Hot temps, cool credits

Scott Pinkowski, CPA

It’s another hot summer in the St. Louis area, which also means it’s home improvement time.  Something to remember when you’re in fix-it mode are those items  that might qualify for the energy saving tax credits listed below: 

The credit for energy efficient property is for 30% of the cost of the following:

 

            Solar Energy Systems (water heating and electricity)

            Fuel Cells

            Small Wind Energy Systems

            Geothermal Heat Pumps

 

IMPORTANT:

Items that do not qualify for the credit include energy efficient appliances.

 

There is also a credit available for 10% of the cost of certain specific energy property.

This credit is limited based on the type of property as follows:

$200 credit for exterior doors, exterior windows and skylights that meet or exceed the Energy Star program requirements

           $50 credit for each advance main air circulating fan,

           $150 credit for each natural gas, propane or oil furnace or hot water boiler, and a

 

            $300 credit for each of the following:

                                    Electric heat pump water heaters

                                    Electric heat pumps

                                    Biomass fuel stoves

                                    High-efficiency central air-conditioners

                                    Natural gas, propane or oil water heaters

 

IMPORTANT:

There is a $500 per taxpayer lifetime limit on this 10% credit, so if the full $500 has been claimed in a prior year(s), you are out of luck.

 

Please contact us if you have any questions about this topic.

TAX BENEFIT FOR SUMMER DAY CAMP EXPENSES

Jennah Purk, CPA, MST

With summer in full swing, it's time to identify the expenses of  summer day camps for your school-age children that qualify  for the dependent care credit. These day camps include those for math, computers, theater, or soccer, or other special day camps, like those that focus on improving reading, writing or study skills. The costs of summer school and tutoring programs are not eligible, however, as they are considered education costs.

The credit is generally a percentage of the qualifying expenses, the percentage depends on your adjusted gross income (AGI), for example, in 2012 it was 20% if your AGI was over $43,000.


Some rules for claiming the dependent care credit include the following:

• Your dependent qualifying child must be under the age of 13 when the care is provided.
• You must file a joint return, if married.
• The amount of expenses considered is capped $3,000 for one child, $6,000 for two or more.
• The expenses generally may not exceed the lesser of your earned income or your spouse's earned income.
• No credit is allowed for any child care costs that are paid through a Flexible Spending Account (FSA).
• The expenses must be work-related, which means they are paid to enable you and your spouse to work or actively look for work.

Please contact us if you have any questions about this topic.

DEDUCTING INTEREST ON DEBT USED TO BUY S CORP STOCK

Eddie Quigg, CPA, JD

A recent Chief Counsel Advice (CCA) discussed the rules for individuals deducting interest on debt incurred to purchase stock in an S corp. Since this is a question that we get asked on a regular basis, this is a good opportunity to review the applicable rules.
The first rule is that the interest tracing rules apply, which provide that interest expense on a debt is allocated in the same way as the debt to which the interest expense relates is allocated. This mouthful from the Regulations simply means that to trace the interest, you must follow the proceeds.
In the case of debt used to purchase S corp stock, a "pass-through" rule applies which says that the debt proceeds are allocated ratably among the S corp assets, as if the proceeds were expended on the purchase of the assets.
Roughly speaking then, if all the S corp's assets are used in a trade or business, the interest is fully deductible as business interest, and is reported in Part II of Schedule E, Form 1040 on a separate line in column (a) as "business interest", with the name of the pass-through entity to which it relates. Likewise, if the S corp has portfolio assets like marketable securities, or "passive activity" assets like investments in real estate partnerships, part of the interest expense will be allocated to these assets, i.e.,  on Form 1040 on Schedule A as investment interest expense (marketable securities), or, if passive (real estate investment) on Form 8582 as a passive activity item.
It is also important to remember that these rules are separate from the rules that determine the status of the S corp shareholder under the "passive activity" rules. For example, assume that all of the interest expense is treated as "business interest" -- if the shareholder "materially participated" in the business, then the Schedule E reporting would apply, as explained above. However, if the shareholder's status was considered "passive," then the interest would be reported on Form 8582 and be governed by the passive activity rules.
The discussion above is a brief overview of the complex rules that apply in this area. Please contact us if you have any questions about how the rules apply to your situation.