Back to top

Weekly News

Click here to go back

Selling your home? Consider these tax implications

Posted by Admin Posted on May 15 2019

Spring and summer are the optimum seasons for selling a home. And interest rates are currently attractive, so buyers may be out in full force in your area. Freddie Mac reports that the average 30-year fixed mortgage rate was 4.14% during the week of May 2, 2019, while the 15-year mortgage rate was 3.6%. This is down 0.41 and 0.43%, respectively, from a year earlier. 

But before you contact a realtor to sell your home, you should review the tax considerations.

Sellers can exclude some gain

If you’re selling your principal residence, and you meet certain requirements, you can exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for the exclusion is also excluded from the 3.8% net investment income tax. 

To qualify for the exclusion, you must meet these tests:

  • The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.
  • The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years. 

Handling bigger gains

What if you’re fortunate enough to have more than $250,000/$500,000 of profit when selling your home? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Other tax issues

Here are some additional tax considerations when selling a home:

Keep track of your basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a second home (for example, a vacation home), be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Your home is probably your largest investment. So before selling it, make sure you understand the tax implications. We can help you plan ahead to minimize taxes and answer any questions you have about your situation.

© 2019

Consider a Roth 401(k) plan — and make sure employees use it  

Posted by Admin Posted on May 13 2019

Roth 401(k) accounts have been around for 13 years now. Studies show that more employers are offering them each year. A recent study by the Plan Sponsor Council of America (PSCA) found that Roth 401(k)s are now available at 70% of employer plans, up from 55.6% of plans in 2016.  

However, despite the prevalence of employers offering Roth 401(k)s, most employees aren’t choosing to contribute to them. The PSCA found that only 20% of participants who have access to a Roth 401(k) made contributions to one in 2017. Perhaps it’s because they don’t understand them.  

If you offer a Roth 401(k) or you’re considering one, educate your employees about the accounts to boost participation.  

A 401(k) with a twist  

As the name implies, these plans are a hybrid — taking some characteristics from Roth IRAs and some from employer-sponsored 401(k)s.  

An employer with a 401(k), 403(b) or governmental 457(b) plan can offer designated Roth 401(k) accounts.  

As with traditional 401(k)s, eligible employees can elect to defer part of their salaries to Roth 401(k)s, subject to annual limits. The employer may choose to provide matching contributions. For 2019, a participating employee can contribute up to $19,000 ($25,000 if he or she is age 50 or older) to a Roth 401(k). The most you can contribute to a Roth IRA for 2019 is $6,000 ($7,000 for those age 50 or older).  

Note: The ability to contribute to a Roth IRA is phased out for upper-income taxpayers, but there’s no such restriction for a Roth 401(k).  

The pros and cons  

Unlike with traditional 401(k)s, contributions to employees’ accounts are made with after-tax dollars, instead of pretax dollars. Therefore, employees forfeit a key 401(k) tax benefit. On the plus side, after an initial period of five years, “qualified distributions” are 100% exempt from federal income tax, just like qualified distributions from a Roth IRA. In contrast, regular 401(k) distributions are taxed at ordinary-income rates, which are currently up to 37%.  

In general, qualified distributions are those:  

  • Made after a participant reaches age 59½, or  
  • Made due to death or disability.  

Therefore, you can take qualified Roth 401(k) distributions in retirement after age 59½ and pay no tax, as opposed to the hefty tax bill that may be due from traditional 401(k) payouts. And unlike traditional 401(k)s, which currently require retirees to begin taking required minimum distributions after age 70½, Roth 401(k)s have no mandate to take withdrawals.  

Not for everyone  

A Roth 401(k) is more beneficial than a traditional 401(k) for some participants, but not all. For example, it may be valuable for employees who expect to be in higher federal and state tax brackets in retirement. Contact us if you have questions about adding a Roth 401(k) to your benefits lineup.  

© 2019  

 
 

Check on your refund — and find out why the IRS might not send it  

Posted by Admin Posted on May 07 2019

It’s that time of year when many people who filed their tax returns in April are checking their mail or bank accounts to see if their refunds have landed. According to the IRS, most refunds are issued in less than 21 calendar days. However, it may take longer — and in rare cases, refunds might not come at all.  

Your refund status  

If you’re curious about when your refund will arrive, you can use the IRS “Where’s My Refund?” tool. Go to https://bit.ly/2cl5MZo and click “Check My Refund Status.” You’ll need your Social Security number, your filing status (single, married joint filer, etc.) and your exact refund amount.  

In some cases, taxpayers who are expecting a refund may be notified that all or part of their refunds aren’t going to be paid. A number of situations can cause this to happen. 

Refunds settle debts  

The Treasury Offset Program can use all, or part, of a refund to settle certain debts, including:  

  • Past-due federal tax debts,  
  • State income tax obligations,  
  • Past-due child and spousal support,  
  • Federal agency debts such as a delinquent student loan, and  
  • Certain unemployment compensation owed to a state. 

If the federal government is going to “offset” a refund to pay past-due debts, a letter is sent to the taxpayer listing the original refund, the offset amount and the agency that received the payment. If the taxpayer wants to dispute the offset, he or she should contact the relevant federal agency.  

Spousal relief 

If you file a joint tax return and your tax refund is applied to the past-due debts of your spouse, you may be able to get back your share of the joint refund. For example, let’s say a husband has back child support debt from before he was married. After he and his new spouse file a joint tax return, their joint refund is applied to his child support. His wife can apply for injured spouse relief to get her portion of the refund. This is done by filing Form 8379, “Injured Spouse Allocation.” 

No passports in significant cases  

Beyond having a refund taken by the government, owing a significant amount of back federal taxes can now also cause a taxpayer to have passport problems. Last year, the IRS began enforcing a tax law provision that gives the IRS the authority to notify the State Department about individuals who have “seriously delinquent tax debts.” The State Department is then tasked with denying the individuals new passports or revoking existing passports. 

For these purposes, a seriously delinquent tax debt is defined as an inflation-adjusted $50,000 or more. For 2019, the threshold is $52,000.  

Refund questions?  

In most cases, refunds are routinely sent to taxpayers within a few weeks. However, there may be some delays, or, in worst-case scenarios, refunds may be applied to debts owed to the federal or state governments. If you have questions about your refund, contact us.  

© 2019  

What type of expenses can’t be written off by your business?  

Posted by Admin Posted on May 07 2019

If you read the Internal Revenue Code (and you probably don’t want to!), you may be surprised to find that most business deductions aren’t specifically listed. It doesn’t explicitly state that you can deduct office supplies and certain other expenses. 

Some expenses are detailed in the tax code, but the general rule is contained in the first sentence of Section 162, which states you can write off “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

Basic definitions  

In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, insurance premiums to protect a store would be an ordinary business expense in the retail industry. 

A necessary expense is defined as one that’s helpful or appropriate. For example, let’s say a car dealership purchases an automatic defibrillator. It may not be necessary for the operation of the business, but it might be helpful and appropriate if an employee or customer suffers a heart attack.

It’s possible for an ordinary expense to be unnecessary — but, in order to be deductible, an expense must be ordinary and necessary.

In addition, a deductible amount must be reasonable in relation to the benefit expected. For example, if you’re attempting to land a $3,000 deal, a $65 lunch with a potential client should be OK with the IRS. (Keep in mind that the Tax Cuts and Jobs Act eliminated most deductions for entertainment expenses but retains the 50% deduction for business meals.)

Examples of not ordinary and unnecessary  

Not surprisingly, the IRS and courts don’t always agree with taxpayers about what qualifies as ordinary and necessary expenditures.  

In one case, a man engaged in a business with his brother was denied deductions for his private airplane expenses. The U.S. Tax Court noted that the taxpayer had failed to prove the expenses were ordinary and necessary to the business. In addition, only one brother used the plane and the flights were to places that the taxpayer could have driven to or flown to on a commercial airline. And, in any event, the stated expenses including depreciation expenses, weren’t adequately substantiated, the court added. (TC Memo 2018-108) 

In another case, the Tax Court ruled that a business owner wasn’t entitled to deduct legal and professional fees he’d incurred in divorce proceedings defending his ex-wife’s claims to his interest in, or portion of, distributions he received from his LLC. The IRS and the court ruled the divorce legal fees were nondeductible personal expenses and weren’t ordinary and necessary. (TC Memo 2018-80)  

Proceed with caution

The deductibility of some expenses is clear. But for other expenses, it can get more complicated. Generally, if an expense seems like it’s not normal in your industry — or if it could be considered fun, personal or extravagant in nature — you should proceed with caution. And keep records to substantiate the expenses you’re deducting. Consult with us for guidance.

© 2019  

Plug in tax savings for electric vehicles  

Posted by Admin Posted on May 01 2019

While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)  

However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.  

Tax credit basics  

You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.  

A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.  

The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.  

How the phaseout rule works  

The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.  

The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.  

Powering forward  

Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page: https://bit.ly/2vqC8vM. Contact us if you want more information about the tax breaks that may be available for these vehicles.  

© 2019  

 
 

Employee vs. independent contractor: How should you handle worker classification?  

Posted by Admin Posted on Apr 30 2019

Many employers prefer to classify workers as independent contractors to lower costs, even if it means having less control over a worker’s day-to-day activities. But the government is on the lookout for businesses that classify workers as independent contractors simply to reduce taxes or avoid their employee benefit obligations.

Why it matters

When your business classifies a worker as an employee, you generally must withhold federal income tax and the employee’s share of Social Security and Medicare taxes from his or her wages. Your business must then pay the employer’s share of these taxes, pay federal unemployment tax, file federal payroll tax returns and follow other burdensome IRS and U.S. Department of Labor rules.

You may also have to pay state and local unemployment and workers’ compensation taxes and comply with more rules. Dealing with all this can cost a bundle each year.

On the other hand, with independent contractor status, you don’t have to worry about employment tax issues. You also don’t have to provide fringe benefits like health insurance, retirement plans and paid vacations. If you pay $600 or more to an independent contractor during the year, you must file a Form 1099-MISC with the IRS and send a copy to the worker to report what you paid. That’s basically the extent of your bureaucratic responsibilities.

But if you incorrectly treat a worker as an independent contractor — and the IRS decides the worker is actually an employee — your business could be assessed unpaid payroll taxes plus interest and penalties. You also could be liable for employee benefits that should have been provided but weren’t, including penalties under federal laws.

Filing an IRS form

To find out if a worker is an employee or an independent contractor, you can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” Then, the IRS will let you know how to classify a worker. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Businesses should consult with us before filing Form SS-8 because it may alert the IRS that your business has worker classification issues — and inadvertently trigger an employment tax audit.

It can be better to simply treat independent contractors so the relationships comply with the tax rules. This generally includes not controlling how the workers perform their duties, ensuring that you’re not the workers’ only customer, providing annual Forms 1099 and, basically, not treating the workers like employees.

Workers can also ask for a determination

Workers who want an official determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to employee benefits and want to eliminate self-employment tax liabilities.

If a worker files Form SS-8, the IRS will send a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return the form to the IRS, which will render a classification decision.

Defending your position

If your business properly handles independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that stand up to IRS scrutiny.

© 2019

Casualty loss deductions: You can claim one only for a federally declared disaster 

Posted by Admin Posted on Apr 24 2019

Unforeseen disasters happen all the time and they may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act, eligible casualty loss victims could claim a deduction on their tax returns. But there are new restrictions that make these deductions much more difficult to take. 

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, or fire; an accident or act of vandalism; or even a terrorist attack.

Unfavorable change   

For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during 2019, there were presidential declarations of major disasters in parts of Iowa and Nebraska after severe storms and flooding. So victims there would be eligible for casualty loss deductions.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Special timing election  

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can help you get extra cash when you need it.  

This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating personal losses 

To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps:  

  1. Subtract any insurance proceeds. 
  2. Subtract $100 per casualty event.  
  3. Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.  

Important: Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2019, they are $12,200 for single filers, $18,350 for heads of households, and $24,400 for married joint-filing couples. 

So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.

We can help 

These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. If you have disaster-related losses, we can help you navigate the complex rules. 

© 2019

How entrepreneurs must treat expenses on their tax returns

Posted by Admin Posted on Apr 22 2019

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

  1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.

  2. Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

  3. No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

 

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

© 2019

Three questions you may have after you file your return

Posted by Admin Posted on Apr 17 2019

Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.  

Question #1: What tax records can I throw away now?   

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)  

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.  

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)  

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)  

Question #2: Where’s my refund?  

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.  

Question #3: Can I still collect a refund if I forgot to report something?  

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.  

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.  

We can help  

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time!  

© 2019  

 
 

Small Business Tax Brief

Posted by Admin Posted on Apr 15 2019

Deducting business meal expenses under today’s tax rules 

In the course of operating your business, you probably spend time and money “wining and dining” current or potential customers, vendors and employees. What can you deduct on your tax return for these expenses? The rules changed under the Tax Cuts and Jobs Act (TCJA), but you can still claim some valuable write-offs.

No more entertainment deductions

One of the biggest changes is that you can no longer deduct most business-related entertainment expenses. Beginning in 2018, the TCJA disallows deductions for entertainment expenses, including those for sports events, theater productions, golf outings and fishing trips.

Meal deductions still allowed

You can still deduct 50% of the cost of food and beverages for meals conducted with business associates. However, you need to follow three basic rules in order to prove that your expenses are business related:

  1. The expenses must be “ordinary and necessary” in carrying on your business. This means your food and beverage costs are customary and appropriate. They shouldn’t be lavish or extravagant.

  2. The expenses must be directly related or associated with your business. This means that you expect to receive a concrete business benefit from them. The principal purpose for the meal must be business. You can’t go out with a group of friends for the evening, discuss business with one of them for a few minutes, and then write off the check.

  3. You must be able to substantiate the expenses. There are requirements for proving that meal and beverage expenses qualify for a deduction. You must be able to establish the amount spent, the date and place where the meals took place, the business purpose and the business relationship of the people involved.

Set up detailed record keeping procedures to keep track of business meal costs. That way, you can prove them and the business connection in the event of an IRS audit.  

Other considerations

What if you spend money on food and beverages at an entertainment event? The IRS clarified in guidance (Notice 2018-76) that taxpayers can still deduct 50% of food and drink expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. The food-and-drink expenses should also be “stated separately from the cost of the entertainment on one or more bills, invoices or receipts,” according to the guidance.

Another related tax law change involves meals provided to employees on the business premises. Before the TCJA, these meals provided to an employee for the convenience of the employer were 100% deductible by the employer. Beginning in 2018, meals provided for the convenience of an employer in an on-premises cafeteria or elsewhere on the business property are only 50% deductible. After 2025, these meals won’t be deductible at all.

Plan ahead

As you can see, the treatment of meal and entertainment expenses became more complicated after the TCJA. Your tax advisor can keep you up to speed on the issues and suggest strategies to get the biggest tax-saving bang for your business meal bucks.

Seniors: Medicare premiums could lower your tax bill

Posted by Admin Posted on Apr 09 2019

Americans who are 65 and older qualify for basic Medicare insurance, and they may need to pay additional premiums to get the level of coverage they desire. The premiums can be expensive, especially if you're married and both you and your spouse are paying them. But one aspect of paying premiums might be positive: If you qualify, they may help lower your tax bill.

Medicare premium tax deductions

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return. This includes amounts for "Medigap" insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don't cover all their health care expenses. Coverage gaps include co–payments, co–insurance, deductibles and other costs. Medigap is private supplemental insurance that's intended to cover some or all gaps.

Fewer people now itemize

Qualifying for a medical expense deduction can be difficult for a couple of reasons. For 2019, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 10% of AGI. (This threshold was 7.5% for the 2018 tax year.)

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals are claiming itemized deductions.

However, if you have significant medical expenses (including Medicare health insurance premiums), you may itemize and collect some tax savings.

Important note: Self–employed people and shareholder–employees of S corporations can generally claim an above–the–line deduction for their health insurance premiums, including Medicare premiums. So, they don't need to itemize to get the tax savings from their premiums.

Other deductible medical expenses

In addition to Medicare premiums, you can deduct a variety of medical expenses, including those for ambulance services, dental treatment, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long–term care services, prescription medicines and others.

Keep in mind that many items that Medicare doesn't cover can be written off for tax purposes, if you qualify. You can also deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 20-cents-per-mile rate for 2019, or you can keep track of your actual out–of–pocket expenses for gas, oil and repairs.

Need more information?

Contact us if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax–planning strategy based on your personal circumstances.

© 2019

Divorcing business owners need to pay attention to tax implications 

Posted by Admin Posted on Apr 08 2019

If you’re getting a divorce, you know it’s a highly stressful time. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and your marital property will include all or part of it.

Transferring property tax-free

You can generally divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that, under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing basis and holding periods for the home and the stock would carry over to the person who receives them.

Tax-free transfers can occur before the divorce or at the time it becomes final. Tax-free treatment also applies to postdivorce transfers so long as they’re made “incident to divorce.” This means transfers that occur within:

  • A year after the date the marriage ends, or
  • Six years after the date the marriage ends if the transfers are made pursuant to your divorce agreement.

Future tax implications

Eventually, there will be tax implications for assets received tax-free in a divorce settlement. The ex-spouse who winds up owning an appreciated asset — when the fair market value exceeds the tax basis — generally must recognize taxable gain when it’s sold (unless an exception applies).

What if your ex-spouse receives 49% of your highly appreciated small business stock? Thanks to the tax-free transfer rule, there’s no tax impact when the shares are transferred. Your ex will continue to apply the same tax rules as if you had continued to own the shares, including carryover basis and carryover holding period. When your ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes. You will owe nothing.

Note that the person who winds up owning appreciated assets must pay the built-in tax liability that comes with them. From a net-of-tax perspective, appreciated assets are worth less than an equal amount of cash or other assets that haven’t appreciated. That’s why you should always take taxes into account when negotiating your divorce agreement.

In addition, the IRS now extends the beneficial tax-free transfer rule to ordinary-income assets, not just to capital-gains assets. For example, if you transfer business receivables or inventory to your ex-spouse in divorce, these types of ordinary-income assets can also be transferred tax-free. When the asset is later sold, converted to cash or exercised (in the case of nonqualified stock options), the person who owns the asset at that time must recognize the income and pay the tax liability.

Avoid adverse tax consequences

Like many major life events, divorce can have major tax implications. For example, you may receive an unexpected tax bill if you don’t carefully handle the splitting up of qualified retirement plan accounts (such as a 401(k) plan) and IRAs. And if you own a business, the stakes are higher. Your tax advisor can help you minimize the adverse tax consequences of settling your divorce under today’s laws.

© 2019

Make a deductible IRA contribution for 2018. It’s not too late!

Posted by Admin Posted on Apr 02 2019

Do you want to save more for retirement on a tax-favored basis? If so, and if you qualify, you can make a deductible traditional IRA contribution for the 2018 tax year between now and the tax filing deadline and claim the write-off on your 2018 return. Or you can contribute to a Roth IRA and avoid paying taxes on future withdrawals.

You can potentially make a contribution of up to $5,500 (or $6,500 if you were age 50 or older as of December 31, 2018). If you’re married, your spouse can potentially do the same, thereby doubling your tax benefits.

The deadline for 2018 traditional and Roth contributions for most taxpayers is April 15, 2019 (April 17 for those in Maine and Massachusetts).

There are some ground rules. You must have enough 2018 earned income (from jobs, self-employment or alimony) to equal or exceed your IRA contributions for the tax year. If you’re married, either spouse can provide the necessary earned income. And you can’t make a deductible contribution to a traditional IRA if you were 70½ or older as of December 31, 2018. (But you can make one to a Roth IRA after that age.)

Finally, deductible IRA contributions are phased out (reduced or eliminated) if last year’s modified adjusted gross income (MAGI) is too high.

Types of contributions

If you haven’t already maxed out your 2018 IRA contribution limit, consider making one of these three types of contributions by the April deadline:

1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2018 tax return. If you or your spouse do participate in an employer-sponsored plan, your deduction is subject to the following MAGI phaseout:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participated in 2018: $101,000–$121,000.
    • For a spouse who didn’t participate in 2018: $189,000–$199,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan: $63,000–$73,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution. But those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

2. Roth. Roth IRA contributions aren’t deductible, but qualified distributions — including growth — are tax-free, if you satisfy certain requirements.

