Making Sense Of New EU Bonus Rules

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Making Sense Of New EU Bonus Rules

New Rules Are Aimed At Stamping Out Misconduct

The ESMA announced last year that it would terminate bonuses and the market was non-plussed. On the one hand bonuses are a real problem when it comes to fraud, scams and your ability to withdraw your deposited money and profits. In this light their announcement was a good thing but perhaps went a bit to far, at least in the minds of traders and brokers alike. Brokers like to use bonuses as a means of attracting and retaining clients, we traders like bonuses because it’s free money for trading, and we were going to trade anyway so why not take a bonus? After a bit of uproar the agency came back and clarified their policy and let me tell you, it is a lot better than you might think.

  • The ESMA along with the MiFID and local regulators have implemented a ban on all bonuses tied to trading volume. This does not mean there are no bonuses, incentives or rewards programs just no more cash match bonuses that tie up deposits and prevent withdrawals. In response the European Binary Options Association has echoed the sentiment and included these principles in their code of conduct and financial guidelines.

The new rules as laid out by the MiFID and ESMA state that no binary option bonus can be tied to trading volume as a basis for withdrawals. This means no more of those first time deposit bonuses or any other bonus that requires you to trade a certain amount of volume to unlock your account. These bonuses are at the heart of many complaints and criticisms of the industry and do not take the clients best interests into account. The new rules will allow bonuses but they are more like a reward program for trading activity than a cash match for deposit.

There are a couple of variations but in most cases the new EU bonus works like this. Anytime you deposit money into your account or make a trade it counts as trading volume. The more trading volume you have the more “bonus” you are eligible for. The bonus money may be shown in a tally in your account but will never be added to your money until you meet the required amount of trading volume. Once you do meet the volume requirement the bonus money is put into your account and becomes immediately withdrawable. The best part is that your money is always withdrawable and is never restricted in any way. The bad part is that there is no added leverage to enhance to your profits.

Another type of bonus that is allowed under the new rules uses a deposit/bonus ratio to track what percentage of your account is a bonus, and how much is your real money. I see this types most often as a cash back or risk free trade type of bonus that you must request upon registration. What happens is this. If you ask for this bonus your first trade, up to a $1,000 for example, is covered under the risk free trade agreement. If you win you keep your money and the profit, no problem there. If you lose they give you back the amount you wagered but in bonus money. The difference is that now, instead of having your entire account tied up until you hit some impossible to achieve turnover rate, any real money left in your account is free to withdraw, as are any profits with one restriction.

The restriction is the deposit/bonus ratio. It dictates how much of your profits are based on real money and how much are based on bonus money. The amount of your profits that are based on real money are always withdrawable, the amount of profits based on the bonus aren’t withdrawable until the turnover rate is met. Here is an example;

Let’s say you have $1,000 in your account and have a bonus/return on risk free trade for $200 for a total of $1,200. Your deposit ratio $1,000/$1,200 or 83% so if you make a trade and win 83% of those profits are yours to withdraw immediately. Let’s say you trade $200 and win with a return of 81% bringing your account up to $1362. Your profits on the trade are $162, 83% of $162 is $134.46 and that is how much you can withdraw now. The remainder of the money is left in your account and becomes withdrawable once the turnover is met. Also, each time you trade and win or lose your deposit ratio is adjusted for the new total. In this example we add the profit, $162, to $1,000 and then divide that by the account total which equals 85%.

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Tom Copeland’s Taking Care of Business

The Nation’s Leading Expert on the Business of Family Child Care

Making Sense of New Depreciation Rules for 2020

January 22, 2020

Update: After further research I have made a change in this article to include land improvements and home improvements as eligible for the new $2,500 rule. See my article: “Clarification of the $2,500 Rule.”

Recent major changes in depreciation rules affecting family child care providers are both welcome and somewhat confusing.

They are welcome because they eliminate the need to depreciate many items, saving providers the headache of record keeping and increasing their current tax deductions.

But one of the changes is confusing and it’s not clear how it applies to providers.

Definition of Depreciation

The general rule is that items purchased for your business that last longer than one year and cost more than $200 must be depreciated. That is, instead of deducting the cost in one year you spread the deduction over a number of years to reflect the life of the item.

