iterations of the Datto product line, Datto’s backup and disaster recovery products are still flying off its Monroe, CT warehouse shelves to small businesses around the world, now being distributed and served by almost one dozen offices and data centers around the world.

Despite being a 20-something with a nearly 6-figure credit card balance and no “real-world” technology or business experience, how did Austin McChord defy the odds and go from a “C” college student to turning down a $100 million acquisition offer to selling his company for over $1 billion by age 32?

An Insider’s Perspective

After working at Datto for nearly three years (before going full-time on Pinewood), I observed live, in person, several qualities in Datto’s CEO that resembled those found in entrepreneurs most of us can only read about in blogs and magazines.

1.He focused: Austin McChord started Datto to avoid getting a job. He built his first product by piecing together computer parts with hot glue and lego blocks. How many friends of yours would spend their 20’s sitting in a basement building computers and racking up credit card debt not on beers and vacations but on computer parts and server space? Tip: Find a market problem that you can solve and build a solution to address it quickly, no matter how ugly or unpolished it may seem at first. Be prepared to be “that friend” who doesn’t go out every weekend so you can work on your business.

2. He’s stubborn: Would you keep going on your business idea even if it was costing you thousands in interest payments and causing you tons of stress? Would you make 1,000 cold calls and pretend you had 5 employees even if it were just you in a basement doing it all? Austin did, and he sold products to big companies doing it. He also didn’t take venture capital investors in the early days and even turned down a $100 million buyout before age 30 because he had bigger plans. Tip: Once you commit to your business and have people ready to buy your products, do whatever you can to fund it yourself. Get a night job, sell stuff on eBay, get a credit card, get yourself some sales and make your product better each week. Go as long as you can without investor money and you can control your destiny. Datto was generating tens of millions in revenue before taking professional investment.

3. He listens: Austin McChord listens to his customers and trusts his employees. He might even up-vote this article (Austin?). When the early products had flaws and Datto’s customers called in demanding refunds and replacements, he did it. When employees asked for better benefits and perks (like better health insurance or even a ball pit), Austin made it happen. He still attends trade shows to sit in Datto’s booth to interact with customers to stay in touch with the market. Tip: Your customers and staff will tell you how to keep them motivated and buying into your vision. Take the time to listen and talk with them daily. And you’re never too busy to attend a trade show or build a ball pit in your office.

4. He’s honest: Datto has an “anonymous question” forum where Austin answers questions from employees and emails them to the entire company. He leaves his keys to his Tesla on his desk for staff to take it for a spin. He personally emails his 10,000 partners when Datto releases a bad update or buggy product. He admits that he almost failed at formal education and just wanted to build something that would pay him a $100,000 salary someday. Tip: Ask for feedback. Tell your customers when you screw up and they will respect you for it and give you time to fix it before going to your competitors. Be transparent with your staff and they are more likely to embrace change and big decisions when they may not make sense at first.

5. He motivates: The motto at Datto was it’s better to ask for forgiveness than ask for permission, which gives Datto employees power to do better work without bureaucracy. Datto’s monthly town hall meetings were always packed with transparent insights on the company’s goals, product releases, and private news that ALWAYS stayed private. Austin McChord even buys lunch for every office each Friday and sits with the staff to talk. Tip:Your staff and customers are your business. Once your business is running, focus on being a leader, a coach, a visionary, and trust your staff to do their jobs.

Summary

Datto’s success story can teach entrepreneurs a few good lessons. As Datto continues to grow with Vista Equity Partners and Autotask with Austin at the helm there is no doubt that the combined companies will continue to be a powerhouse in the Information Technology world.

And the lesson for entrepreneurs. Clearly, you don’t have to be an industry veteran, a PHD or MBA, or have worked…anywhere before, to start a company and earn a living for yourself or in Austin’s case, build an asset worth over $1 billion.

So – What’s your excuse?