Your ability to contribute, however, is subject to a MAGI-based phaseout:

  • For married taxpayers filing jointly: $189,000–$199,000.
  • For single and head-of-household taxpayers: $120,000–$135,000.

You can make a partial contribution if your 2018 MAGI is within the applicable range, but no contribution if it exceeds the top of the range.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions, you’ll only be taxed on the growth.

Act fast

Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making 2018 contributions and making the most of IRAs in 2019 and beyond.

© 2019

Understanding how taxes factor into an M&A transaction

Posted by Admin Posted on Apr 01 2019

Merger and acquisition activity has been brisk in recent years. If your business is considering merging with or acquiring another business, it’s important to understand how the transaction will be taxed under current law.  

Stocks vs. assets  

From a tax standpoint, a transaction can basically be structured in two ways:  

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.  

The now-permanent 21% corporate federal income tax rate under the Tax Cuts and Jobs Act (TCJA) makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.  

The TCJA’s reduced individual federal tax rates may also make ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also will be taxed at lower rates on a buyer’s personal tax return. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and, depending on future changes in Washington, they could be eliminated earlier or extended.  

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.  

Note: In some circumstances, a corporate stock purchase can be treated as an asset purchase by making a “Section 338 election.” Ask your tax advisor for details.  

Buyer vs. seller preferences   

For several reasons, buyers usually prefer to purchase assets rather than ownership interests. Generally, a buyer’s main objective is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.  

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.  

Meanwhile, sellers generally prefer stock sales for tax and nontax reasons. One of their main objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling business assets.  

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).  

Keep in mind that other issues, such as employee benefits, can also cause unexpected tax issues when merging with, or acquiring, a business.  

Professional advice is critical  

Buying or selling a business may be the most important transaction you make during your lifetime, so it’s important to seek professional tax advice as you negotiate. After a deal is done, it may be too late to get the best tax results. Contact us for the best way to proceed in your situation.  

© 2019 

 
 

Still working after age 70½? You may not have to begin 401(k) withdrawals  

Posted by Admin Posted on Mar 27 2019

If you participate in a qualified retirement plan, such as a 401(k), you must generally begin taking required withdrawals from the plan no later than April 1 of the year after which you turn age 70½. However, there’s an exception that applies to certain plan participants who are still working for the entire year in which they turn 70½.  

The basics of RMDs  

Required minimum distributions (RMDs) are the amounts you’re legally required to withdraw from your qualified retirement plans and traditional IRAs after reaching age 70½. Essentially, the tax law requires you to tap into your retirement assets — and begin paying taxes on them — whether you want to or not.  

Under the tax code, RMDs must begin to be taken from qualified pension, profit sharing and stock bonus plans by a certain date. That date is April 1 of the year following the later of the calendar year in which an employee:  

  • Reaches age 70½, or  
  • Retires from employment with the employer maintaining the plan under the “still working” exception.  

Once they begin, RMDs must generally continue each year. The tax penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.  

However, there’s an important exception to the still-working exception. If owner-employees own at least 5% of the company, they must begin taking RMDs from their 401(k)s beginning at 70½, regardless of their work status.  

The still-working rule doesn’t apply to distributions from IRAs (including SEPs or SIMPLE IRAs). RMDs from these accounts must begin no later than April 1 of the year following the calendar year such individuals turn age 70½, even if they’re not retired.  

The law and regulations don’t state how many hours an employee needs to work in order to postpone 401(k) RMDs. There’s no requirement that he or she work 40 hours a week for the exception to apply. However, the employee must be doing legitimate work and receiving W-2 wages.  

For a customized plan  

The RMD rules for qualified retirement plans (and IRAs) are complex. With careful planning, you can minimize your taxes and preserve more assets for your heirs. If you’re still working after age 70½, it may be beneficial to delay taking RMDs but there could also be disadvantages. Contact us to customize the optimal plan based on your individual retirement and estate planning goals.  

© 2019  

 
 

2019 Q2 tax calendar: Key deadlines for businesses and other employers 

Posted by Admin Posted on Mar 26 2019

Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.  

April 1   

  • File with the IRS if you’re an employer that will electronically file 2018 Form 1097, Form 1098, Form 1099 (other than those with an earlier deadline) and/or Form W-2G.  
  • If your employees receive tips and you file electronically, file Form 8027.  
  • If you’re an Applicable Large Employer and filing electronically, file Forms 1094-C and 1095-C with the IRS. For all other providers of minimum essential coverage filing electronically, file Forms 1094-B and 1095-B with the IRS.  

April 15  

  • If you’re a calendar-year corporation, file a 2018 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.  
  • Corporations pay the first installment of 2019 estimated income taxes.  

April 30   

  • Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941) and pay any tax due.  

May 10   

  • Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941), if you deposited on time and fully paid all of the associated taxes due.  

June 17   

  • Corporations pay the second installment of 2019 estimated income taxes.  

© 2019  

 
 

Stretch your college student’s spending money with the dependent tax credit 

Posted by Admin Posted on Mar 19 2019

If you’re the parent of a child who is age 17 to 23, and you pay all (or most) of his or her expenses, you may be surprised to learn you’re not eligible for the child tax credit. But there’s a dependent tax credit that may be available to you. It’s not as valuable as the child tax credit, but when you’re saving for college or paying tuition, every dollar counts!  

Background of the credits  

The Tax Cuts and Jobs Act (TCJA) increased the child credit to $2,000 per qualifying child under the age of 17. The law also substantially increased the phaseout income thresholds for the credit so more people qualify for it. Unfortunately, the TCJA eliminated dependency exemptions for older children for 2018 through 2025. But the TCJA established a new $500 tax credit for dependents who aren’t under-age-17 children who qualify for the child tax credit. However, these individuals must pass certain tests to be classified as dependents.  

A qualifying dependent for purposes of the $500 credit includes:  

  1. A dependent child who lives with you for over half the year and is over age 16 and up to age 23 if he or she is a student, and 
  2. Other nonchild dependent relatives (such as a grandchild, sibling, father, mother, grandfather, grandmother and other relatives).

To be eligible for the $500 credit, you must provide over half of the person’s support for the year and he or she must be a U.S. citizen, U.S. national or U.S. resident. 

Both the child tax credit and the dependent credit begin to phase out at $200,000 of modified adjusted gross income ($400,000 for married joint filers).  

The child’s income 

After the TCJA passed, it was unclear if your child would qualify you for the $500 credit if he or she had any gross income for the year. Fortunately, IRS Notice 2018-70 favorably resolved the income question. According to the guidance, a dependent will pass the income test for the 2018 tax year if he or she has gross income of $4,150 or less. (The $4,150 amount will be adjusted for inflation in future years.) 

More spending money 

Although $500 per child doesn’t cover much for today’s college student, it can help with books, clothing, software and other needs. Contact us with questions about whether you qualify for either the child or the dependent tax credits.  

© 2019 

Could your business benefit from the tax credit for family and medical leave?

Posted by Admin Posted on Mar 19 2019

The Tax Cuts and Jobs Act created a new federal tax credit for employers that provide qualified paid family and medical leave to their employees. It’s subject to numerous rules and restrictions and the credit is only available for two tax years — those beginning between January 1, 2018, and December 31, 2019. However, it may be worthwhile for some businesses.  

The value of the credit  

An eligible employer can claim a credit equal to 12.5% of wages paid to qualifying employees who are on family and medical leave, if the leave payments are at least 50% of the normal wages paid to them. For each 1% increase over 50%, the credit rate increases by 0.25%, up to a maximum credit rate of 25%.  

An eligible employee is one who’s worked for your company for at least one year, with compensation for the preceding year not exceeding 60% of the threshold for highly compensated employees for that year. For 2019, the threshold for highly compensated employees is $125,000 (up from $120,000 for 2018). That means a qualifying employee’s 2019 compensation can’t exceed $72,000 (60% × $120,000).  

Employers that claim the family and medical leave credit must reduce their deductions for wages and salaries by the amount of the credit.  

Qualifying leave  

For purposes of the credit, family and medical leave is defined as time off taken by a qualified employee for these reasons:  

  • The birth, adoption or fostering of a child (and to care for the child),  
  • To care for a spouse, child or parent with a serious health condition,  
  • If the employee has a serious health condition,  
  • Any qualifying need due to an employee’s spouse, child or parent being on covered active duty in the Armed Forces (or being notified of an impending call or order to covered active duty), and  
  • To care for a spouse, child, parent or next of kin who’s a covered veteran or member of the Armed Forces.  

Employer-provided vacation, personal, medical or sick leave (other than leave defined above) isn’t eligible.  

When a policy must be established   

The general rule is that, to claim the credit for your company’s first tax year that begins after December 31, 2017, your written family and medical leave policy must be in place before the paid leave for which the credit will be claimed is taken.  

However, under a favorable transition rule for the first tax year beginning after December 31, 2017, your company’s written leave policy (or an amendment to an existing policy) is considered to be in place as of the effective date of the policy (or amendment) rather than the later adoption date.  

Attractive perk  

The new family and medical leave credit could be an attractive perk for your company’s employees. However, it can be expensive because it must be provided to all qualifying full-time employees. Consult with us if you have questions or want more information.  

© 2019

 
 

The 2018 gift tax return deadline is almost here

Posted by Admin Posted on Mar 13 2019

Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2018 gift tax return — or whether filing one would be beneficial even if it isn’t required.  

Filing requirements  

Generally, you must file a gift tax return for 2018 if, during the tax year, you made gifts:  

  • That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),  
  • That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,  
  • That exceeded the $152,000 annual exclusion for gifts to a noncitizen spouse,  
  • To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2018,  
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or  
  • Of jointly held or community property.  

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.18 million for 2018). As you can see, some transfers require a return even if you don’t owe tax.  

No return required  

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as:  

  • Annual exclusion gifts,  
  • Present interest gifts to a U.S. citizen spouse,  
  • Educational or medical expenses paid directly to a school or health care provider, or  
  • Political or charitable contributions.  

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.  

Be ready for April 15  

The gift tax return deadline is the same as the income tax filing deadline. For 2018 returns, it’s April 15, 2019 — or October 15, 2019, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.  

© 2019 

 
 

There’s still time for small business owners to set up a SEP retirement plan for last year 

Posted by Admin Posted on Mar 12 2019

If you own a business and don’t have a tax-advantaged retirement plan, it’s not too late to establish one and reduce your 2018 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2018, and you can make contributions to it that you can deduct on your 2018 income tax return.  

Contribution deadlines  

A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2018 in 2019 as long as you do it before your 2018 return filing deadline. You have until the same deadline to make 2018 contributions and still claim a potentially substantial deduction on your 2018 return.  

Generally, other types of retirement plans would have to have been established by December 31, 2018, in order for 2018 contributions to be made (though many of these plans do allow 2018 contributions to be made in 2019).  

Discretionary contributions  

With a SEP, you can decide how much to contribute each year. You aren’t obligated to make any certain minimum contributions annually.  

But, if your business has employees other than you:  

  1. Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and  
  2. Employee accounts must be immediately 100% vested.  

The contributions go into SEP-IRAs established for each eligible employee.  

For 2018, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $55,000. (The 2019 cap is $56,000.)  

Next steps  

To set up a SEP, you just need to complete and sign the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.  

Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2018 (or 2019).   

© 2019  

 
 

Vehicle-expense deduction ins and outs for individual taxpayers

Posted by Admin Posted on Mar 07 2019

It’s not just businesses that can deduct vehicle-related expenses. Individuals also can deduct them in certain circumstances. Unfortunately, the Tax Cuts and Jobs Act (TCJA) might reduce your deduction compared to what you claimed on your 2017 return.  

For 2017, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. TCJA changes could also affect your tax benefit from medical and charitable miles.  

Current limits vs. 2017  

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. For 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.  

If you’re self-employed, business mileage is deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.  

Miles driven for a work-related move in 2017 were generally deductible “above the line” (that is, itemizing isn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.  

Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your AGI. For 2019, the floor returns to 10%, unless Congress extends the 7.5% floor.  

The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that it’s an itemized deduction. So, you can claim the deduction only if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).  

Differing mileage rates  

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The rates vary depending on the purpose and the year:  

  • Business: 54.5 cents (2018), 58 cents (2019)  
  • Medical: 18 cents (2018), 20 cents (2019)  
  • Moving: 18 cents (2018), 20 cents (2019)  
  • Charitable: 14 cents (2018 and 2019)  

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.  

Get help   

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your 2018 return and 2019 tax planning.

 
 

Will leasing equipment or buying it be more tax efficient for your business?

Posted by Admin Posted on Mar 05 2019

Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them. 

Pros and cons of leasing  

From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.) 

Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.  

Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.  

Pros and cons of buying 

Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.  

These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules. 

The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.  

Decision time

When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances. 

© 2019  

Careful tax planning required for incentive stock options

Posted by Admin Posted on Mar 01 2019

Incentive stock options (ISOs) are a popular form of compensation for executives and other employees of corporations. They allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the ISO grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. But careful tax planning is required because of the complex rules that apply.  

Tax advantages abound  

Although ISOs must comply with many rules, they receive tax-favored treatment. You owe no tax when ISOs are granted. You also owe no regular income tax when you exercise ISOs. There could be alternative minimum tax (AMT) consequences, but the AMT is less of a risk now because of the high AMT exemption under the Tax Cuts and Jobs Act.  

There are regular income tax consequences when you sell the stock. If you sell the stock after holding it at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT).  

If you sell the stock before long-term capital gains treatment applies, a "disqualifying disposition" occurs and any gain is taxed as compensation at ordinary-income rates.  

Impact on your 2018 return  

If you were granted ISOs in 2018, there likely isn’t any impact on your 2018 income tax return. But if in 2018 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2018 tax liability.  

It’s important to properly report the exercise or sale on your 2018 return to avoid potential interest and penalties for underpayment of tax.  

Planning for the future  

If you receive ISOs in 2019 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.  

Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.  

The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.  

If you need help tax planning for your ISOs, please contact us.  

© 2019

 
 

Beware the Ides of March — if you own a pass-through entity

Posted by Admin Posted on Feb 26 2019

Shakespeare’s words don’t apply just to Julius Caesar; they also apply to calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes. Why? The Ides of March, more commonly known as March 15, is the federal income tax filing deadline for these “pass-through” entities.  

Not-so-ancient history  

Until the 2016 tax year, the filing deadline for partnerships was the same as that for individual taxpayers: April 15 (or shortly thereafter if April 15 fell on a weekend or holiday). One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.  

For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.  

Avoiding a tragedy  

If you haven’t filed your calendar-year partnership or S corporation return yet and are worried about having sufficient time to complete it, you can avoid the tragedy of a late return by filing for an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 16, 2019, for 2018 returns). This is up from five months under the old law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 16, 2019, for 2018 returns.  

Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.  

Extending the drama  

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.  

But to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There probably won’t be any tax liability from the partnership or S corporation return. But, if filing for an extension for the entity return causes you to also have to file an extension for your personal return, it could cause you to owe interest and penalties in relation to your personal return.  

We can help you file your tax returns on a timely basis or determine whether filing for an extension is appropriate. Contact us today.  

© 2019  

 
 

Some of your deductions may be smaller (or nonexistent) when you file your 2018 tax return 

Posted by Admin Posted on Feb 19 2019

While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:

1. State and local tax deduction.For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.  

2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.  

3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.

4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)

5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.

Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.

© 2019  

The home office deduction: Actual expenses vs. the simplified method

Posted by Admin Posted on Feb 19 2019

If you run your business from your home or perform certain functions at home that are related to your business, you might be able to claim a home office deduction against your business income on your 2018 income tax return. There are now two methods for claiming this deduction: the actual expenses method and the simplified method.  

Basics of the deduction  

In general, you’ll qualify for a home office deduction if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for your business. 

Actual expenses  

Traditionally, taxpayers have deducted actual expenses when they claim a home office deduction.

Deductible home office expenses may include: 

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,  
  • A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
  • A depreciation allowance.

But keeping track of actual expenses can be time consuming.  

The simplified method  

Fortunately, there’s a simplified method that’s been available since 2013: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction will still be only $1,500 because of the cap on the deduction under this method.

As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers may qualify for a bigger deduction using the actual expense method. So, tracking your actual expenses can be worth the extra hassle. 

Flexibility in filing  

When claiming the home office deduction, you’re not locked into a particular method. For instance, you might choose the actual expense method on your 2018 return, use the simplified method when you file your 2019 return next year and then switch back to the actual expense method thereafter. The choice is yours.

Unsure whether you qualify for the home office deduction? Or wondering whether you should deduct actual expenses or use the simplified method? Contact us. We can help you determine what’s right for your specific situation.

© 2019  

3 big TCJA changes affecting 2018 individual tax returns and beyond  

Posted by Admin Posted on Feb 13 2019

When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.  

1. No more personal exemptions  

For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.  

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.  

2. Nearly doubled standard deduction

Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.  

For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly. 

The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.) 

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.  

3. Enhanced child credit 

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.  

The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.  

Maximize your tax savings 

These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019.  

© 2019  

When are LLC members subject to self-employment tax?  

Posted by Admin Posted on Feb 12 2019

Limited liability company (LLC) members commonly claim that their distributive shares of LLC income — after deducting compensation for services in the form of guaranteed payments — aren’t subject to self-employment (SE) tax. But the IRS has been cracking down on LLC members it claims have underreported SE income, with some success in court.  

SE tax background  

Self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax. Generally, if you’re a member of a partnership — including an LLC taxed as a partnership — that conducts a trade or business, you’re considered self-employed.

General partners pay SE tax on all their business income from the partnership, whether it’s distributed or not. Limited partners, however, are subject to SE tax only on any guaranteed payments for services they provide to the partnership. The rationale is that limited partners, who have no management authority, are more akin to passive investors.

(Note, however, that “service partners” in service partnerships, such as law firms, medical practices, and architecture and engineering firms, generally may not claim limited partner status regardless of their level of participation.)  

LLC uncertainty

Over the years, many LLC members have taken the position that they’re equivalent to limited partners and, therefore, exempt from SE tax (except on guaranteed payments for services). But there’s a big difference between limited partners and LLC members. Both enjoy limited personal liability, but, unlike limited partners, LLC members can actively participate in management without jeopardizing their liability protection.

Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. The IRS issued proposed regulations to that effect in 1997, but hasn’t finalized them — although it follows them as a matter of internal policy.

Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and has successfully litigated its position. The courts generally have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business. 

Review your situation 

The law in this area remains uncertain, particularly with regard to capital-intensive businesses. But given the IRS’s aggressiveness in collecting SE taxes from LLCs, LLC members should assess whether the IRS might claim that they’ve underpaid SE taxes.

Those who wish to avoid or reduce these taxes in the future may have some options, including converting to an S corporation or limited partnership, or restructuring their ownership interests. When evaluating these strategies, there are issues to consider beyond taxes. Contact us to discuss your specific situation.

© 2019 

Why you shouldn’t wait to file your 2018 income tax return

Posted by Admin Posted on Feb 08 2019

The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.

What is tax identity theft?

In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.

What if you haven’t received your W-2s and 1099s?

To file your tax return, you must have received all of your W-2s and 1099s. January 31 was the deadline for employers to issue 2018 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.

If you haven’t received a W-2 or 1099, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

What are other benefits of filing early?

Besides protecting yourself from tax identity theft, the most obvious benefit of filing early is that, if you’re getting a refund, you’ll get that refund sooner. The IRS expects more than nine out of ten refunds to be issued within 21 days.

But even if you owe tax, filing early can be beneficial. You still won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Keep in mind that some taxpayers who typically have gotten refunds in the past could find themselves owing tax when they file their 2018 return due to tax law changes under the Tax Cuts and Jobs Act (TCJA) and reduced withholding from 2018 paychecks.

Need help?

If you have questions about tax identity theft or would like help filing your 2018 return early, please contact us. While the new Form 1040 essentially does fit on a postcard, many taxpayers will also have to complete multiple schedules along with the form. And the TCJA has changed many tax breaks. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

Fundamental tax truths for C corporations

Posted by Admin Posted on Feb 08 2019

The flat 21% federal income tax rate for C corporations under the Tax Cuts and Jobs Act (TCJA) has been great news for these entities and their owners. But some fundamental tax truths for C corporations largely remain the same:

C corporations are subject to double taxation. Double taxation occurs when corporate income is taxed once at the corporate level and again at the shareholder level as dividends are paid out. The cost of double taxation, however, is now generally less because of the 21% corporate rate.

