Mesa Money Minute

Here in Colorado it's common for people to both rent out a property and use it for personal purposes. This could be the case with a vacation rental or in a situation where you're renting a portion of your home but using the other portion for personal purposes.  IRS rules state that if the rental use is less than 15 days, this is not income and expenses are not allowed. If the rental use is more than 14 days, then you must report the rent income and you can report the proportional expenses against this income. If it was a vacation rental, use the days rented and the total days used to determine the rental portion of expenses. If it was your home that you were renting a portion of, you can use the square footage of the portion rented compared to the total square footage of the home, or the number of rooms rented compared to the total number of rooms in the home. Note that shared areas are considered personal use. If personal use of the property is more than 14 days or 10% of rental days, whichever is greater, then you cannot take a loss on the rental activity (expenses cannot exceed income). 

With the real estate market boom recently, a lot of folks are investing in rental properties. Now's a good time to discuss the taxability of rental income. A common misconception is that if your rental expenses are greater than your rental income, you don't have to report it. Not only are you still required to report rental losses, but you may be missing out on valuable tax benefits from a loss on your rental investment. Rental income is generally considered "investment income", with some exceptions for real estate professionals who work in real estate full-time. Investment income is treated differently for tax purposes than earned income. Losses are limited, and for certain high-income taxpayers there is an additional 3.8% tax. Rental real estate losses are allowed an exception to the loss limitation. If you make less than $150k as a married couple filing jointly, or $75k as a single person, you can take up to $25k per year of your rental property losses against your other income, as long as you actively participate in the management of your rental property. 

Starting a new business? One of the first things you will need to do is decide on what type of entity you'll set up - sole proprietorship, corporation, partnership, limited liability company or another type. Sole proprietorships have the benefit of simplicity - there are no legal forms to file in Colorado and they do not require a separate income tax return. However, they can be more expensive in self-employment taxes and don't offer as much liability protection for the owner. Corporations and partnerships are a little more difficult to set up, as the state requires documents be filed and it is generally best practice to have an attorney draft an operating agreement. However, they offer the benefit of having more than one owner split the profits and additional liability protection for the owners. LLC's can offer the best of both worlds in some situations. It's best to chat with your attorney and CPA to determine which entity type will serve you best now and in the future.

It's the great resignation and a lot of people are opting to start their own businesses. If you are one of them, there are a few steps to take to get going. First, make an appointment with an attorney specializing in business law. They can advise you on the best way to structure your start up and can help you draft the documents you need. Then, meet with an accountant. They will also give their two cents about your entity structure and help you get your accounting systems in place to make sure you can monitor your business's success and stay in line with tax laws. Lastly, visit your bank. It's smart to set up a separate bank account for your business to keep it separate from your personal finances, and they can help you if you need financing to get started. The state of Colorado has some good resources for new business owners as well, just visit mybiz.colorado.gov. 

There's still time to claim your Employee Retention Tax Credits (ERTC's)! Although the program is only available for wages paid through September 30, 2021, you still have time to file and claim the credit for wages paid before that date. The ERTC offers a credit of 50% of eligible wages paid, up to $10,000 per employee per year, for 2020. For 2021, the credit is 70% of eligible wages paid, up to $10,000 per employee per quarter. What this means is there is a potential credit available of up to $26,000 per employee. To be eligible, you must have either a significant decline in gross receipts for the quarter, or have been shut down by government order. Most owner's wages are not eligible. Talk to your CPA about determining if you're eligible for the credit!

Reminder of some important upcoming tax deadlines. Fourth quarter 2021 individual and calendar year business estimated tax payments are due on January 18, 2022. Pay on time to avoid possible penalties and surprise tax bills. Fourth quarter 2021 payroll tax reports are due January 31. W-2's are due to the SSA and the recipients on January 31. 1099's are due to the IRS and the recipients by January 31.