The new rules have drastically reduced the number of items that you must depreciate.

Categories of Depreciation

Here are the categories of items that are subject to depreciation rules:

Office Equipment (computers, printers, copiers, etc.)

If an item individually cost less than $2,500 you can deduct it in one year. Remember to attach a statement to your tax return electing this rule.

If an item individually cost more than $2,500 you must depreciate it over 5 years.

If you purchased it new and used it more than 50% in your business, you can use the 50% bonus depreciation rule.

If you purchased it new or used and use it more than 50% of the time in your business you can use the Section 179 rule and deduct the business portion in one year.

Personal Property (furniture, appliances, playground equipment, etc.)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If an item individually cost more than $2,500 you must depreciate it over 7 years.

If you purchased it new you can use the 50% bonus depreciation rule.

If you purchased it new or used and use it more than 50% of the time in your business you can use the Section 179 rule and deduct the business portion in one year.

Land Improvement (fence, patio, driveway)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If it costs more than $2,500 you must depreciate it over 15 years.

If you purchased it new you can use the 50% bonus depreciation rule.

Note: See below for a situation where you may be able to deduct land improvements in one year.

Home Improvement (remodeling, replacing roof, adding an addition)

If an item individually cost less than $2,500 you can deduct it in one year.

Remember to attach a statement to your tax return electing this rule.

If it costs more than $2,500 you must depreciate it over 39 years.

Note: See below for a situation where you may be able to deduct home improvements in one year.

Home

You cannot use the $2,500 rule or the 50% bonus depreciation rule.

You must depreciate your home over 39 years.

Repairs vs. Home Improvements

A repair can be deducted in one year, regardless of the cost. A home improvement must be depreciated over 39 years.

New IRS rules have expanded the definition of what is a repair vs. a home improvement. Now, under certain circumstances, the following could be considered as repairs: insulation, new windows or doors, new wood/tile floors, remodeling of a basement. See my article, “When is a Home Improvement Now a Repair?”

It’s not clear if the following are repairs or home improvements: new furnace, new air conditioning unit, hot water heater, bathroom remodeling, etc. I will continue to try to seek clarification on this and will update providers when I get additional information. Talk to your tax professional about whether your expense is a repair or improvement.

Safe Harbor for Small Taxpayers: Home and Land Improvements

You may be able to deduct home and land improvements in one year under the following conditions: The combination of the cost of home and land improvements and house repairs in one year is the lessor of 2% of the adjusted basis of the home or $10,000. If so deduct in one year. See my article “When Can Your Home/Land Improvements Be Deducted in One Year?”

Adjusted basis of home = purchase price of home, plus home improvements made before and after the business began

Example: $250,000 purchase price + $50,000 home improvements before 2020 = $300,000 x 2% = $6,000

Therefore, if a provider spent a total of less than $6,000 (the lessor of $6,000 and $10,000) on home and land improvements and house repairs in 2020 she would qualify for this rule. If her expenses were $6,500 this rule would not apply and the first $6,000 could not be deducted in one year.

Summary Considerations

  • Since most office equipment and personal property items shown above will cost individually less than $2,500 there is no need to depreciate them or to use the 50% bonus depreciation rule or the Section 179 rule.
  • If you are eligible to use the Section 179 rule, use it rather than the 50% bonus depreciation rule, unless you plan to go out of business in the next few years. The Section 179 rule allows you to deduct the entire business portion of an item in one year. But, if you use the Section 179 rule and later use the item less than 50% of the time for your business you will have to pay back some of the deductions you claimed.
  • If you do spend money on a land or home improvement that costs more then $2,500, check to see if you are eligible to use the Safe Harbor for Small Taxpayers rule and deduct them in one year.

Depreciation is the most complicated area of the tax law! These new changes do make it easier to deduct items, so it’s to your benefit to take advantage of them.

I’ve attached a handout that summarizes these rules that you can share with your tax professional or use in a training workshop.

My 2020 Family Child Care Tax Workbook and Organizer has a chapter on depreciation that explains these rules in more detail.

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