And double taxation isn’t a problem when a C corporation needs to retain all its earnings to finance growth and capital investments. Because all the earnings stay “inside” the corporation, no dividends are paid to shareholders, and, therefore, there’s no double taxation.

Double taxation also isn’t an issue when a C corporation’s taxable income levels are low. This can often be achieved by paying reasonable salaries and bonuses to shareholder-employees and providing them with tax-favored fringe benefits (deductible by the corporation and tax-free to the recipient shareholder-employees).

C corporation status isn’t generally advisable for ventures with appreciating assets or certain depreciable assets. If assets such as real estate are eventually sold for substantial gains, it may be impossible to extract the profits from the corporation without being subject to double taxation. In contrast, if appreciating assets are held by a pass-through entity (such as an S corporation, partnership or limited liability company treated as a partnership for tax purposes), gains on such sales will be taxed only once, at the owner level.

But assets held by a C corporation don’t necessarily have to appreciate in value for double taxation to occur. Depreciation lowers the tax basis of the property, so a taxable gain results whenever the sale price exceeds the depreciated basis. In effect, appreciation can be caused by depreciation when depreciable assets hold their value.

To avoid this double-taxation issue, you might consider using a pass-through entity to lease to your C corporation appreciating assets or depreciable assets that will hold their value.

C corporation status isn’t generally advisable for ventures that will incur ongoing tax losses. When a venture is set up as a C corporation, losses aren’t passed through to the owners (the shareholders) like they would be in a pass-through entity. Instead, they create corporate net operating losses (NOLs) that can be carried over to future tax years and then used to offset any corporate taxable income.

This was already a potential downside of C corporations, because it can take many years for a start-up to be profitable. Now, under the TCJA, NOLs that arise in tax years beginning after 2017 can’t offset more than 80% of taxable income in the NOL carryover year. So it may take even longer to fully absorb tax losses.

Do you have questions about C corporation tax issues post-TCJA? Contact us.

Investment interest expense is still deductible, but that doesn’t necessarily mean you’ll benefit  

Posted by Admin Posted on Jan 30 2019

As you likely know by now, the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many deductions for individuals. One itemized deduction the TCJA kept intact is for investment interest expense. This is interest on debt used to buy assets held for investment, such as margin debt used to buy securities. But if you have investment interest expense, you can’t count on benefiting from the deduction.  

3 hurdles  

There are a few hurdles you must pass to benefit from the investment interest deduction even if you have investment interest expense:  

  1. You must itemize deductions. In the past this might not have been a hurdle, because you may have typically had enough itemized deductions to easily exceed the standard deduction. But the TCJA nearly doubled the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018. Plus, some of your other itemized deductions, such as your state and local tax deduction, might be smaller on your 2018 return because of TCJA changes. So you might not have enough itemized deductions to exceed your standard deduction and benefit from itemizing.  
  2. You can’t have incurred the interest to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.  
  3. You must have sufficient “net investment income.” The investment interest deduction is limited to your net investment income. For the purposes of this deduction, net investment income generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.  

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.  

Will interest expense save you tax?  

As you can see, the answer to the question depends on multiple factors. We can review your situation and help you determine whether you can benefit from the investment interest expense deduction on your 2018 tax return.  

© 2019  

 
 

There’s still time to get substantiation for 2018 donations

Posted by Admin Posted on Jan 23 2019

If you’re like many Americans, letters from your favorite charities have been appearing in your mailbox in recent weeks acknowledging your 2018 year-end donations. But what happens if you haven’t received such a letter — can you still claim an itemized deduction for the gift on your 2018 income tax return? It depends.

Basic requirements

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.

“Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So if you made a donation in 2018 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2018 return. Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.

Substantiation is serious business

Don’t take the substantiation requirements lightly. In one U.S. Tax Court case, the taxpayers substantiated a donation deduction with canceled checks and a written acknowledgment. The IRS denied the deduction, however, because the acknowledgment failed to state whether the taxpayers received goods or services in consideration for their donation.

The taxpayers obtained a second acknowledgment including the required statement. But the Tax Court didn’t accept it because it wasn’t contemporaneous (that is, it was obtained after the tax return was filed).

2018 and 2019 deductions

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2018 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2019 return.

© 2019

Many tax-related limits affecting businesses increase for 2019

Posted by Admin Posted on Jan 22 2019

A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

  • Section 179 expensing:
    • Limit: $1.02 million (up from $1 million)
    • Phaseout: $2.55 million (up from $2.5 million)
  • Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:
    • Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
    • Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
    • Other filers: $160,700-$210,700 (up from $157,500-$207,500)

 

Retirement plans

  • Employee contributions to 401(k) plans: $19,000 (up from $18,500)
  • Catch-up contributions to 401(k) plans: $6,000 (no change)
  • Employee contributions to SIMPLEs: $13,000 (up from $12,500)
  • Catch-up contributions to SIMPLEs: $3,000 (no change)
  • Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
  • Maximum compensation used to determine contributions: $280,000 (up from $275,000)
  • Annual benefit for defined benefit plans: $225,000 (up from $220,000)
  • Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
  • Compensation defining “key employee”: $180,000 (up from $175,000)

 

Other employee benefits

  • Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
  • Health Savings Account contributions:
    • Individual coverage: $3,500 (up from $3,450)
    • Family coverage: $7,000 (up from $6,900)
    • Catch-up contribution: $1,000 (no change)
  • Flexible Spending Account contributions:
    • Health care: $2,700 (up from $2,650)
    • Dependent care: $5,000 (no change)

     

    Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information.

    © 2019

What will your marginal income tax rate be?

Posted by Admin Posted on Jan 15 2019

While the Tax Cuts and Jobs Act (TCJA) generally reduced individual tax rates for 2018 through 2025, some taxpayers could see their taxes go up due to reductions or eliminations of certain tax breaks — and, in some cases, due to their filing status. But some may see additional tax savings due to their filing status.

Unmarried vs. married taxpayers

In an effort to further eliminate the marriage “penalty,” the TCJA made changes to some of the middle tax brackets. As a result, some single and head of household filers could be pushed into higher tax brackets more quickly than pre-TCJA. For example, the beginning of the 32% bracket for singles for 2018 is $157,501, whereas it was $191,651 for 2017 (though the rate was 33%). For heads of households, the beginning of this bracket has decreased even more significantly, to $157,501 for 2018 from $212,501 for 2017.

Married taxpayers, on the other hand, won’t be pushed into some middle brackets until much higher income levels for 2018 through 2025. For example, the beginning of the 32% bracket for joint filers for 2018 is $315,001, whereas it was $233,351 for 2017 (again, the rate was 33% then).

2018 filing and 2019 brackets

Because there are so many variables, it will be hard to tell exactly how specific taxpayers will be affected by TCJA changes, including changes to the brackets, until they file their 2018 tax returns. In the meantime, it’s a good idea to begin to look at 2019. As before the TCJA, the tax brackets are adjusted annually for inflation.

Below is a look at the 2019 brackets under the TCJA. Contact us for help assessing what your tax rate likely will be for 2019 — and for help filing your 2018 tax return.

Single individuals

10%: $0 - $9,700
12%: $9,701 - $39,475
22%: $39,476 - $84,200
24%: $84,201 - $160,725
32%: $160,726 - $204,100
35%: $204,101 - $510,300
37%: Over $510,300

Heads of households

10%: $0 - $13,850
12%: $13,851 - $52,850
22%: $52,851 - $84,200
24%: $84,201 - $160,700
32%: $160,701 - $204,100
35%: $204,101 - $510,300
37%: Over $510,300

Married individuals filing joint returns and surviving spouses

10%: $0 - $19,400
12%: $19,401 - $78,950
22%: $78,951 - $168,400
24%: $168,401 - $321,450
32%: $321,451 - $408,200
35%: $408,201 - $612,350
37%: Over $612,350

Married individuals filing separate returns

10%: $0 - $9,700
12%: $9,701 - $39,475
22%: $39,476 - $84,200
24%: $84,201 - $160,725
32%: $160,726 - $204,100
35%: $204,101 - $306,175
37%: Over $306,175

© 2019

Higher mileage rate may mean larger tax deductions for business miles in 2019  

Posted by Admin Posted on Jan 14 2019

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.  

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.  

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.  

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.  

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.  

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.  

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear. 

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it. 

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return. 

© 2019 

2 major tax law changes for individuals in 2019

Posted by Admin Posted on Jan 10 2019

While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look.  

1. Medical expense deduction threshold  

With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that was already difficult for many taxpayers to meet, and it may be even harder to meet this year.  

The TCJA temporarily reduced the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI. Unfortunately, the reduction applies only to 2017 and 2018. So for 2019, the threshold returns to 10% — unless legislation is signed into law extending the 7.5% threshold. Only qualified, unreimbursed expenses exceeding the threshold can be deducted.  

Also, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018 through 2025, many taxpayers who’ve typically itemized may no longer benefit from itemizing.  

2. Tax treatment of alimony  

Alimony has generally been deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, hasn’t been deductible by the payer or taxable income to the recipient.  

Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. So, essentially, alimony will be treated the same way as child support.  

Because the recipient ex-spouse would typically pay income taxes at a rate lower than that of the paying ex-spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.  

TCJA impact on 2018 and 2019  

Most TCJA changes went into effect in 2018, but not all. Contact us if you have questions about the medical expense deduction or the tax treatment of alimony — or any other changes that might affect you in 2019. We can also help you assess the impact of the TCJA when you file your 2018 tax return.  

© 2019  

 
 

Is there still time to pay 2018 bonuses and deduct them on your 2018 return?

Posted by Admin Posted on Jan 08 2019

There aren’t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company).  

Basic requirements  

First, only accrual-basis taxpayers can take advantage of the 2½ month rule. Cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned.  

Second, even for accrual-basis taxpayers, the 2½ month rule isn’t automatic. The bonuses can be deducted on the tax return for the year they’re earned only if the business’s bonus liability was fixed by the end of the year.  

Passing the test  

For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the “all-events test.” Under this test, a liability is incurred when:  

  • All events have occurred that establish the taxpayer’s liability,  
  • The amount of the liability can be determined with reasonable accuracy, and  
  • Economic performance has occurred.  

Generally, the last requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.  

For example, many bonus plans require an employee to still be an employee on the payment date to receive the bonus. Even when the amount of each employee’s bonus is fixed at the end of the tax year, if employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Why? The business’s liability for bonuses isn’t fixed until then.  

Diving into a bonus pool  

Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement. According to the IRS, employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer.  

Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year. It doesn’t matter that amounts allocated to specific employees aren’t determined until the payment date.  

When you can deduct bonuses  

So does your current bonus plan allow you to take 2018 deductions for bonuses paid in early 2019? If you’re not sure, contact us. We can review your situation and determine when you can deduct your bonus payments.  

If you’re an accrual taxpayer but don’t qualify to accelerate your bonus deductions this time, we can help you design a bonus plan for 2019 that will allow you to accelerate deductions when you file your 2019 return next year.  

© 2019

 
 

A review of significant TCJA provisions impacting individual taxpayers  

Posted by Admin Posted on Jan 02 2019

Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.  

Rates and exemptions

Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes: 

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • Elimination of personal and dependent exemptions 
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers for 2018
  • Approximate doubling of the gift and estate tax exemption, to $11.18 million for 2018
Credits and deductions

Generally, tax breaks are reduced for 2018. However, a few are enhanced. Here’s a closer look: 

  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit  
  • Near doubling of the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018  
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes  
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income or sales taxes; $5,000 for separate filers)  
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions 
  • Elimination of the deduction for interest on home equity debt
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)  
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
  • Elimination of the AGI-based reduction of certain itemized deductions
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year 
How are you affected? 

As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning.  

© 2019  

A refresher on major tax law changes for small-business owners 

Posted by Admin Posted on Dec 31 2018

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.  

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.  

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:  

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%  
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)  
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability  
Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:  

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%  
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%  
  • Repeal of the 20% corporate alternative minimum tax (AMT)  
Tax break positives 

These changes generally apply to both pass-through entities and corporations:

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets  
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million 
  • A new tax credit for employer-paid family and medical leave  
Tax break negatives

These changes generally also apply to both pass-through entities and corporations:  

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply) 
  • New limits on net operating loss (NOL) deductions 
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction” 
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)  
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation 
Preparing for 2018 filing 

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.  

© 2018 

You may be able to save more for retirement in 2019 

Posted by Admin Posted on Dec 27 2018

Retirement plan contribution limits are indexed for inflation, and many have gone up for 2019, giving you opportunities to increase your retirement savings:  

  • Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $19,000 (up from $18,500)  
  • Contributions to defined contribution plans: $56,000 (up from $55,000)  
  • Contributions to SIMPLEs: $13,000 (up from $12,500)  
  • Contributions to IRAs: $6,000 (up from $5,500)  

One exception is catch-up contributions for taxpayers age 50 or older, which remain at the same levels as for 2018:  

  • Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $6,000  
  • Catch-up contributions to SIMPLEs: $3,000  
  • Catch-up contributions to IRAs: $1,000  

Keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.  

For more on how to make the most of your tax-advantaged retirement-saving opportunities in 2019, please contact us.  

© 2018  

 
 

Business owners: An exit strategy should be part of your tax planning 

Posted by Admin Posted on Dec 26 2018

Tax planning is a juggling act for business owners. You have to keep your eye on your company’s income and expenses and applicable tax breaks (especially if you own a pass-through entity). But you also must look out for your own financial future.

For example, you need to develop an exit strategy so that taxes don’t trip you up when you retire or leave the business for some other reason. An exit strategy is a plan for passing on responsibility for running the company, transferring ownership and extracting your money from the business.

Buy-sell agreement

When a business has more than one owner, a buy-sell agreement can be a powerful tool. The agreement controls what happens to the business when a specified event occurs, such as an owner’s retirement, disability or death. Among other benefits, a well-drafted agreement:

  • Provides a ready market for the departing owner’s shares,
  • Prescribes a method for setting a price for the shares, and  
  • Allows business continuity by preventing disagreements caused by new owners.  

    A key issue with any buy-sell agreement is providing the buyer(s) with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income.

    Succession within the family

    You can pass your business on to family members by giving them interests, selling them interests or doing some of each. Be sure to consider your income needs, the tax consequences, and how family members will feel about your choice.

    Under the annual gift tax exclusion, you can gift up to $15,000 of ownership interests without using up any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift.

    With the gift and estate tax exemption approximately doubled through 2025 ($11.4 million for 2019), gift and estate taxes may be less of a concern for some business owners. But others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership.

    Plan ahead

    If you don’t have co-owners or want to pass the business to family members, other options include a management buyout, an employee stock ownership plan (ESOP) or a sale to an outsider. Each involves a variety of tax and nontax considerations.

    Please contact us to discuss your exit strategy. To be successful, your strategy will require planning well in advance of the transition.

    © 2018  

Act soon to save 2018 taxes on your investments

Posted by Admin Posted on Dec 21 2018

Do you have investments outside of tax-advantaged retirement plans? If so, you might still have time to shrink your 2018 tax bill by selling some investments • you just need to carefully select which investments you sell.

Try balancing gains and losses

If you’ve sold investments at a gain this year, consider selling some losing investments to absorb the gains. This is commonly referred to as “harvesting” losses.

If, however, you’ve sold investments at a loss this year, consider selling other investments in your portfolio that have appreciated, to the extent the gains will be absorbed by the losses. If you believe those appreciated investments have peaked in value, essentially you’ll lock in the peak value and avoid tax on your gains.

Review your potential tax ratesAt the federal level, long-term capital gains (on investments held more than one year) are taxed at lower rates than short-term capital gains (on investments held one year or less). The Tax Cuts and Jobs Act (TCJA) retains the 0%, 15% and 20% rates on long-term capital gains. But, for 2018 through 2025, these rates have their own brackets, instead of aligning with various ordinary-income brackets.

For example, these are the thresholds for the top long-term gains rates for 2018:

  • Singles: $425,800
  • Heads of households: $452,400
  • Married couples filing jointly: $479,000

But the top ordinary-income rate of 37%, which also applies to short-term capital gains, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. The TCJA also retains the 3.8% net investment income tax (NIIT) and its $200,000 and $250,000 thresholds.

Don't forget the netting rules

Before selling investments, consider the netting rules for gains and losses, which depend on whether gains and losses are long term or short term. To determine your net gain or loss for the year, long-term capital losses offset long-term capital gains before they offset short-term capital gains. In the same way, short-term capital losses offset short-term capital gains before they offset long-term capital gains.

You may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income. Any remaining net losses are carried forward to future years.

Time is running out

By reviewing your investment activity year-to-date and selling certain investments by year end, you may be able to substantially reduce your 2018 taxes. But act soon, because time is running out.

Keep in mind that tax considerations shouldn’t drive your investment decisions. You also need to consider other factors, such as your risk tolerance and investment goals.

We can help you determine what makes sense for you. Please contact us.

© 2018

6 last-minute tax moves for your business

Posted by Admin Posted on Dec 19 2018

Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:  

  • Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.  
  • Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.  
  • Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.  
  • Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.  
  • Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).  
  • Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.  
  • Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next.  

    © 2018  

     
     

    Year-end tax and financial to-do list for individuals

    Posted by Admin Posted on Dec 12 2018

    With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends:  

    Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.  

    Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)  

    Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.  

    Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).  

    Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.  

    Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).  

    Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)  

    For assistance with these and other year-end planning ideas, please contact us.  

    © 2018  

     
     

    Can a PTO contribution arrangement help your employees and your business?

    Posted by Admin Posted on Dec 12 2018

    As the year winds to a close, most businesses see employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, find themselves particularly short-staffed in December because they don’t allow unused paid time off (PTO) to be rolled over to the new year, or they allow only very limited rollovers.  

    There are good business reasons to limit PTO rollovers. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.  

    Retirement saving with a twist  

    A PTO contribution arrangement allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.  

    This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.  

    Good for the business  

    Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).  

    A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.  

    Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who want to save more for retirement or don’t care about having a lot of PTO.  

    Set-up is simple  

    To offer a PTO contribution arrangement, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.  

    Have questions about PTO contribution arrangements? Contact us. We can help you assess whether such an arrangement would make sense for your business.  

    © 2018  

     
     

    Check deductibility before making year-end charitable gifts 

    Posted by Admin Posted on Dec 07 2018

    As the holidays approach and the year draws to a close, many taxpayers make charitable gifts — both in the spirit of the season and as a year-end tax planning strategy. But with the tax law changes that go into effect in 2018 and the many rules that apply to the charitable deduction, it’s a good idea to check deductibility before making any year-end donations.  

    Confirm you can still benefit from itemizing  

    Last year’s Tax Cuts and Jobs Act (TCJA) didn’t put new limits on or suspend the charitable deduction, like it did to many other itemized deductions. Nevertheless, it will reduce or eliminate the tax benefits of charitable giving for many taxpayers this year.  

    Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA significantly increases the standard deduction, to $24,000 for married couples filing jointly, $18,000 for heads of households, and $12,000 for singles and married couples filing separately.  

    The nearly doubled standard deduction combined with the new limits or suspensions of some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your donations won’t save you tax.  

    So before you make any year-end charitable gifts, total up your potential itemized deductions for the year, including the donations you’re considering. If the total is less than your standard deduction, your year-end donations won’t provide a tax benefit.  

    You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.  

    Meet the delivery deadline  

    To be deductible on your 2018 return, a charitable gift must be made by Dec. 31, 2018. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:  

    Check. The date you mail it.  

    Credit card. The date you make the charge.  

    Stock certificate. The date you mail the properly endorsed stock certificate to the charity.  

    Make sure the organization is “qualified”  

    To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.  

    The IRS’s online search tool, Tax Exempt Organization Search, can help you easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access this tool at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly. Remember that political donations aren’t deductible.  

    Consider other rules  

    We’ve discussed only some of the rules for the charitable deduction; many others apply. We can answer any questions you have about the deductibility of donations or changes to the standard deduction and itemized deductions.  

    © 2018  

     
     

    2019 Q1 tax calendar: Key deadlines for businesses and other employers  

    Posted by Admin Posted on Dec 05 2018

    Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.  

    January 31  

    • File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.  
    • Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.  
    • File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.  
    • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.  
    • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)  
    • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.  

    February 28  

    • File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)  

    March 15  

    • If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.  

    © 2018  

     
     

    Does prepaying property taxes make sense anymore?  

    Posted by Admin Posted on Nov 29 2018

    Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?  

    The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.  

    What’s changed?  

    The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.  

    For property tax prepayment to make sense, two things must happen:  

    1. You must itemize (that is, your itemized deductions must exceed the standard deduction), and  
    2. Your other SALT expenses for the year must be less than $10,000.  

    If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.  

    Example  

    Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.  

    Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.  

    Look before you leap  

    Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.  

    For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.  

    © 2018  

     
     

    When holiday gifts and parties are deductible or taxable

    Posted by Admin Posted on Nov 27 2018

    The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.  

    Gifts to customers  

    When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.  

    The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”  

    Gifts to employees  

    Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”  

    These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.  

    De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.  

    Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.  

    Holiday parties  

    The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.  

    Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.  

    Gifts that give back  

    If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.  

    Catch-up retirement plan contributions can be particularly advantageous post-TCJA

    Posted by Admin Posted on Nov 20 2018

    Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past because of changes under the Tax Cuts and Jobs Act (TCJA).  

    Catching up  

    Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.  

    So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.  

    More benefits now?  

    This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.  

    If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.  

    Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.  

    2018 contribution limits  

    Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.  

    But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.  

    Additional options  

    Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan. Please contact us for more information about catch-up contributions and other year-end tax planning strategies.  

    © 2018  

     
     

    Tax reform expands availability of cash accounting

    Posted by Admin Posted on Nov 20 2018

    Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.  

    What’s changed?  

    Previously, the cash method was unavailable to certain businesses, including:  

    • C corporations — as well as partnerships (or limited liability companies taxed as partnerships) with C corporation partners — whose average annual gross receipts for the previous three tax years exceeded $5 million, and  
    • Businesses required to account for inventories, whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for certain industries).  

    In addition, construction companies whose average annual gross receipts for the previous three tax years exceeded $10 million were required to use the percentage-of-completion method (PCM) to account for taxable income from long-term contracts (except for certain home construction contracts). Generally, the PCM method is less favorable, from a tax perspective, than the completed-contract method.  

    The TCJA raised all of these thresholds to $25 million, beginning with the 2018 tax year. In other words, if your business’s average gross receipts for the previous three tax years is $25 million or less, you generally now will be eligible for the cash method, regardless of how your business is structured, your industry or whether you have inventories. And construction firms under the threshold need not use PCM for jobs expected to be completed within two years.  

    You’re also eligible for streamlined inventory accounting rules. And you’re exempt from the complex uniform capitalization rules, which require certain expenses to be capitalized as inventory costs.  

    Should you switch?  

    If you’re eligible to switch to the cash method, you need to determine whether it’s the right method for you. Usually, if a business’s receivables exceed its payables, the cash method will allow more income to be deferred than will the accrual method. (Note, however, that the TCJA has a provision that limits the cash method’s advantages for businesses that prepare audited financial statements or file their financial statements with certain government entities.) It’s also important to consider the costs of switching, which may include maintaining two sets of books.  

    The IRS has established procedures for obtaining automatic consent to such a change, beginning with the 2018 tax year, by filing Form 3115 with your tax return. Contact us to learn more.  

    © 2018

     
     

    Mutual funds: Handle with care at year end

    Posted by Admin Posted on Nov 13 2018

    As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.  

    Avoid surprise capital gains  

    Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.  

    For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.  

    Buyer beware  

    Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.  

    In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.  

    Seller beware  

    If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.  

    When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.  

    Think beyond just taxes  

    Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.  

    But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.  

    © 2018  

     
     

    It's not too late: You can still set up a retirement plan for 2018

    Posted by Admin Posted on Nov 13 2018

    If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!  

    More benefits  

    Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.  

    If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.  

    And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.  

    3 options to consider  

    Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:  

    1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.  

    2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.  

    3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.  

    You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.  

    Sound good?  

    If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.  

    © 2018  

     
     

    Time for NQDC plan deferral elections

    Posted by Admin Posted on Nov 07 2018

    Time for NQDC plan deferral elections  

    If you’re an executive or other key employee, your employer may offer you a nonqualified deferred compensation (NQDC) plan. As the name suggests, NQDC plans pay employees in the future for services currently performed. The plans allow deferral of the income tax associated with the compensation.  

    But to receive this attractive tax treatment, NQDC plans must meet many requirements. One is that employees must make the deferral election before the year they perform the services for which the compensation is earned. So, if you wish to defer part of your 2019 compensation, you generally must make the election by the end of 2018.  

    NQDC plans vs. qualified plans  

    NQDC plans differ from qualified plans, such as 401(k)s, in that:  

    • NQDC plans can favor highly compensated employees,  
    • Although your income tax liability can be deferred, your employer can’t deduct the NQDC until you recognize it as income, and  
    • Any NQDC plan funding isn’t protected from your employer’s creditors.  

    While some rules are looser for NQDC plans, there are also many rules that apply to them that don’t apply to qualified plans.  

    2 more NQDC rules  

    In addition to the requirement that deferral elections be made before the start of the year, there are two other important NQDC rules to be aware of:  

    1. Distributions. Benefits must be paid on a specified date, according to a fixed payment schedule or after the occurrence of a specified event — such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.  

    2. Elections to make certain changes. The timing of benefits can be delayed but not accelerated. Elections to change the timing or form of a payment must be made at least 12 months in advance. Also, new payment dates must be at least five years after the date the payment would otherwise have been made.  

    Be aware that the penalties for noncompliance with NQDC rules can be severe: You can be taxed on plan benefits at the time of vesting, and a 20% penalty and interest charges also may apply. So if you’re receiving NQDC, check with your employer to make sure it’s addressing any compliance issues.  

    No deferral of employment tax  

    Another important NQDC tax issue is that employment taxes are generally due when services are performed or when there’s no longer a substantial risk of forfeiture, whichever is later. This is true even though the compensation isn’t actually paid or recognized for income tax purposes until later years.  

    So your employer may withhold your portion of the tax from your salary or ask you to write a check for the liability. Or your employer might pay your portion, in which case you’ll have additional taxable income.  

    Next steps  

    Questions about NQDC — or other executive comp, such as incentive stock options or restricted stock? Contact us. We can answer them and help you determine what, if any, steps you need to take before year end to defer taxes and avoid interest and penalties.  

    © 2018  

    Buy business assets before year end to reduce your 2018 tax liability

    Posted by Admin Posted on Nov 06 2018

    The Tax Cuts and Jobs Act (TCJA) has enhanced two depreciation-related breaks that are popular year-end tax planning tools for businesses. To take advantage of these breaks, you must purchase qualifying assets and place them in service by the end of the tax year. That means there’s still time to reduce your 2018 tax liability with these breaks, but you need to act soon.  

    Section 179 expensing  

    Sec. 179 expensing is valuable because it allows businesses to deduct up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. Sec. 179 expensing can be used for assets such as equipment, furniture and software. Beginning in 2018, the TCJA expanded the list of qualifying assets to include qualified improvement property, certain property used primarily to furnish lodging and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.   

    The maximum Sec. 179 deduction for 2018 is $1 million, up from $510,000 for 2017. The deduction begins to phase out dollar-for-dollar for 2018 when total asset acquisitions for the tax year exceed $2.5 million, up from $2.03 million for 2017.  

    100% bonus depreciation  

    For qualified assets that your business places in service in 2018, the TCJA allows you to claim 100% first-year bonus depreciation • compared to 50% in 2017. This break is available when buying computer systems, software, machinery, equipment and office furniture. The TCJA has expanded eligible assets to include used assets; previously, only new assets were eligible.  

    However, due to a TCJA drafting error, qualified improvement property will be eligible only if a technical correction is issued. Also be aware that, under the TCJA, certain businesses aren’t eligible for bonus depreciation in 2018, such as real estate businesses that elect to deduct 100% of their business interest and auto dealerships with floor plan financing (if the dealership has average annual gross receipts of more than $25 million for the three previous tax years).  

    Traditional, powerful strategy  

    Keep in mind that Sec. 179 expensing and bonus depreciation can also be used for business vehicles. So purchasing vehicles before year end could reduce your 2018 tax liability. But, depending on the type of vehicle, additional limits may apply.  

    Investing in business assets is a traditional and powerful year-end tax planning strategy, and it might make even more sense in 2018 because of the TCJA enhancements to Sec. 179 expensing and bonus depreciation. If you have questions about these breaks or other ways to maximize your depreciation deductions, please contact us.  

    © 2018  

     
     

    Donate appreciated stock for twice the tax benefits

    Posted by Admin Posted on Oct 30 2018

    A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash?  

    2 benefits from 1 gift  

    Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:  

    • If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and  
    • You can avoid the capital gains tax you’d pay if you sold the stock.  

     

    Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.  

    Stock vs. cash  

    Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 37% and your long-term capital gains rate is 20%. Let’s also say you itemize deductions.  

    If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.  

    By instead donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.  

    Watch your step  

    First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.  

    Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 60% and 30%, respectively, for cash donations).  

    Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.  

    Minimizing tax and maximizing deductions  

    For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability. Please contact us with any questions you have about minimizing capital gains tax or maximizing charitable deductions.  

    © 2018  

     

    Research credit available to some businesses for the first time 

    Posted by Admin Posted on Oct 30 2018

    The Tax Cuts and Jobs Act (TCJA) didn’t change the federal tax credit for “increasing research activities,” but several TCJA provisions have an indirect impact on the credit. As a result, the research credit may be available to some businesses for the first time.  

    AMT reform  

    Previously, corporations subject to alternative minimum tax (AMT) couldn’t offset the research credit against their AMT liability, which erased the benefits of the credit (although they could carry unused research credits forward for up to 20 years and use them in non-AMT years). By eliminating corporate AMT for tax years beginning after 2017, the TCJA removed this obstacle.  

    Now that the corporate AMT is gone, unused research credits from prior tax years can be offset against a corporation’s regular tax liability and may even generate a refund (subject to certain restrictions). So it’s a good idea for corporations to review their research activities in recent years and amend prior returns if necessary to ensure they claim all the research credits to which they’re entitled.  

    The TCJA didn’t eliminate individual AMT, but it did increase individuals’ exemption amounts and exemption phaseout thresholds. As a result, fewer owners of sole proprietorships and pass-through businesses are subject to AMT, allowing more of them to enjoy the benefits of the research credit, too.  

    More to consider  

    By reducing corporate and individual tax rates, the TCJA also will increase research credits for many businesses. Why? Because the tax code, to prevent double tax benefits, requires businesses to reduce their deductible research expenses by the amount of the credit.  

    To avoid this result (which increases taxable income), businesses can elect to reduce the credit by an amount calculated at the highest corporate rate that eliminates the double benefit. Because the highest corporate rate has been reduced from 35% to 21%, this amount is lower and, therefore, the research credit is higher.  

    Keep in mind that the TCJA didn’t affect certain research credit benefits for smaller businesses. Pass-through businesses can still claim research credits against AMT if their average gross receipts are $50 million or less. And qualifying start-ups without taxable income can still claim research credits against up to $250,000 in payroll taxes.  

    Do your research  

    If your company engages in qualified research activities, now’s a good time to revisit the credit to be sure you’re taking full advantage of its benefits.  

    © 2018  

     
     

    Could “bunching” medical expenses into 2018 save you tax? 

    Posted by Admin Posted on Oct 24 2018

    Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit because of the TCJA’s increase to the standard deduction.  

    The Changes

    Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.  

    Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018. 

    Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.  

    However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.  

    If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.  

    Planning for uncertainty

    Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond. For help determining whether you could benefit from bunching medical expenses into 2018, please contact us. 

    © 2018 

    Selling your business? Defer — and possibly reduce — tax with an installment sale 

    Posted by Admin Posted on Oct 22 2018

    You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it.  

    That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale.  

    Tax benefits  

    With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years.  

    This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.  

    For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).  

    Other benefits  

    An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.  

    Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.  

    Tax risks  

    An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.  

    It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With tax rates currently quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.  

    Pluses and minuses  

    As you can see, installment sales have both pluses and minuses. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us.

     
     

    Consider all the tax consequences before making gifts to loved ones

    Posted by Admin Posted on Oct 16 2018

    Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.  

    Multiple types of taxes  

    Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).  

    Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.  

    Minimizing estate tax   

    If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.  

    If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.  

    Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.  

    Minimizing your beneficiary’s income tax  

    You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.  

    On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.  

    Minimizing your own income tax   

    Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.  

    Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.  

    Choose gifts wisely  

    No matter your current net worth, it’s important to choose gifts wisely. Please contact us to discuss the gift, estate and income tax consequences of any gifts you’d like to make.  

    © 2018 

     
     

    Now’s the time to review your business expenses

    Posted by Admin Posted on Oct 15 2018

    As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.  

    Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.  

    What’s deductible, anyway?  

    There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.  

    An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.

    What did the TCJA change?

    The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:  

    Meals and entertainment.The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.  

    TransportationThe act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law. 

    Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.

    Need Help?

    The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance. For assistance, please contact us.  

    © 2018  

    529 plans offer two tax-advantaged education funding options

    Posted by Admin Posted on Oct 09 2018

    Section 529 plans are a popular education-funding tool because of tax and other benefits. Two types are available: 1) prepaid tuition plans, and 2) savings plans. And one of these plans got even better under the Tax Cuts and Jobs Act (TCJA).  

    Enjoy valuable benefits

    529 plans provide a tax-advantaged way to help pay for qualifying education expenses. First and foremost, although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing in the form of deductions or credits.  

    But that’s not all. 529 plans also usually offer high contribution limits. And there are no income limits for contributing.  

    Lock in current tuition rates  

    With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

    One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.  

    Fund more than just college tuition 

    A 529 savings plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.  

    In addition, the Tax Cuts and Jobs Act expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year.  

    The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.  

    But each time you make a contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.  

    Picking your plan

    Both prepaid tuition plans and savings plans offer attractive benefits. We can help you determine which one is a better fit for you or explore other tax-advantaged education-funding options.

    © 2018  

    Tax-free fringe benefits help small businesses and their employees

    Posted by Admin Posted on Oct 08 2018

     

    In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.  

    Insurance  

    Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:  

    Health insurance. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.  

    Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.  

    Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.  

    Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.  

    Other types of tax-advantaged benefits  

    Insurance isn’t the only type of tax-free benefit you can provide — but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:  

    Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 though a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).  

    Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.  

    Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.  

    Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.  

    Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.  

    Varying tax treatment  

    As you can see, the tax treatment of fringe benefits varies. Contact us for more information.  

    © 2018 

     
     

    Charitable IRA rollovers may be especially beneficial in 2018  

    Posted by Admin Posted on Oct 02 2018

    If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions. This break may be especially beneficial now because of Tax Cuts and Jobs Act (TCJA) changes that affect who can benefit from the itemized deduction for charitable donations.  

    Counts toward your RMD 

    A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (Deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.) 

    So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid to you.

    Doesn’t require itemizing

    You might be able to achieve a similar tax result from taking the RMD and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation.

    And, with the TCJA’s near doubling of the standard deduction, fewer taxpayers will benefit from itemizing. Itemizing saves tax only when itemized deductions exceed the standard deduction. For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households, and $24,000 for married couples filing jointly.

    Doesn’t have other deduction downsides 

    Even if you have enough other itemized deductions to exceed your standard deduction, taking your RMD and contributing that amount to charity has two more possible downsides.

    First, the reported RMD income might increase your income to the point that you’re pushed into a higher tax bracket, certain additional taxes are triggered and/or the benefits of certain tax breaks are reduced or eliminated. It could even cause Social Security payments to become taxable or increase income-based Medicare premiums and prescription drug charges.

    Second, if your donation would equal a large portion of your income for the year, your deduction might be reduced due to the percentage-of-income limit. You generally can’t deduct cash donations that exceed 60% of your adjusted gross income for the year. (The TCJA raised this limit from 50%, but if the cash donation is to a private nonoperating foundation, the limit is only 30%.) You can carry forward the excess up to five years, but if you make large donations every year, that won’t help you.

    A charitable IRA rollover avoids these potential negative tax consequences.

    Have questions? 

    The considerations involved in deciding whether to make a direct IRA rollover have changed in light of the TCJA. So contact us to go over your particular situation and determine what’s right for you.  

    © 2018

    Could a cost segregation study help you accelerate depreciation deductions?

    Posted by Admin Posted on Oct 01 2018

      

    Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA).  

    Real property vs. tangible personal property  

    IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing and wiring — along with the building. Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.  

    Too often, businesses allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. In some cases — computers or furniture, for instance — the distinction between real and personal property is obvious. But often the line between the two is less clear. Items that appear to be part of a building may in fact be personal property, like removable wall and floor coverings, removable partitions, awnings and canopies, window treatments, signs and decorative lighting.  

    In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. This includes reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations required to operate specialized equipment, or dedicated cooling systems for data processing rooms.  

    A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. Although the relative costs and benefits of a cost segregation study depend on your particular facts and circumstances, it can be a valuable investment.  

    Depreciation break enhancements   

    Last year’s TCJA enhances certain depreciation-related tax breaks, which may also enhance the benefits of a cost segregation study. Among other things, the act permanently increased limits on Section 179 expensing. Sec. 179 allows you to immediately deduct the entire cost of qualifying equipment or other fixed assets up to specified thresholds.  

    The TCJA also expanded 15-year-property treatment to apply to qualified improvement property. Previously this break was limited to qualified leasehold-improvement, retail-improvement and restaurant property. And it temporarily increased first-year bonus depreciation to 100% (from 50%).  

    Assess the potential savings  

    Cost segregation studies may yield substantial benefits, but they’re not right for every business. To find out whether a study would be worthwhile for yours, contact us for help assessing the potential tax savings.  

    © 2018  

     
     

    Tax planning for investments gets more complicated

    Posted by Admin Posted on Sept 25 2018

    For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

    For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate. 

    Old rules

    For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.  

    Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.  

    In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.  

    New Rules

    The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:  

    • Singles:
      • 0%: $0 – $38,600
      • 15%: $38,601 – $425,800
      • 20%: $425,801 and up
    • Head of Households:
      • 0%: $0 – $51,700
      • 15%: $51,701 – $452,400
      • 20%: $452,401 and up 
    • Married couples filing jointly
      • 0%: $0 – $77,200 
      • 15%: $77,201 – $479,000
      • 20%: $479,001 and up 

    For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

    More thresholds, more complexity

    With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us.

    © 2018 

    Businesses aren’t immune to tax identity theft

    Posted by Admin Posted on Sept 24 2018

    Businesses aren’t immune to tax identity theft  

    Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.  

    How it works  

    In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.  

    For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.  

    The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.  

    Red flags  

    There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:  

    • Your business doesn’t receive expected or routine mailings from the IRS,  
    • You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,  
    • The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,  
    • You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or  
    • You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.  

    Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.  

    Prevention tips  

    Businesses should take steps such as the following to protect their own information as well as that of their employees:  

    • Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.  
    • Use secure methods to send W-2 forms to employees.  
    • Implement risk management strategies designed to flag suspicious communications.  

    Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.  

    © 2018  

    The tax deduction ins and outs of donating artwork to charity

    Posted by Admin Posted on Sept 18 2018

    If you’re charitably inclined and you collect art, appreciated artwork can make one of the best charitable gifts from a tax perspective. In general, donating appreciated property is doubly beneficial because you can both enjoy a valuable tax deduction and avoid the capital gains taxes you’d owe if you sold the property. The extra benefit from donating artwork comes from the fact that the top long-term capital gains rate for art and other “collectibles” is 28%, as opposed to 20% for most other appreciated property.  

    Requirements  

    The first thing to keep in mind if you’re considering a donation of artwork is that you must itemize deductions to deduct charitable contributions. Now that the Tax Cuts and Jobs Act has nearly doubled the standard deduction and put tighter limits on many itemized deductions (but not the charitable deduction), many taxpayers who have itemized in the past will no longer benefit from itemizing.  

    For 2018, the standard deduction is $12,000 for singles, $18,000 for heads of households and $24,000 for married couples filing jointly. Your total itemized deductions must exceed the applicable standard deduction for you to enjoy a tax benefit from donating artwork.  

    Something else to be aware of is that most artwork donations require a “qualified appraisal” by a “qualified appraiser.” IRS rules contain detailed requirements about the qualifications an appraiser must possess and the contents of an appraisal.  

    IRS auditors are required to refer all gifts of art valued at $20,000 or more to the IRS Art Advisory Panel. The panel’s findings are the IRS’s official position on the art’s value, so it’s critical to provide a solid appraisal to support your valuation.  

    Finally, note that, if you own both the work of art and the copyright to the work, you must assign the copyright to the charity to qualify for a charitable deduction.  

    Maximizing your deduction  

    The charity you choose and how the charity will use the artwork can have a significant impact on your tax deduction. Donations of artwork to a public charity, such as a museum or university with public charity status, can entitle you to deduct the artwork’s full fair market value. If you donate art to a private foundation, however, your deduction will be limited to your cost.  

    For your donation to a public charity to qualify for a full fair-market-value deduction, the charity’s use of the donated artwork must be related to its tax-exempt purpose. If, for example, you donate a painting to a museum for display or to a university’s art history department for use in its research, you’ll satisfy the related-use rule. But if you donate it to, say, a children’s hospital to auction off at its annual fundraising gala, you won’t satisfy the rule.  

    Plan carefully  

    Donating artwork is a great way to share enjoyment of the work with others. But to reap the maximum tax benefit, too, you must plan your gift carefully and follow all of the applicable rules. Contact us to learn more.  

    © 2018  

     
     

    Be sure your employee travel expense reimbursements will pass muster with the IRS

    Posted by Admin Posted on Sept 17 2018

    Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees. If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS.

    The TCJA’s impact  

    Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.  

    For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.

    The potential tax benefits 

    Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible.  

    To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.  

    Reimbursing actual expenses

    An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria: 

    • Payments must be for “ordinary and necessary” business expenses. 
    • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
    • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days. 

    The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).  

    Keeping it simple

    With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)  

    Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.

    What’s right for your business? 

    To learn more about business travel expense deductions and reimbursements post-TCJA, contact us. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.  

    © 2018  

    You might save tax if your vacation home qualifies as a rental property

    Posted by Admin Posted on Sept 11 2018

    Do you own a vacation home? If you both rent it out and use it personally, you might save tax by taking steps to ensure it qualifies as a rental property this year. Vacation home expenses that qualify as rental property expenses aren’t subject to the Tax Cuts and Jobs Act’s (TCJA’s) new limit on the itemized deduction for state and local taxes (SALT) or the lower debt limit for the itemized mortgage interest deduction.

    Rental or personal property?

    If you rent out your vacation home for 15 days or more, what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

    Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. Your deduction for property tax attributable to the rental use of the home isn’t subject to the TCJA’s new SALT deduction limit. And your deduction for mortgage interest on the home isn’t subject to the debt limit that applies to the itemized deduction for mortgage interest. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction (subject to the new SALT limit).

    Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years.

    If you itemize deductions, you also can deduct the personal portion of both property tax and mortgage interest, subject to the TCJA’s new limits on those deductions. The SALT deduction limit is $10,000 for the combined total of state and local property taxes and either income taxes or sales taxes ($5,000 for married taxpayers filing separately). For mortgage interest debt incurred after December 15, 2017, the debt limit (with some limited exceptions) has been reduced to $750,000.

    Be aware that many taxpayers who have itemized in the past will no longer benefit from itemizing because of the TCJA’s near doubling of the standard deduction. Itemizing saves tax only if total itemized deductions exceed the standard deduction for the taxpayer’s filing status.

    Year-to-date review

    Keep in mind that, if you rent out your vacation home for less than 15 days, you don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

    Now is a good time to review your vacation home use year-to-date to project how it will be classified for tax purposes. By increasing the number of days you rent it out and/or reducing the number of days you use it personally between now and year end, you might be able to ensure it’s classified as a rental property and save some tax. But there also could be circumstances where personal property treatment would be beneficial. Please contact us to discuss your particular situation.

    © 2018  

    2018 Q4 tax calendar: Key deadlines for businesses and other employers  

    Posted by Admin Posted on Sept 10 2018

    Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. 

    October 15

    • If a calendar-year C corporation that filed an automatic six-month extension:
      • File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due. 
      • Make contributions for 2017 to certain employer-sponsored retirement plans.  

    October 31

    • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”)  

    November 13

    • Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.  

    December 17

    • If a calendar-year C corporation, pay the fourth installment of 2018 estimated income taxes.  

    © 2018  

    Do you need to make an estimated tax payment by September 17?  

    Posted by Admin Posted on Sept 05 2018

    To avoid interest and penalties, you must make sufficient federal income tax payments long before your April filing deadline through withholding, estimated tax payments, or a combination of the two. The third 2018 estimated tax payment deadline for individuals is September 17.  

    If you don’t have an employer withholding tax from your pay, you likely need to make estimated tax payments. But even if you do have withholding, you might need to pay estimated tax. It can be necessary if you have more than a nominal amount of income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets.  

    A two-prong test  

    Generally, you must pay estimated tax for 2018 if both of these statements apply:  

    1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and  
    2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2018 or 100% of the tax on your 2017 return — 110% if your 2017 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).  

    If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.  

    Quarterly payments  

    Estimated tax payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15 and September 15 of the tax year and January 15 of the next year, unless the date falls on a weekend or holiday (hence the September 17 deadline this year).  

    Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.  

    Confirming withholding   

    If you determine you don’t need to make estimated tax payments for 2018, it’s a good idea to confirm that the appropriate amount is being withheld from your paycheck. To reflect changes under the Tax Cuts and Jobs Act (TCJA), the IRS updated the tables that indicate how much employers should withhold from their employees’ pay, generally reducing the amount withheld.  

    The new tables might cause some taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations.  

    Avoiding penalties  

    Keep in mind that, if you underpaid estimated taxes in earlier quarters, you generally can’t avoid penalties by making larger estimated payments in later quarters. But if you also have withholding, you may be able to avoid penalties by having the estimated tax shortfall withheld.  

    To learn more about estimated tax and withholding — and for help determining how much tax you should be paying during the year — contact us.  

    © 2018  

     
     

    How to reduce the tax risk of using independent contractors  

    Posted by Admin Posted on Sept 05 2018

    Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.  

    For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.  

    Key factors  

    When assessing worker classification, the IRS typically looks at the:  

    Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.  

    Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.  

    Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.  

    The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.  

    Protective measures  

    Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk.  

    From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.  

    Also, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.  

    Handle with care  

    Keep in mind that taxes, interest and penalties aren’t the only possible negative consequences of a worker being reclassified as an employee. In addition, your business could be liable for employee benefits that should have been provided but weren’t. Fortunately, careful handling of contractors can help ensure that independent contractor status will pass IRS scrutiny. Contact us if you have questions about worker classification.  

    © 2018  

     
     

    Back-to-school time means a tax break for teachers 

    Posted by Admin Posted on Aug 29 2018

    When teachers are setting up their classrooms for the new school year, it’s common for them to pay for a portion of their classroom supplies out of pocket. A special tax break allows these educators to deduct some of their expenses. This educator expense deduction is especially important now due to some changes under the Tax Cuts and Jobs Act (TCJA).  

    The old miscellaneous itemized deduction  

    Before 2018, employee expenses were potentially deductible if they were unreimbursed by the employer and ordinary and necessary to the “business” of being an employee. A teacher’s out-of-pocket classroom expenses could qualify.  

    But these expenses had to be claimed as a miscellaneous itemized deduction and were subject to a 2% of adjusted gross income (AGI) floor. This meant employees, including teachers, could enjoy a tax benefit only if they itemized deductions (rather than taking the standard deduction) and all their deductions subject to the floor, combined, exceeded 2% of their AGI.  

    Now, for 2018 through 2025, the TCJA has suspended miscellaneous itemized deductions subject to the 2% of AGI floor. Fortunately, qualifying educators can still deduct some of their unreimbursed out-of-pocket classroom costs under the educator expense deduction.  

    The above-the-line educator expense deduction  

    Back in 2002, Congress created the above-the-line educator expense deduction because, for many teachers, the 2% of AGI threshold for the miscellaneous itemized deduction was difficult to meet. An above-the-line deduction is one that’s subtracted from your gross income to determine your AGI.  

    You don’t have to itemize to claim an above-the-line deduction. This is especially significant with the TCJA’s near doubling of the standard deduction, which means fewer taxpayers will benefit from itemizing.  

    Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.  

    Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs of supplies are qualified expenses only if related to athletics.  

    Many rules, many changes  

    Some additional rules apply to the educator expense deduction. Contact us for more details or to discuss other tax deductions that may be available to you this year. The TCJA has made significant changes to many deductions for individuals.  

    © 2018  

     
     

    Keep it SIMPLE: A tax-advantaged retirement plan solution for small businesses

    Posted by Admin Posted on Aug 28 2018

    If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help you attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2018.  

    The basics  

    SIMPLE stands for “savings incentive match plan for employees.” As the name implies, these plans are simple to set up and administer. Unlike 401(k) plans, SIMPLE IRAs don’t require annual filings or discrimination testing.  

    SIMPLE IRAs are available to businesses with 100 or fewer employees. Employers must contribute and employees have the option to contribute. The contributions are pretax, and accounts can grow tax-deferred like a traditional IRA or 401(k) plan, with distributions taxed when taken in retirement.  

    As the employer, you can choose from two contribution options:  

    1. Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. You must make the contribution regardless of whether the employee contributes. This applies to compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).  
    2. Match employee contributions up to 3% of compensation. Here, you contribute only if the employee contributes. This isn’t subject to the annual compensation limit.  

    Employees are immediately 100% vested in all SIMPLE IRA contributions.  

    Employee contribution limits  

    Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE IRA.  

    SIMPLE IRAs offer greater income deferral opportunities than ordinary IRAs, but lower limits than 401(k)s. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can also make a catch-up contribution of up to $3,000. This compares to $5,500 and $1,000, respectively, for ordinary IRAs, and to $18,500 and $6,000 for 401(k)s. (Some or all of these limits may increase for 2019 under annual cost-of-living adjustments.)  

    You’ve got options  

    A SIMPLE IRA might be a good choice for your small business, but it isn’t the only option. The more-complex 401(k) plan we’ve already mentioned is one alternative. Some others are a Simplified Employee Pension (SEP) and a defined-benefit pension plan. These two plans don’t allow employee contributions and have other pluses and minuses. Contact us to learn more about a SIMPLE IRA or to hear about other retirement plan alternatives for your business.  

    © 2018  

     
     

    Play your tax cards right with gambling wins and losses

    Posted by Admin Posted on Aug 22 2018

     

     

    If you gamble, be sure you understand the tax consequences. Both wins and losses can affect your income tax bill. And changes under the Tax Cuts and Jobs Act (TCJA) could also have an impact.  

    Wins and taxable income  

    You must report 100% of your gambling winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income as winnings.  

    Winnings are subject to your regular federal income tax rate. You might pay a lower rate on gambling winnings this year because of rate reductions under the TCJA.  

    Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, remember that the IRS will expect to see the winnings on your tax return.  

    Losses and tax deductions  

    You can write off gambling losses as a miscellaneous itemized deduction. While miscellaneous deductions subject to the 2% of adjusted gross income floor are not allowed for 2018 through 2025 under the TCJA, the deduction for gambling losses isn’t subject to that floor. So gambling losses are still deductible.  

    But the TCJA’s near doubling of the standard deduction for 2018 (to $24,000 for married couples filing jointly, $18,000 for heads of households and $12,000 for singles and separate filers) means that, even if you typically itemized deductions in the past, you may no longer benefit from itemizing. Itemizing saves tax only when total itemized deductions exceed the applicable standard deduction.  

    Also be aware that the deduction for gambling losses is limited to your winnings for the year, and any excess losses cannot be carried forward to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth can’t be deducted unless you qualify as a gambling professional.  

    And, for 2018 through 2025, the TCJA modifies the limit on gambling losses for professional gamblers so that all deductions for expenses incurred in carrying out gambling activities, not just losses, are limited to the extent of gambling winnings.  

    Tracking your activities  

    To claim a deduction for gambling losses, you must adequately document them, including:  

    1. 1. The date and type of gambling activity.  
    2. 2. The name and address or location of the gambling establishment.  
    3. 3. The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)  
    4. 4. The amount won or lost.  

    You can document income and losses from gambling on table games by recording the number of the table you played and keeping statements showing casino credit issued to you. For lotteries, you can use winning statements and unredeemed tickets as documentation.  

    Please contact us if you have questions or want more information about the tax treatment of gambling wins and losses.  

    Assessing the S corp 

    Posted by Admin Posted on Aug 21 2018

     

    The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible • and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.  

    Tax comparison  

    The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.  

    But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.  

    You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.  

    S eligibility requirements  

    If S corp status makes tax sense for your business, you need to make sure you qualify • and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:  

    • Be a domestic corporation and have only one class of stock,  
    • Have no more than 100 shareholders, and  
    • Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.  

    In addition, certain businesses are ineligible, such as insurance companies.  

    Reasonable compensation  

    Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.  

    Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.  

    Pros and cons  

    S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.  

    © 2018  

     

    Keep an eye out for extenders legislation

    Posted by Admin Posted on Aug 15 2018

    The pieces of tax legislation garnering the most attention these days are the Tax Cuts and Jobs Act (TCJA) signed into law last December and the possible “Tax Reform 2.0” that Congress might pass this fall. But for certain individual taxpayers, what happens with “extenders” legislation is also important.  

    Recent history  

    Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The TCJA didn’t address these breaks, but they were retroactively extended through December 31, 2017, by the Bipartisan Budget Act of 2018 (BBA), which was signed into law on February 9, 2018.  

    Now the question is whether Congress will extend them for 2018 and, if so, when. In July, House Ways and Means Committee Chair Kevin Brady (R-TX) released a broad outline of what Tax Reform 2.0 legislation may contain. And he indicated that it probably wouldn’t include the so-called “extenders” but that they would likely be addressed by separate legislation.  

    Mortgage insurance and loan forgiveness   

    Under the BBA, through 2017, you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This was an itemized deduction that phased out for taxpayers with AGI of $100,000 to $110,000.  

    The BBA likewise extended through 2017 the exclusion from gross income for mortgage loan forgiveness. It also allowed the exclusion to apply to mortgage forgiveness that occurs in 2018 as long as it’s granted pursuant to a written agreement entered into in 2017. So even if this break isn’t extended, you might still be able to benefit from it on your 2018 income tax return.  

    Tuition and related expenses  

    Also available through 2017 under the BBA was the above-the-line deduction for qualified tuition and related expenses for higher education. It was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers).  

    You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings.  

    But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts.  

    Still time …   

    There’s still plenty of time for Congress to extend these breaks for 2018. And, if you qualify and you haven’t filed your 2017 income tax return yet, there’s even still time to take advantage of these breaks on that tax return. The deadline for individual extended 2017 returns is October 15, 2018. Contact us with questions about these breaks and whether you can benefit.  

    © 2018

     

    Choosing the right accounting method for tax purposes

    Posted by Admin Posted on Aug 15 2018

    The Tax Cuts and Jobs Act (TCJA) liberalized the eligibility rules for using the cash method of accounting, making this method — which is simpler than the accrual method — available to more businesses. Now the IRS has provided procedures a small business taxpayer can use to obtain automatic consent to change its method of accounting under the TCJA. If you have the option to use either accounting method, it pays to consider whether switching methods would be beneficial.  

    Cash vs. accrual  

    Generally, cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid. Accrual-basis businesses, on the other hand, recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments.  

    In most cases, a business is permitted to use the cash method of accounting for tax purposes unless it’s:  

    1. Expressly prohibited from using the cash method, or  
    2. Expressly required to use the accrual method.  

    Cash method advantages  

    The cash method offers several advantages, including:  

    Simplicity. It’s easier and cheaper to implement and maintain.  

    Tax-planning flexibility. It offers greater flexibility to control the timing of income and deductible expenses. For example, it allows you to defer income to next year by delaying invoices or to shift deductions into this year by accelerating the payment of expenses. An accrual-basis business doesn’t enjoy this flexibility. For example, to defer income, delaying invoices wouldn’t be enough; the business would have to put off shipping products or performing services.  

    Cash flow benefits. Because income is taxed in the year it’s received, the cash method does a better job of ensuring that a business has the funds it needs to pay its tax bill.  

    Accrual method advantages  

    In some cases, the accrual method may offer tax advantages. For example, accrual-basis businesses may be able to use certain tax-planning strategies that aren’t available to cash-basis businesses, such as deducting year-end bonuses that are paid within the first 2½ months of the following year and deferring income on certain advance payments.  

    The accrual method also does a better job of matching income and expenses, so it provides a more accurate picture of a business’s financial performance. That’s why it’s required under Generally Accepted Accounting Principles (GAAP).  

    If your business prepares GAAP-compliant financial statements, you can still use the cash method for tax purposes. But weigh the cost of maintaining two sets of books against the potential tax benefits.  

    Making a change  

    Keep in mind that cash and accrual are the two primary tax accounting methods, but they’re not the only ones. Some businesses may qualify for a different method, such as a hybrid of the cash and accrual methods.  

    If your business is eligible for more than one method, we can help you determine whether switching methods would make sense and can execute the change for you if appropriate.  

    © 2018

     

    The TCJA prohibits undoing 2018 Roth IRA conversions, but 2017 conversions are still eligible

    Posted by Admin Posted on Aug 08 2018

    Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement. But what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you hadn’t converted it? 

    Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “recharacterization.” Effective with 2018 conversions, the TCJA prohibits recharacterizations — permanently. But if you executed a conversion in 2017, you may still be able to undo it.

    Reasons to recharacterize 

    Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit. 

    Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion: 

    • The conversion combined with your other income pushed you into a higher tax bracket in 2017. 
    • Your marginal income tax rate will be lower in 2018 than it was in 2017. 
    • The value of your account has declined since the conversion, so you owe taxes partially on money you no longer have. 

    If you recharacterize your 2017 conversion but would still like to convert your traditional IRA to a Roth IRA, you must wait until the 31st day after the recharacterization. If you undo a conversion because your IRA’s value declined, there’s a risk that your investments will bounce back during the waiting period, causing you to reconvert at a higher tax cost.

    Recharacterization in action

    Sally had a traditional IRA with a balance of $100,000 when she converted it to a Roth IRA in 2017. Her 2017 tax rate was 33%, so she owed $33,000 in federal income taxes on the conversion. 

    However, by August 1, 2018, the value of her account had dropped to $80,000. So Sally recharacterizes the account as a traditional IRA and amends her 2017 tax return to exclude the $100,000 in income.

    On September 1, she reconverts the traditional IRA, whose value remains at $80,000, to a Roth IRA. She will report that amount when she files her 2018 tax return. The 33% rate has dropped to 32% under the TCJA. Assuming Sally is still in this bracket, this time she’ll owe $25,600 ($80,000 × 32%) — deferred for a year and resulting in a tax savings of $7,400.

    (Be aware that the thresholds for the various brackets have changed for 2018, in some cases increasing but in others decreasing. This, combined with other TCJA provisions and changes in your income, could cause you to be in a higher or lower bracket in 2018.)  

    Know your options

    If you converted a traditional IRA to a Roth IRA in 2017, it’s worthwhile to see if you could save tax by undoing the conversion. If you’re considering a Roth conversion in 2018, keep in mind that you won’t have the option to recharacterize. We can help you assess whether recharacterizing a 2017 conversion or executing a 2018 conversion makes sense for you.  

    © 2018  

    An FLP can save tax in a family business succession

    Posted by Admin Posted on Aug 08 2018

    One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.  

    A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.  

    How it works  

    To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children.  

    You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.  

    Tax benefits  

    As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.  

    Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.  

    The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2018 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.  

    To transfer interests in excess of the annual exclusion, you can apply your lifetime gift tax exemption. And 2018 may be a particularly good year to do so, because the Tax Cuts and Jobs Act raised it to a record-high $11.18 million. The exemption is scheduled to be indexed for inflation through 2025 and then drop back down to an inflation-adjusted $5 million in 2026. While Congress could extend the higher exemption, using as much of it as possible now may be tax-smart.  

    There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.  

    FLP risks  

    Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.  

    The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-reduction strategy.  

    Right for you?  

    An FLP can be an effective succession and estate planning tool, but it isn’t risk free. Please contact us for help determining whether an FLP is right for you.  

    © 2018  

     
     

    Do you still need to worry about AMT?

    Posted by Admin Posted on Aug 08 2018

    There was talk of repealing the individual alternative minimum tax (AMT) as part of last year’s tax reform legislation. A repeal wasn’t included in the final version of the Tax Cuts and Jobs Act (TCJA), but the TCJA will reduce the number of taxpayers subject to the AMT.  

    Now is a good time to familiarize yourself with the changes, assess your AMT risk and see if there are any steps you can take during the last several months of the year to avoid the AMT, or at least minimize any negative impact.  

    AMT vs. regular tax  

    The top AMT rate is 28%, compared to the top regular ordinary-income tax rate of 37%. But the AMT rate typically applies to a higher taxable income base and will result in a larger tax bill if you’re subject to it.  

    The TCJA reduced the number of taxpayers who’ll likely be subject to the AMT in part by increasing the AMT exemption and the income phaseout ranges for the exemption:  

    • For 2018, the exemption is $70,300 for singles and heads of households (up from $54,300 for 2017), and $109,400 for married couples filing jointly (up from $84,500 for 2017).  
    • The 2018 phaseout ranges are $500,000–$781,200 for singles and heads of households (up from $120,700–$337,900 for 2017) and $1,000,000–$1,437,600 for joint filers (up from $160,900–$498,900 for 2017).  

    You’ll be subject to the AMT if your AMT liability is greater than your regular tax liability.  

    AMT triggers  

    In the past, common triggers of the AMT were differences between deductions allowed for regular tax purposes and AMT purposes. Some popular deductions aren’t allowed under the AMT.  

    New limits on some of these deductions for regular tax purposes, such as on state and local income and property tax deductions, mean they’re less likely to trigger the AMT. And certain deductions not allowed for AMT purposes are now not allowed for regular tax purposes either, such as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor.  

    But deductions aren’t the only things that can trigger the AMT. Some income items might do so, too, such as:  

    • Long-term capital gains and dividend income, even though they’re taxed at the same rate for both regular tax and AMT purposes,  
    • Accelerated depreciation adjustments and related gain or loss differences when assets are sold,  
    • Tax-exempt interest on certain private-activity municipal bonds, and  
    • The exercise of incentive stock options.  

    AMT planning tips  

    If it looks like you could be subject to the AMT in 2018, consider accelerating income into this year. Doing so may allow you to benefit from the lower maximum AMT rate. And deferring expenses you can’t deduct for AMT purposes may allow you to preserve those deductions. If you also defer expenses you can deduct for AMT purposes, the deductions may become more valuable because of the higher maximum regular tax rate.  

    Please contact us if you have questions about whether you could be subject to the AMT this year or about minimizing negative consequences from the AMT.  

    © 2018  

     
     

    Do you qualify for the home office deduction?

    Posted by Admin Posted on Aug 08 2018

    Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.  

    Home-related expenses  

    Homeowners know that they can claim itemized deductions for property tax and mortgage interest on their principal residences, subject to certain limits. Most other home-related expenses, such as utilities, insurance and repairs, aren’t deductible.  

    But if you use part of your home for business purposes, you may be entitled to deduct a portion of these expenses, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).  

    Regular and exclusive use  

    You might qualify for the home office deduction if part of your home is used as your principal place of business “regularly and exclusively,” defined as follows:  

    1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use.  

    2. Exclusive use. You use the specific area of your home only for business. It’s not necessary for the space to be physically partitioned off. But, you don’t meet the requirements if the area is used both for business and personal purposes, such as a home office that also serves as a guest bedroom.  

    Regular and exclusive business use of the space aren’t, however, the only criteria.  

    Principal place of business  

    Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.  

    Examples of activities that are administrative or managerial in nature include:  

    • Billing customers, clients or patients,  
    • Keeping books and records,  
    • Ordering supplies,  
    • Setting up appointments, and  
    • Forwarding orders or writing reports.  

    Meetings or storage  

    If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on your premises. The use of your home must be substantial and integral to the business conducted.  

    Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.  

    Valuable tax-savings  

    The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. If you’re not sure whether you qualify or if you have other questions, please contact us.  

    © 2018  

     
     

    Why the “kiddie tax” is more dangerous than ever

    Posted by Admin Posted on July 25 2018

    Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.

    A short history

    Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

    What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.

    A fiercer kiddie tax

    The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases.

    For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000.

    Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively. 

    In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability.  

    The moral of the story

    To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them.

    Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family.

    © 2018

    Business deductions for meal, vehicle and travel expenses: Document, document, document

    Posted by Admin Posted on July 23 2018

    Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.

    A critical requirement

    Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.

    Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.

    What you need to do

    Following some simple steps can help ensure you have documentation that will pass muster with the IRS: 

    Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business expenses. If you’re deducting vehicle expenses using the standard mileage rate (54.5 cents for 2018), log business miles driven.

    Track business purposes. Be sure to record the business purpose of each expense. This is especially important if on the surface an expense could appear to be a personal one. If the business purpose of an expense is clear from the surrounding circumstances, the IRS might not require a written explanation — but it’s probably better to err on the side of caution and document the business purpose anyway.  

    Require employees to comply. If you reimburse employees for expenses, make sure they provide you with proper documentation. Also be aware that the reimbursements will be treated as taxable compensation to the employee (and subject to income tax and FICA withholding) unless you make them via an “accountable plan.”

    Don’t re-create expense logs at year end or when you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. The IRS considers timely kept records more reliable, plus it’s easier to track expenses as you go than try to re-create a log later. For expense reimbursements, require employees to submit monthly expense reports (which is also generally a requirement for an accountable plan).  

    Addressing uncertainty

    You’ve probably heard that, under the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible. There’s some debate as to whether this includes business meals with actual or prospective clients. Until there’s more certainty on that issue, it’s a good idea to document these expenses. That way you’ll have what you need to deduct them if Congress or the IRS provides clarification that these expenses are indeed still deductible.

    For more information about what meal, vehicle and travel expenses are and aren’t deductible — and how to properly document deductible expenses — please contact us. 

    © 2018 

    3 traditional midyear tax planning strategies for individuals that hold up post-TCJA 

    Posted by Admin Posted on July 18 2018

    With its many changes to individual tax rates, brackets and breaks, the Tax Cuts and Jobs Act (TCJA) means taxpayers need to revisit their tax planning strategies. Certain strategies that were once tried-and-true will no longer save or defer tax. But there are some that will hold up for many taxpayers. And they’ll be more effective if you begin implementing them this summer, rather than waiting until year end. Take a look at these three ideas, and contact us to discuss what midyear strategies make sense for you.

    1. Look at your bracket

    Under the TCJA, the top income tax rate is now 37% (down from 39.6%) for taxpayers with taxable income over $500,000 (single and head-of-household filers) or $600,000 (married couples filing jointly). These thresholds are higher than for the top rate in 2017 ($418,400, $444,550 and $470,700, respectively). So the top rate might be less of a concern. 

    However, singles and heads of households in the middle and upper brackets could be pushed into a higher tax bracket much more quickly this year. For example, for 2017 the threshold for the 33% tax bracket was $191,650 for singles and $212,500 for heads of households. For 2018, the rate for this bracket has been reduced slightly to 32% — but the threshold for the bracket is now only $157,500 for both singles and heads of households.

    So a lot more of these filers could find themselves in this bracket. (Fortunately for joint filers, their threshold for this bracket has increased from $233,350 to $315,000.) 

    If you expect this year’s income to be near the threshold for a higher bracket, consider strategies for reducing your taxable income and staying out of the next bracket. For example, you could take steps to accelerate deductible expenses. 

    2. Incur medical expenses 

    One itemized deduction the TCJA has retained and — temporarily — enhanced is the medical expense deduction. If you expect to benefit from itemizing on your 2018 return, take a look at whether you can accelerate deductible medical expenses into this year.

    You can deduct only expenses that exceed a floor based on your adjusted gross income (AGI). Under the TCJA, the floor has dropped from 10% of AGI to 7.5%. But it’s scheduled to return to 10% for 2019 and beyond. 

    Deductible expenses may include:

    • Health insurance premiums, 
    • Long-term care insurance premiums,
    • Medical and dental services and prescription drugs, and
    • Mileage driven for health care purposes.

    You may be able to control the timing of some of these expenses so you can bunch them into 2018 and exceed the floor while it’s only 7.5%. 

    3. Review your investments

    The TCJA didn’t make changes to the long-term capital gains rate, so the top rate remains at 20%. However, that rate now kicks in before the top ordinary-income tax rate. For 2018, the 20% rate applies to taxpayers with taxable income exceeding $425,800 (singles), $452,400 (heads of households), or $479,000 (joint filers).

    If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

    You also may need to plan for the 3.8% net investment income tax (NIIT). It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

    © 2018

    Close-up on the new QBI deduction’s wage limit

    Posted by Admin Posted on July 18 2018

    The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in. 

    Full vs. partial phase-in 

    When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of: 

    • 50% of the amount of W-2 wages paid to employees during the tax year, or
    • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

    When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows: 

    1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers. 
    2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction. 
    3. The result is subtracted from the gross deduction to determine the final deduction. 

    Some examples

    Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

    The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

    What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies: 

    ($400,000 taxable income - $315,000 threshold)/$100,000 = 85%

    To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

    ($60,000 - $50,000) × 85% = $8,500

    That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.  

    That's not all

    Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction. 

    © 2018 

    What you can deduct when volunteering 

    Posted by Admin Posted on July 11 2018

    Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that’s not the case. 

    Donations of time or services aren’t deductible. It doesn’t matter if it’s simple administrative work, such as checking in attendees at a fundraising event, or if it’s work requiring significant experience and expertise that would be much more costly to the charity if it had to pay for it, such as skilled carpentry or legal counsel.

    However, you potentially can deduct out-of-pocket costs associated with your volunteer work. 

    The basic rules

    As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s “Tax Exempt Organization Search” tool (formerly “Select Check”) at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search to find out. 

    Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:  

    • Unreimbursed,
    • Directly connected with the services you’re providing,
    • Incurred only because of your charitable work, and 
    • Not “personal, living or family” expenses.


    Supplies, uniforms and transportation

    A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

    Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven. But you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she’s volunteering, you can’t deduct the cost. 

    You also can’t deduct transportation costs you’d be incurring even if you weren’t volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you won’t be able to deduct your train fares. But if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation. 

    Volunteer travel

    Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include air, rail and bus transportation; driving expenses; and taxi or other transportation costs between an airport or train station and wherever you’re staying. Lodging and meal costs also might be deductible.

    The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally won’t be deductible. 

    Keep careful records

    The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records. If you have questions about what volunteer expenses are and aren’t deductible, please contact us. 

    © 2018  

    How to avoid getting hit with payroll tax penalties 

    Posted by Admin Posted on July 11 2018

    For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government.

    If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company. 

    The 100% penalty  

    Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.

    If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a “responsible person.” 
    The corporate veil won’t shield corporate owners in this instance. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts. 

    When the IRS assesses the 100% penalty, it can file a lien or take levy or seizure action against personal assets of a responsible person.

      “Responsible person,” defined  

    The penalty can be assessed against a shareholder, owner, director, officer or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must: 

    1. Be responsible for collecting, accounting for and remitting withheld federal taxes, and  
    2. Willfully fail to remit those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law. 
    3.  

    Prevention is the best medicine  

     

    When it comes to the 100% penalty, prevention is the best medicine. So make sure that federal taxes are being properly withheld from employees’ paychecks and are being timely remitted to the federal government. (It’s a good idea to also check state and local requirements and potential penalties.) 

     

    If you aren’t already using a payroll service, consider hiring one. A good payroll service provider relieves you of the burden of withholding the proper amounts, taking care of the tax payments and handling recordkeeping. Contact us for more information. 

    © 2018  

    Does your business have to begin collecting sales tax on all out-of-state online sales?

    Posted by Admin Posted on July 10 2018

    You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax.

    What the requirements used to be

    Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.

    Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.

    What has changed

    In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is “unsound and incorrect,” and that the South Dakota tax satisfies the substantial nexus requirement. 

    The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes.

    In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.

    What the decision means

    Wayfair doesn’t necessarily mean that you must immediately begin collecting sales tax on online sales to all of your out-of-state customers. You’ll be required to collect such taxes only if the particular state requires it. Some states already have laws on the books similar to South Dakota’s, but many states will need to revise or enact legislation. 

    Also keep in mind that the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The others weren’t argued in Wayfair, but the Court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.

    Please contact us with any questions you have about sales tax collection requirements.   © 2018 

    Home green home: Save tax by saving energy

    Posted by Admin Posted on July 10 2018

     

    “Going green” at home — whether it’s your principal residence or a second home — can reduce your tax bill in addition to your energy bill, all while helping the environment, too. The catch is that, to reap all three benefits, you need to buy and install certain types of renewable energy equipment in the home. Invest in green and save green For 2018 and 2019, you may be eligible for a tax credit of 30% of expenditures (including costs for site preparation, assembly, installation, piping, and wiring) for installing the following types of renewable energy equipment: • Qualified solar electricity generating equipment and solar water heating equipment, • Qualified wind energy equipment, • Qualified geothermal heat pump equipment, and • Qualified fuel cell electricity generating equipment (limited to $500 for each half kilowatt of fuel cell capacity). Because these items can be expensive, the credits can be substantial. To qualify, the equipment must be installed at your U.S. residence, including a vacation home — except for fuel cell equipment, which must be installed at your principal residence. You can’t claim credits for equipment installed at a property that’s used exclusively as a rental. To qualify for the credit for solar water heating equipment, at least 50% of the energy used to heat water for the property must be generated by the solar equipment. And no credit is allowed for solar water heating equipment unless it’s certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state in which your residence is located. (Keep this certification with your tax records.) The credit rate for these expenditures is scheduled to drop to 26% in 2020 and then to 22% in 2021. After that, the credits are scheduled to expire. Document and explore As with all tax breaks, documentation is key when claiming credits for green investments in your home. Keep proof of how much you spend on qualifying equipment, including any extra amounts for site preparation, assembly and installation. Also keep a record of when the installation is completed, because you can claim the credit only for the year when that occurs. Be sure to look beyond the federal tax credits and explore other ways to save by going green. Your green home investments might also be eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates. To learn more about federal, state and local tax breaks available for green home investments, contact us. © 2018

    Do you know the ABCs of HSAs, FSAs and HRAs?

    Posted by Admin Posted on June 27 2018

     

    There continues to be much uncertainty about the Affordable Care Act and how such uncertainty will impact health care costs. So it’s critical to leverage all tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs. Here’s how to make sense of this alphabet soup of health care accounts.  

    HSAs  

    If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,450 for self-only coverage and $6,900 for family coverage for 2018. Plus, if you’re age 55 or older, you may contribute an additional $1,000.  

    You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.  

    FSAs  

    Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,650 in 2018. The plan pays or reimburses you for qualified medical expenses.  

    What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a grace period of two and a half months to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.  

    HRAs  

    A Health Reimbursement Account is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year.  

    There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.  

    Maximize the benefit  

    If you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. But tax-advantaged accounts aren’t the only way to save taxes in relation to health care. If you have questions about tax planning and health care expenses, please contact us.  

    © 2018  

    Choosing the best business entity structure post-TCJA

    Posted by Admin Posted on June 26 2018

    For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.

    On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.

    Conventional wisdom

    Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations: A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.

    Although C corporations are still potentially subject to double taxation under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, the break is available only for tax years beginning in 2018 through 2025.

    There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your business’s unique situation and your situation as an owner.

    3 common scenarios

    Here are three common scenarios and the entity-choice implications:;

    1. Business generates tax losses. For a business that consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. A pass-through entity will generally make more sense because losses pass through to the owners’ personal tax returns.

    2. Business distributes all profits to owners. For a profitable business that pays out all income to the owners, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.

    3. Business retains all profits to finance growth. For a business that’s profitable but holds on to its profits to fund future growth strategies, operating as a C corporation generally will be advantageous if the corporation is a qualified small business (QSB). Why? A 100% gain exclusion may be available for QSB stock sale gains. If QSB status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level.

    Many considerations

    These are only some of the issues to consider when making the C corporation vs. pass-through entity choice. We can help you evaluate your options.

    © 2018

    Consider the tax advantages of investing in qualified small business stock 

    Posted by Admin Posted on June 19 2018

    While the Tax Cuts and Jobs Act (TCJA) reduced most ordinary-income tax rates for individuals, it didn’t change long-term capital gains rates. They remain at 0%, 15% and 20%.   The 0% rate generally applies to taxpayers in the bottom two ordinary-income tax brackets (now 10% and 12%), but you no longer have to be in the top ordinary-income tax bracket (now 37%) to be subject to the top long-term capital gains rate of 20%. Many taxpayers in the 35% tax bracket also will be subject to the 20% rate.  

    So finding ways to defer or minimize taxes on investments is still important. One way to do that — and diversify your portfolio, too — is to invest in qualified small business (QSB) stock.  

    QSB defined  

    To be a QSB, a business must be a C corporation engaged in an active trade or business and must not have assets that exceed $50 million when you purchase the shares.  

    The corporation must be a QSB on the date the stock is issued and during substantially all the time you own the shares. If, however, the corporation’s assets exceed the $50 million threshold while you’re holding the shares, it won’t cause QSB status to be lost in relation to your shares.  

    2 tax advantages  

    QSBs offer investors two valuable tax advantages:  

    1. Up to a 100% exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude a portion of their gain if they’ve held the stock for more than five years. The amount of the exclusion depends on the acquisition date. The exclusion is 100% for stock acquired on or after Sept. 28, 2010. So if you purchase QSB stock in 2018, you can enjoy a 100% exclusion if you hold it until sometime in 2023. (The specific date, of course, depends on the date you purchase the stock.)  

    2. Tax-free gain rollovers. If you don’t want to hold the QSB stock for five years, you still have the opportunity to enjoy a tax benefit: Within 60 days of selling the stock, you can buy other QSB stock with the proceeds and defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.  

    More to think about  

    Additional requirements and limits apply to these breaks. For example, there are many types of business that don’t qualify as QSBs, ranging from various professional fields to financial services to hospitality and more.  

    Before investing, it’s important to also consider nontax factors, such as your risk tolerance, time horizon and overall investment goals. Contact us to learn more about QSB stock. 

    © 2018

     

    2018 Q3 tax calendar: Key deadlines for businesses and other employers

    Posted by Admin Posted on June 19 2018

    Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.


    July 31

    • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”) 
    • File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

    August 10

    • Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.  

    September 17

    • If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes. 
    • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
      • File a 2017 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
      • Make contributions for 2017 to certain employer-sponsored retirement plans.

    © 2018

    The tax impact of the TCJA on estate planning

    Posted by Admin Posted on June 13 2018

     

    The massive changes the Tax Cuts and Jobs Act (TCJA) made to income taxes have garnered the most attention. But the new law also made major changes to gift and estate taxes. While the TCJA didn’t repeal these taxes, it did significantly reduce the number of taxpayers who’ll be subject to them, at least for the next several years. Nevertheless, factoring taxes into your estate planning is still important.  

    Exemption increases  

    The TCJA more than doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million for 2018.  

    This amount will continue to be annually adjusted for inflation through 2025. Absent further congressional action, however, the exemptions will revert to their 2017 levels (adjusted for inflation) for 2026 and beyond.  

    The rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.  

    The impact  

    Even before the TCJA, the vast majority of taxpayers didn’t have to worry about federal gift and estate taxes. While the TCJA protects even more taxpayers from these taxes, those with estates in the roughly $6 million to $11 million range (twice that for married couples) still need to keep potential post-2025 estate tax liability in mind in their estate planning. Although their estates would escape estate taxes if they were to die while the doubled exemption is in effect, they could face such taxes if they live beyond 2025.  

    Any taxpayer who could be subject to gift and estate taxes after 2025 may want to consider making gifts now to take advantage of the higher exemptions while they’re available.  

    Factoring taxes into your estate planning is also still important if you live in a state with an estate tax. Even before the TCJA, many states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states will be even greater.  

    Finally, income tax planning, which became more important in estate planning back when exemptions rose to $5 million more than 15 years ago, is now an even more important part of estate planning.  

    For example, holding assets until death may be advantageous if estate taxes aren’t a concern. When you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains tax should he or she turn around and sell it. When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income tax.  

    Review your estate plan  

    Whether or not you need to be concerned about federal gift and estate taxes, having an estate plan in place and reviewing it regularly is important. Contact us to discuss the potential tax impact of the TCJA on your estate plan.  

    © 2018  

    2 tax law changes that may affect your business’s 401(k) plan 

    Posted by Admin Posted on June 12 2018

    When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.

    1. Plan loan repayment extension

    The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do. 

    Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59½).

    Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.

    2. Hardship swithdrawl limit increase

    Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.

    Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.) 

    Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.

    Nest egg harm

    These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement. 

    So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions. 

    © 2018 

    Factor in stat and local taxes when deciding where to live in retirement

    Posted by Admin Posted on June 06 2018

    Many Americans relocate to another state when they retire. If you’re thinking about such a move, state and local taxes should factor into your decision. 

    Income, property and sales tax

    Choosing a state that has no personal income tax may appear to be the best option. But that might not be the case once you consider property taxes and sales taxes.

    For example, suppose you’ve narrowed your decision down to two states: State 1 has no individual income tax, and State 2 has a flat 5% individual income tax rate. At first glance, State 1 might appear to be much less expensive from a tax perspective. What happens when you factor in other state and local taxes? 

    Let’s say the property tax rate in your preferred locality in State 1 is 5%, while it’s only 1% in your preferred locality in State 2. That difference could potentially cancel out any savings in state income taxes in State 1, depending on your annual income and the assessed value of the home. 

    Also keep in mind that home values can vary dramatically from location to location. So if home values are higher in State 1, there’s an even greater chance that State 1’s overall tax cost could be higher than State 2’s, despite State 1’s lack of income tax. 

    The potential impact of sales tax can be harder to estimate, but it’s a good idea at minimum to look at the applicable rates in the various retirement locations you’re considering.  

    More to think about

    If states you’re considering have an income tax, also look at what types of income they tax. Some states, for example, don’t tax wages but do tax interest and dividends. Others offer tax breaks for retirement plan and Social Security income.

    In the past, the federal income tax deduction for state and local property and income or sales tax could help make up some of the difference between higher- and lower-tax states. But with the Tax Cuts and Jobs Act (TCJA) limiting that deduction to $10,000 ($5,000 for married couples filing separately), this will be less help — at least through 2025, after which the limit is scheduled to expire.

    There’s also estate tax to consider. Not all states have estate tax, but it can be expensive in states that do. While under the TJCA the federal estate tax exemption has more than doubled from the 2017 level to $11.18 million for 2018, states aren’t necessarily keeping pace with the federal exemption. So state estate tax could be levied after a much lower exemption.

    Choose Wisely

    As you can see, it’s important to factor in state and local taxes as you decide where to live in retirement. You might ultimately decide on a state with higher taxes if other factors are more important to you. But at least you will have made an informed decision and avoid unpleasant tax surprises. Contact us to learn more. 

    © 2018

    Saving tax on restricted stock awards with the Sec. 83(b) election

    Posted by Admin Posted on May 30 2018

    Saving tax on restricted stock awards with the Sec. 83(b) election Today many employees receive stock-based compensation from their employer as part of their compensation and benefits package. The tax consequences of such compensation can be complex — subject to ordinary-income, capital gains, employment and other taxes. But if you receive restricted stock awards, you might have a tax-saving opportunity in the form of the Section 83(b) election. Convert ordinary income to long-term capital gains Restricted stock is stock your employer grants you subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk (that is, it’s vested) or you sell it. At that time, you pay taxes on the stock’s fair market value (FMV) at your ordinary-income rate. The FMV will be considered FICA income, so it also could trigger or increase your exposure to the additional 0.9% Medicare tax. But you can instead make a Sec. 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold. The Sec. 83(b) election can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly. With ordinary-income rates now especially low under the Tax Cuts and Jobs Act (TCJA), it might be a good time to recognize such income. Weigh the potential disadvantages There are some potential disadvantages, however: • You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax. But if your company is in the earlier stages of development, the income recognized may be relatively small. • Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value. However, you’d have a capital loss in those situations. • When you sell the shares, any gain will be included in net investment income and could trigger or increase your liability for the 3.8% net investment income tax. It’s complicated As you can see, tax planning for restricted stock is complicated. Let us know if you’ve recently been awarded restricted stock or expect to be awarded such stock this year. We can help you determine whether the Sec. 83(b) election makes sense in your specific situation. © 2018

    Putting your child on your business's payroll for the summer may make more tax sense than ever

    Posted by Admin Posted on May 30 2018

    If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).  

    How it works

    By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable. 

    Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings. 

    The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

    The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

    Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate. 

    Avoiding the "kiddie tax"

    TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

    The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income. 

    But the kiddie tax doesn’t apply to earned income.

    Other tax considerations

    If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact us to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies. 

    The TCJA changes some rules for deducting pass-through business losses

    Posted by Admin Posted on May 23 2018

    It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions. Before the TCJA Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless: • The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or • The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL). After the TCJA The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of: • Your aggregate business income and gains for the tax year, and • $250,000 ($500,000 if you’re a married taxpayer filing jointly). The excess business loss is carried over to the following tax year and can be deducted under the rules for NOLs. For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year. Keep in mind that the new loss limitation rules apply after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules. Expecting a business loss? The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains. The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses. If you’re expecting your business to generate a tax loss in 2018, contact us to determine whether you’ll be affected by the new loss limitation rules. We can also provide more information about the PAL and NOL rules. © 2018

    Be aware of the tax consequences before selling your home

    Posted by Admin Posted on May 17 2018

    In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.

    Home sale gain exclusion

    The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.

    As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

    To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.

    More tax considerations

    Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

    Here are some additional tax considerations when selling a home:

    Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

    Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

    Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

    A big investment 

    Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.

    Can you deduct business travel when it's combined with a vacation?

    Posted by Admin Posted on May 16 2018

    At this time of year, a summer vacation is on many people’s minds. If you travel for business, combining a business trip with a vacation to offset some of the cost with a tax deduction can sound appealing. But tread carefully, or you might not be eligible for the deduction you’re expecting. 

    General rules

    Business travel expenses are potentially deductible if the travel is within the United States and the expenses are “ordinary and necessary” and directly related to the business. (Foreign travel expenses may also be deductible, but stricter rules apply than are discussed here.)   Currently, business owners and the self-employed are potentially eligible to deduct business travel expenses. Under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed below assume that you’re a business owner or self-employed.  

    Business vs. pleasure

    Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally none of those costs are deductible.   The number of days spent on business vs. pleasure is the key factor in determining whether the primary reason for domestic travel is business:  

    • Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it would be impractical to return home.
    • Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days.
    • Any other day principally devoted to business activities during normal business hours also counts as a business day.

     

    You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days.

    Deductible expenses

    What transportation costs can you deduct? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, etc. Costs for rail travel or driving your personal car are also eligible.   Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.   Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you — unless they’re employees of your business and traveling for a bona fide business purpose. 

    Substantiation is critical

    Be sure to accumulate proof of the business nature of your trip and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or seminar, keep the program and take notes to show you attended the sessions. You also must properly substantiate all of the expenses you’re deducting.   Additional rules and limits apply to the travel expense deduction. Please contact us if you have questions.  

    Do you need to adjust your withholding?

    Posted by Admin Posted on May 09 2018

    If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan.

    That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different.

    The TCJA and withholding

    To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets — the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.

    The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.

    Perils of the new tables

    The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.

    The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

    More considerations

    Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

    • You get married or divorced,
    • You add or lose a dependent,
    • You purchase a home,
    • You start or lose a job, or
    • Your investment income changes significantly.

     

    You can modify your withholding at any time during the year, or even multiple times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. (For estimated tax payments, you can make adjustments each time quarterly payments are due.)

     

    The TCJA and your tax situation

    If you rely solely on the new withholding tables, you could run the risk of significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation

    IRS Audit Techniques Guides provide clues to what may come up if your business is audited

    Posted by Admin Posted on May 07 2018

    IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.

    What do ATGs cover?

    The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

    * The nature of the industry or issue,
    * Accounting methods commonly used in an industry,
    * Relevant audit examination techniques,
    * Common and industry-specific compliance issues,
    * Business practices,
    * Industry terminology, and
    * Sample interview questions.

    By using a specific ATG, an examiner may, for example, be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the taxpayer resides.

    What do ATGs advise?

    ATGs cover the types of documentation IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks.

    Other issues that ATGs might instruct examiners to inquire about include:

    * Internal controls (or lack of controls),
    * The sources of funds used to start the business,
    * A list of suppliers and vendors,
    * The availability of business records,
    * Names of individual(s) responsible for maintaining business records,
    * Nature of business operations (for example, hours and days open),
    * Names and responsibilities of employees,
    * Names of individual(s) with control over inventory, and
    * Personal expenses paid with business funds.

    For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

    Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

    Likewise, for gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.

    Avoiding red flags

    Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS. To access the complete list of ATGs, visit the IRS website https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs. And for more information on the IRS red flags that may be relevant to your business, contact us.

    Get started on 2018 tax planning now!

    Posted by Admin Posted on May 02 2018

    With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

    Many variables

    A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

    For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

    In other words, tax planning shouldn’t be just a year-end activity.

    Certainty vs. uncertainty

    Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. And additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.

    But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

    The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

    Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

    Now and throughout the year

    To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

    A review of significant TCJA provisions affecting small businesses

    Posted by Admin Posted on May 01 2018

    Now that small businesses and their owners have filed their 2017 income tax returns (or filed for an extension), it’s a good time to review some of the provisions of the Tax Cuts and Jobs Act (TCJA) that may significantly impact their taxes for 2018 and beyond. Generally, the changes apply to tax years beginning after December 31, 2017, and are permanent, unless otherwise noted.

    Corporate taxation

    * Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
    * Replacement of the flat personal service corporation (PSC) rate of 35% with a flat rate of 21%
    * Repeal of the 20% corporate alternative minimum tax (AMT)

    Pass-through taxation

    * Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
    * New 20% qualified business income deduction for owners — through 2025
    * Changes to many other tax breaks for individuals — generally through 2025

    New or expanded tax breaks

    * Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
    * Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million (these amounts will be indexed for inflation after 2018)
    * New tax credit for employer-paid family and medical leave — through 2019

    Reduced or eliminated tax breaks

    * New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
    * New limits on net operating loss (NOL) deductions
    * Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
    * New rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
    * New limitations on excessive employee compensation
    * New limitations on deductions for certain employee fringe
    benefits, such as entertainment and, in certain circumstances, meals and transportation

    Don’t wait to start 2018 tax planning

    This is only a sampling of some of the most significant TCJA changes that will affect small businesses and their owners beginning this year, and additional rules and limits apply. The combined impact of these changes should inform which tax strategies you and your business implement in 2018, such as how to time income and expenses to your tax advantage. The sooner you begin the tax planning process, the more tax-saving opportunities will be open to you. So don’t wait to start; contact us today.

    Tax record retention guidelines for individuals

    Posted by Admin Posted on Apr 24 2018

    What 2017 tax records can you toss once you’ve filed your 2017 return? The answer is simple: none. You need to hold on to all of your 2017 tax records for now. But it’s the perfect time to go through old tax records and see what you can discard.

    The 3-year and 6-year rules

    At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you potentially can get rid of most records related to tax returns for 2014 and earlier years. (If you filed an extension for your 2014 return, hold on to your records at least until the three-year anniversary of when you filed your extended return.)

    However, the statute of limitations extends to six years for taxpayers who understate their adjusted gross income by more than 25%. What constitutes an understatement may go beyond simply not reporting items of income. So a common rule of thumb is to save tax records for six years from filing, just to be safe.

    What to keep longer

    You’ll need to hang on to certain tax-related records beyond the statute of limitations:

    * Keep tax returns themselves forever, so you can prove to the IRS that you actually filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)
    * Hold on to W-2 forms until you begin receiving Social Security benefits. Questions might arise regarding your work record or earnings for a particular year, and your W-2 could provide the documentation needed.
    * Retain records related to real estate or investments as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return (or six years if you want to be extra safe).
    * Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years.

    Other documents

    We’ve covered retention guidelines for some of the most common tax-related records. If you have questions about other documents, please contact us.

    Tax document retention guidelines for small businesses

    Posted by Admin Posted on Apr 23 2018

    You may have breathed a sigh of relief after filing your 2017 income tax return (or requesting an extension). But if your office is strewn with reams of paper consisting of years’ worth of tax returns, receipts, canceled checks and other financial records (or your computer desktop is filled with a multitude of digital tax-related files), you probably want to get rid of what you can. Follow these retention guidelines as you clean up.

    General rules

    Retain records that support items shown on your tax return at least until the statute of limitations runs out — generally three years from the due date of the return or the date you filed, whichever is later. That means you can now potentially throw out records for the 2014 tax year if you filed the return for that year by the regular filing deadline. But some records should be kept longer.

    For example, there’s no statute of limitations if you fail to file a tax return or file a fraudulent one. So you’ll generally want to keep copies of your returns themselves permanently, so you can show that you did file a legitimate return.

    Also bear in mind that, if you understate your adjusted gross income by more than 25%, the statute of limitations period is six years.

    Some specifics for businesses

    Records substantiating costs and deductions associated with business property are necessary to determine the basis and any gain or loss when the property is sold. According to IRS guidelines, you should keep these for as long as you own the property, plus seven years.

    The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This timeframe generally will cover varying state and federal requirements.) Also keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.

    For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period.

    Regulations for sales tax returns vary by state. Check the rules for the states where you file sales tax returns. Retention periods typically range from three to six years.

    When in doubt, don’t throw it out

    It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If you’re unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. But, again, you should keep tax returns themselves permanently, and other rules or guidelines might apply in certain situations. Please contact us with any questions.

    Individual tax calendar: Important deadlines for the remainder of 2018

    Posted by Admin Posted on Apr 17 2018

    While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

    Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

    June 15

    • File a 2017 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
    • Pay the second installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

    September 17

    • Pay the third installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

    October 1

    • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2017 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

    October 15

    • File a 2017 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
    • Make contributions for 2017 to certain retirement plans or establish a SEP for 2017, if an automatic six-month extension was filed.
    • File a 2017 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

    December 31

    • Make 2018 contributions to certain employer-sponsored retirement plans.
    • Make 2018 annual exclusion gifts (up to $15,000 per recipient).
    • Incur various expenses that potentially can be claimed as itemized deductions on your 2018 tax return. Examples include charitable donations, medical expenses and property tax payments.

    But remember that some types of expenses that were deductible on 2017 returns won’t be deductible on 2018 returns under the Tax Cuts and Jobs Act, such as unreimbursed work-related expenses, certain professional fees, and investment expenses. In addition, some deductions will be subject to new limits. Finally, with the nearly doubled standard deduction, you may no longer benefit from itemizing deductions.

    TCJA changes to employee benefits tax breaks: 4 negatives and a positive

    Posted by Admin Posted on Apr 16 2018

    The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits.

    4 breaks curtailed

    Beginning with the 2018 tax year, the TCJA reduces or eliminates tax breaks in the following areas:

    1. Transportation benefits. The TCJA eliminates business deductions for the cost of providing qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. (These benefits are still tax-free to recipient employees.) It also disallows business deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And it suspends through 2025 the tax-free benefit of up to $20 a month for bicycle commuting.

    2. On-premises meals. The TCJA reduces to 50% a business’s deduction for providing certain meals to employees on the business premises, such as when employees work late or if served in a company cafeteria. (The deduction is scheduled for elimination in 2025.) For employees, the value of these benefits continues to be tax-free.

    3. Moving expense reimbursements. The TCJA suspends through 2025 the exclusion from employees’ taxable income of a business’s reimbursements of employees’ qualified moving expenses. However, businesses generally will still be able to deduct such reimbursements.

    4. Achievement awards. The TCJA eliminates the business tax deduction and corresponding employee tax exclusion for employee achievement awards that are provided in the form of cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer. The deduction/exclusion limits remain at up to $400 of the value of achievement awards for length of service or safety and $1,600 for awards under a written nondiscriminatory achievement plan.

    1 new break

    For 2018 and 2019, the TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. To qualify, a business must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages. Leave required by state or local law or that was already part of the business’s employee benefits program generally doesn’t qualify.

    The credit equals a minimum of 12.5% of the amount of wages paid during a leave period. The credit is increased gradually for payments above 50% of wages paid and tops out at 25%. No double-dipping: Employers can’t also deduct wages claimed for the credit.

    More rules, limits and changes

    Keep in mind that additional rules and limits apply to these breaks, and that the TCJA makes additional changes affecting employee benefits. Contact us for more details.

    Haven’t filed your 2017 income tax return yet? Beware of these pitfalls

    Posted by Admin Posted on Apr 11 2018

    The federal income tax filing deadline is slightly later than usual this year — April 17 — but it’s now nearly upon us. So, if you haven’t filed your individual return yet, you may be thinking about an extension. Or you may just be concerned about meeting the deadline in the eyes of the IRS. Whatever you do, don’t get tripped up by one of these potential pitfalls.

    Filing for an extension

    Filing for an extension allows you to delay filing your return until the applicable extension deadline, which for 2017 individual tax returns is October 15, 2018.

    While filing for an extension can provide relief from April 17 deadline stress and avoid failure-to-file penalties, there are some possible pitfalls:

    • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • If you expect to owe tax, to avoid potential interest and penalties you still must (with a few exceptions) pay any tax due by April 17.
    • If you expect a refund, remember that you’re simply extending the amount of time your money is in the government’s pockets rather than your own. (If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.)

     

    Meeting the April 17 deadline

    The IRS considers a paper return that’s due April 17 to be timely filed if it’s postmarked by midnight. Sounds straightforward, but here’s a potential pitfall: Let’s say you mail your return with a payment on April 17, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you can still be hit with both failure-to-file and failure-to-pay penalties.

    To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

    • DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope,
    • FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
    • UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.

     

    Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.

    Avoiding interest and penalties

    Despite the potential pitfalls, filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. We can help you estimate whether you owe tax and how much you should pay by April 17. Please contact us if you need help or have questions about avoiding interest and penalties.

    A net operating loss on your 2017 tax return isn’t all bad news

    Posted by Admin Posted on Apr 10 2018

    Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even nondeductible contributions can be beneficial.

    When a company’s deductible expenses exceed its income, generally a net operating loss (NOL) occurs. If when filing your 2017 income tax return you found that your business had an NOL, there is an upside: tax benefits. But beware — the Tax Cuts and Jobs Act (TCJA) makes some significant changes to the tax treatment of NOLs.

    Pre-TCJA law

    Under pre-TCJA law, when a business incurs an NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.

    The business can, however, elect instead to carry the entire loss forward. If cash flow is strong, this may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

    But the TCJA has established a flat 21% tax rate for C corporation taxpayers beginning with the 2018 tax year, and the rate has no expiration date. So C corporations don’t have to worry about being pushed into a higher tax bracket unless Congress changes the corporate rates again.

    Also keep in mind that the rules are more complex for pass-through entities, such as partnerships, S corporations and limited liability companies (if they elected partnership tax treatment). Each owner’s allocable share of the entity’s loss is passed through to the owners and reported on their personal returns. The tax benefit depends on each owner’s particular tax situation.

    The TCJA changes

    The changes the TCJA made to the tax treatment of NOLs generally aren’t favorable to taxpayers:

    • For NOLs arising in tax years ending after December 31, 2017, a qualifying NOL can’t be carried back at all. This may be especially detrimental to start-up businesses, which tend to generate NOLs in their early years and can greatly benefit from the cash-flow boost of a carried-back NOL. (On the plus side, the TCJA allows NOLs to be carried forward indefinitely, as opposed to the previous 20-year limit.
    • For NOLs arising in tax years beginning after December 31, 2017, an NOL carryforward generally can’t be used to shelter more than 80% of taxable income in the carryforward year. (Under prior law, generally up to 100% could be sheltered.)

     

    The differences between the effective dates for these changes may have been a mistake, and a technical correction might be made by Congress. Also be aware that, in the case of pass-through entities, owners’ tax benefits from the entity’s net loss might be further limited under the TCJA’s new “excess business loss” rules.

    Complicated rules get more complicated

    NOLs can provide valuable tax benefits. The rules, however, have always been complicated, and the TCJA has complicated them further. Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefit of an NOL.

    You still have time to make 2017 IRA contributions

    Posted by Admin Posted on Apr 03 2018

    Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even nondeductible contributions can be beneficial.

    Don’t lose the opportunity

    The 2017 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2017). But any unused limit can’t be carried forward to make larger contributions in future years.

    This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So to maximize your potential for tax-deferred or tax-free savings, it’s a good idea to use up as much of your annual limit as possible.

    3 types of contributions

    If you haven’t already maxed out your 2017 IRA contribution limit, consider making one of these types of contributions by April 17:

    1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2017 tax return. If you or your spouse does participate in an employer-sponsored plan, your deduction is subject to a modified adjusted gross income (MAGI) phaseout:

    • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
      • For a spouse who participates: $99,000–$119,000.
      • For a spouse who doesn’t participate: $186,000–$196,000.
    • For single and head-of-household taxpayers participating in an employer-sponsored plan: $62,000–$72,000.

    Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

    2. Roth. With Roth IRAs, contributions aren’t deductible, but qualified distributions — including growth — are tax-free. Your ability to contribute, however, is subject to a MAGI-based phaseout:

    • For married taxpayers filing jointly: $186,000–$196,000.
    • For single and head-of-household taxpayers: $118,000–$133,000.

    You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

    3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth.

    Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

    Maximize your tax-advantaged savings

    Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us to learn more about making 2017 contributions and making the most of IRAs in 2018 and beyond.

    Should you file Form SS-8 to ask the IRS to determine a worker’s status?

    Posted by Admin Posted on Apr 03 2018

    Classifying workers as independent contractors — rather than employees — can save businesses money and provide other benefits. But the IRS is on the lookout for businesses that do this improperly to avoid taxes and employee benefit obligations.

    To find out how the IRS will classify a particular worker, businesses can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, the IRS has a history of reflexively classifying workers as employees, and filing this form may alert the IRS that your business has classification issues — and even inadvertently trigger an employment tax audit.

    Contractor vs. employee status

    A business enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws.

    On the downside, if the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties. That’s why filing IRS Form SS-8 for an up-front determination may sound appealing.

    But because of the risks involved, instead of filing the form, it can be better to simply properly treat independent contractors so they meet the tax code rules. Among other things, this generally includes not controlling how the worker performs his or her duties, ensuring you’re not the worker’s only client, providing Form 1099 and, overall, not treating the worker like an employee.

    Be prepared for workers filing the form

    Workers seeking determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to health, retirement and other employee benefits and want to eliminate self-employment tax liabilities.

    After a worker files Form SS-8, the IRS sends a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return it to the IRS, which will render a classification decision. But the Form SS-8 determination process doesn’t constitute an official IRS audit.

    Passing IRS muster

    If your business properly classifies workers as independent contractors, don’t panic if a worker files a Form SS-8. Contact us before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that can pass muster with the IRS.

    Can you claim your elderly parent as a dependent on your tax return?

    Posted by Admin Posted on Mar 27 2018

    Perhaps. It depends on several factors, such as your parent’s income and how much financial support you provided. If you qualify for the adult-dependent exemption on your 2017 income tax return, you can deduct up to $4,050 per qualifying adult dependent. However, for 2018, under the Tax Cuts and Jobs Act, the dependency exemption is eliminated.

    Income and support

    For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

    In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

    Keep in mind that, even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

    Housing

    Don’t forget about your home. If your parent lived with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence.

    If the parent lived elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contributed to that housing expense counts toward the 50% test.

    Other savings opportunities

    Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit on your 2017 (or 2018) return, you must itemize deductions and the combined medical expenses paid for you, your dependents and your parent for the year must exceed 7.5% of your adjusted gross income.

    The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. For 2018 through 2025, while the exemption is suspended, you might be eligible for a $500 “family” tax credit for your adult dependent. We’d be happy to provide additional information. Contact us to learn more.

    2018 Q2 tax calendar: Key deadlines for businesses and other employers

    Posted by Admin Posted on Mar 26 2018

    Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

    April 2

    • Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

    April 17

    • If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
    • If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

    April 30

    • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

    May 10

    • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

    June 15

    • If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

    Home-related tax breaks are valuable on 2017 returns, will be less so for 2018

    Posted by Admin Posted on Mar 21 2018

    Home ownership is a key element of the American dream for many, and the U.S. tax code includes many tax breaks that help support this dream. If you own a home, you may be eligible for several valuable breaks when you file your 2017 return. But under the Tax Cuts and Jobs Act, your home-related breaks may not be as valuable when you file your 2018 return next year.

    2017 vs. 2018

    Here’s a look at various home-related tax breaks for 2017 vs. 2018:

    Property tax deduction. For 2017, property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT). For 2018, your total deduction for all state and local taxes, including both property taxes and either income taxes or sales taxes, is capped at $10,000.

    Mortgage interest deduction. For 2017, you generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. However, for 2018, if the mortgage debt was incurred on or after December 15, 2017, the debt limit generally is $750,000.

    Home equity debt interest deduction. For 2017, interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. (If home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes). For 2018, the TCJA suspends the home equity interest deduction. But the IRS has clarified that such interest generally still will be deductible if used for home improvements.

    Mortgage insurance premium deduction. This break expired December 31, 2017, but Congress might extend it.

    Home office deduction. For 2017, if your home office use meets certain tests, you may be able to deduct associated expenses or use a simplified method for claiming the deduction. Employees claim this as a miscellaneous itemized deduction, which means there will be tax savings only to the extent that the home office deduction plus other miscellaneous itemized deductions exceeds 2% of adjusted gross income. The self-employed can deduct home office expenses from self-employment income. For 2018, miscellaneous itemized deductions subject to the 2% floor are suspended, so only the self-employed can deduct home office expenses.

    Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Changes to this break had been proposed, but they weren’t included in the final TCJA that was signed into law.

    Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2017, but Congress might extend it.

    Additional rules and limits apply to these breaks. To learn more, contact us. We can help you determine which home-related breaks you’re eligible to claim on your 2017 return and how your 2018 tax situation may be affected by the TCJA.

    Defer tax with a Section 1031 exchange, but new limits apply this year

    Posted by Admin Posted on Mar 19 2018

    Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.

    What is a like-kind exchange?

    Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

    This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

    Deferred and reverse exchanges

    Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

    When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

    An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

    Changes under the TCJA

    There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate.

    But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.

    Complex rules

    The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us. We can help you ensure you’re in compliance with the rules.

    Casualty losses can provide a 2017 deduction, but rules tighten for 2018

    Posted by Admin Posted on Mar 13 2018

    If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. For 2018 through 2025, however, the Tax Cuts and Jobs Act suspends this deduction except for losses due to an event officially declared a disaster by the President.

    What is a casualty? It’s a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

    Here are some things you should know about deducting casualty losses on your 2017 return:

    When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

    Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)

    $100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

    10% rule. You must reduce the total of all your casualty losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

    Note that special relief has been provided to certain victims of Hurricanes Harvey, Irma and Maria and California wildfires that affects some of these rules. For details on this relief or other questions about casualty losses, please contact us.

    Make sure repairs to tangible property were actually repairs before you deduct the cost

    Posted by Admin Posted on Mar 12 2018

    Repairs to tangible property, such as buildings, machinery, equipment or vehicles, can provide businesses a valuable current tax deduction — as long as the so-called repairs weren’t actually “improvements.” The costs of incidental repairs and maintenance can be immediately expensed and deducted on the current year’s income tax return. But costs incurred to improve tangible property must be depreciated over a period of years.

    So the size of your 2017 deduction depends on whether the expense was a repair or an improvement.

    Betterment, restoration or adaptation

    In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be depreciated. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

    Under the “betterment test,” you generally must depreciate amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

    Under the “restoration test,” you generally must depreciate amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

    Under the “adaptation test,” you generally must depreciate amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

    Seeking safety

    Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

    1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

    Amounts incurred for activities outside the safe harbor don’t necessarily have to be depreciated, though. These amounts are subject to analysis under the general rules for improvements.

    2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

    There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. To learn more about these safe harbors and exemptions and other ways to maximize your tangible property deductions, contact us.

    Size of charitable deductions depends on many factors

    Posted by Admin Posted on Mar 08 2018

    Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

    Type of gift

    One of the biggest factors affecting your deduction is what you give:

    Cash. You may deduct 100% gifts made by check, credit card or payroll deduction.

    Ordinary-income property. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.

    Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

    Tangible personal property. Your deduction depends on the situation:

    • If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis.
    • If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.

    Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

    Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.

    Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

    Other factors

    First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable donation deductions may be reduced if they exceed certain income-based limits.

    In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.

    2018 planning

    While December’s Tax Cuts and Jobs Act (TCJA) preserves the charitable deduction, it temporarily makes itemizing less attractive for many taxpayers, reducing the tax benefits of charitable giving for them.

    Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA nearly doubles the standard deduction — plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.

    You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.

    Let us know if you have questions about how much you can deduct on your 2017 return or what your charitable giving strategy should be going forward, in light of the TCJA.

    Don’t forget: 2017 tax filing deadline for pass-through entities is March 15

    Posted by Admin Posted on Mar 06 2018

    When it comes to income tax returns, April 15 (actually April 17 this year, because of a weekend and a Washington, D.C., holiday) isn’t the only deadline taxpayers need to think about. The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this has been the S corporation deadline for a long time, it’s only the second year the partnership deadline has been in March rather than in April.

    Why the deadline change?

    One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April filing deadline. After all, partnership (and S corporation) income passes through to the owners. The earlier date allows owners to use the information contained in the pass-through entity forms to file their personal returns.

    What about fiscal-year entities?

    For partnerships with fiscal year ends, tax returns are now due the 15th day of the third month after the close of the tax year. The same deadline applies to fiscal-year S corporations. Under prior law, returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

    What about extensions?

    If you haven’t filed your calendar-year partnership or S corporation return yet, you may be thinking about an extension. Under the current law, the maximum extension for calendar-year partnerships is six months (until September 17, 2018, for 2017 returns). This is up from five months under prior law. So the extension deadline is the same — only the length of the extension has changed. The extension deadline for calendar-year S corporations also is September 17, 2018, for 2017 returns.

    Whether you’ll be filing a partnership or an S corporation return, you must file for the extension by March 15 if it’s a calendar-year entity.

    When does an extension make sense?

    Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now.

    But keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. If, however, filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 17 deadline.

    Have more questions about the filing deadlines that apply to you or avoiding interest and penalties? Contact us.

    What’s your mileage deduction?

    Posted by Admin Posted on Feb 27 2018

    Individuals can deduct some vehicle-related expenses in certain circumstances. Rather than keeping track of the actual costs, you can use a standard mileage rate to compute your deductions. For 2017, you might be able to deduct miles driven for business, medical, moving and charitable purposes. For 2018, there are significant changes to some of these deductions under the Tax Cuts and Jobs Act (TCJA).

    Mileage rates vary

    The rates vary depending on the purpose and the year:

    Business: 53.5 cents (2017), 54.5 cents (2018)

    Medical: 17 cents (2017), 18 cents (2018)

    Moving: 17 cents (2017), 18 cents (2018)

    Charitable: 14 cents (2017 and 2018)

    The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle. The charitable rate is lower than the medical and moving rate because it isn’t adjusted for inflation.

    In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

    2017 and 2018 limits

    The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

    For example, if you’re an employee, only business mileage not reimbursed by your employer is deductible. It’s a miscellaneous itemized deduction subject to a 2% of adjusted gross income (AGI) floor. For 2017, this means mileage is deductible only to the extent that your total miscellaneous itemized deductions for the year exceed 2% of your AGI. For 2018, it means that you can’t deduct the mileage, because the TCJA suspends miscellaneous itemized deductions subject to the 2% floor for 2018 through 2025.

    If you’re self-employed, business mileage can be deducted against self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

    Miles driven for health-care-related purposes are deductible as part of the medical expense deduction. And an AGI floor applies. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. For 2019, the floor will return to 10%, unless Congress extends the 7.5% floor.

    And while miles driven related to moving can be deductible on your 2017 return, the move must be work-related and meet other tests. For 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.

    Substantiation and more

    There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

    We can help ensure you deduct all the mileage you’re entitled to on your 2017 tax return but don’t risk back taxes and penalties later for deducting more than allowed. Contact us for assistance and to learn how your mileage deduction for 2018 might be affected by the TCJA.

    Sec. 179 expensing provides small businesses tax savings on 2017 returns — and more savings in the future

    Posted by Admin Posted on Feb 26 2018

    If you purchased qualifying property by December 31, 2017, you may be able to take advantage of Section 179 expensing on your 2017 tax return. You’ll also want to keep this tax break in mind in your property purchase planning, because the Tax Cuts and Jobs Act (TCJA), signed into law this past December, significantly enhances it beginning in 2018.

    2017 Sec. 179 benefits

    Sec. 179 expensing allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations. For tax years that began in 2017, the maximum Sec. 179 deduction is $510,000. The maximum deduction is phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeds the phaseout threshold of $2.03 million.

    Qualified real property improvement costs are also eligible for Sec. 179 expensing. This real estate break applies to:

    • Certain improvements to interiors of leased nonresidential buildings,
    • Certain restaurant buildings or improvements to such buildings, and
    • Certain improvements to the interiors of retail buildings.

     

    Deductions claimed for qualified real property costs count against the overall maximum for Sec. 179 expensing.

    Permanent enhancements

    The TCJA permanently enhances Sec. 179 expensing. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million, and the phaseout threshold is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for the acquisition is signed.

    The new law also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for Sec. 179 expensing is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

    Save now and save later

    Many rules apply, so please contact us to learn if you qualify for this break on your 2017 return. We’d also be happy to discuss your future purchasing plans so you can reap the maximum benefits from enhanced Sec. 179 expensing and other tax law changes under the TCJA.

    Tax credit for hiring from certain “target groups” can provide substantial tax savings

    Posted by Admin Posted on Feb 21 2018

    Many businesses hired in 2017, and more are planning to hire in 2018. If you’re among them and your hires include members of a “target group,” you may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2017 and obtained proper certification, you can claim the WOTC on your 2017 tax return.

    Whether or not you’re eligible for 2017, keep the WOTC in mind in your 2018 hiring plans. Despite its proposed elimination under the House’s version of the Tax Cuts and Jobs Act, the credit survived the final version that was signed into law in December, so it’s also available for 2018.

    “Target groups,” defined

    Target groups include:

    • Qualified individuals who have been unemployed for 27 weeks or more,
    • Designated community residents who live in Empowerment Zones or rural renewal counties,
    • Long-term family assistance recipients,
    • Qualified ex-felons,
    • Qualified recipients of Temporary Assistance for Needy Families (TANF),
    • Qualified veterans,
    • Summer youth employees,
    • Supplemental Nutrition Assistance Program (SNAP) recipients,
    • Supplemental Security Income benefits recipients, and
    • Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

    Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you. Unfortunately, this means that, if you hired someone from a target group in 2017 but didn’t obtain the certification, you can’t claim the WOTC on your 2017 return.

    A potentially valuable credit

    Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

    • Target group of the individual hired,
    • Wages paid to that individual, and
    • Number of hours that individual worked during the first year of employment.

    The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans.

    Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if you hired 10 individuals from target groups that qualify for the $2,400 credit, your total credit would be $24,000.

    Remember, credits reduce your tax bill dollar-for-dollar; they don’t just reduce the amount of income subject to tax like deductions do. So that’s $24,000 of actual tax savings.

    Offset hiring costs

    The WOTC can provide substantial tax savings when you hire qualified new employees, offsetting some of the cost. Contact us for more information.

    Tax deduction for moving costs: 2017 vs. 2018

    Posted by Admin Posted on Feb 21 2018

    If you moved for work-related reasons in 2017, you might be able to deduct some of the costs on your 2017 return — even if you don’t itemize deductions. (Or, if your employer reimbursed you for moving expenses, that reimbursement might be excludable from your income.) The bad news is that, if you move in 2018, the costs likely won’t be deductible, and any employer reimbursements will probably be included in your taxable income.

    Suspension for 2018–2025

    The Tax Cuts and Jobs Act (TCJA), signed into law this past December, suspends the moving expense deduction for the same period as when lower individual income tax rates generally apply: 2018 through 2025. For this period it also suspends the exclusion from income of qualified employer reimbursements of moving expenses.

    The TCJA does provide an exception to both suspensions for active-duty members of the Armed Forces (and their spouses and dependents) who move because of a military order that calls for a permanent change of station.

    Tests for 2017

    If you moved in 2017 and would like to claim a deduction on your 2017 return, the first requirement is that the move be work-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction.

    The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would have increased your commute significantly.

    Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.)

    Deductible expenses

    The moving expense deduction is an “above-the-line” deduction, which means it’s subtracted from your gross income to determine your adjusted gross income. It’s not an itemized deduction, so you don’t have to itemize to benefit.

    Generally, you can deduct:

    • Transportation and lodging expenses for yourself and household members while moving,
    • The cost of packing and transporting your household goods and other personal property,
    • The expense of storing and insuring these items while in transit, and
    • Costs related to connecting or disconnecting utilities.

    But don’t expect to deduct everything. Meal costs during move-related travel aren’t deductible • nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return.

    Please contact us if you have questions about whether you can deduct moving expenses on your 2017 return or about what other tax breaks won’t be available for 2018 under the TCJA.

    Families with college students may save tax on their 2017 returns with one of these breaks

    Posted by Admin Posted on Feb 13 2018

    Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.

    But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.

    Higher education breaks 101

    While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So first you need to see which breaks you’re eligible for. Then you need to determine which one will provide the greatest benefit.

    Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.

    Credits

    Two credits are available for higher education expenses:

    1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
    2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

    But income-based phaseouts apply to these credits.

    If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.

    Deductions

    Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

    Be aware that the tuition and fees deduction was extended only through December 31, 2017. So it won’t be available on your 2018 return unless Congress extends it again or makes it permanent.

    Maximizing your savings

    If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2017 tax returns — and which will provide the greatest tax savings — please contact us.

    Small business owners: A SEP may give you one last 2017 tax and retirement saving opportunity

    Posted by Admin Posted on Feb 12 2018

    Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) may be just what you need, and now may be a great time to establish one. A SEP has high contribution limits and is simple to set up. Best of all, there’s still time to establish a SEP for 2017 and make contributions to it that you can deduct on your 2017 income tax return.

    2018 deadlines for 2017

    A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2017 in 2018 as long as you do it before your 2017 return filing deadline. You have until the same deadline to make 2017 contributions and still claim a potentially hefty deduction on your 2017 return.

    Generally, other types of retirement plans would have to have been established by December 31, 2017, in order for 2017 contributions to be made (though many of these plans do allow 2017 contributions to be made in 2018).

    High contribution limits

    Contributions to SEPs are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than yourself: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. The contributions go into SEP-IRAs established for each eligible employee.

    For 2017, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $270,000, subject to a contribution cap of $54,000. (The 2018 limits are $275,000 and $55,000, respectively.)

    Simple to set up

    A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

    Additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. Contact us to learn more about SEPs and how they might reduce your tax bill for 2017 and beyond.

    TCJA temporarily lowers medical expense deduction threshold

    Posted by Admin Posted on Feb 06 2018

    With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that may be hard to meet. Fortunately, the Tax Cuts and Jobs Act (TCJA) has temporarily reduced the threshold.

    What expenses are eligible?

    Medical expenses may be deductible if they’re “qualified.” Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. Examples include payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices and prescription drugs.

    Mileage driven for health-care-related purposes is also deductible at a rate of 17 cents per mile for 2017 and 18 cents per mile for 2018. Health insurance and long-term care insurance premiums can also qualify, with certain limits.

    Expenses reimbursed by insurance or paid with funds from a tax-advantaged account such as a Health Savings Account or Flexible Spending Account can’t be deducted. Likewise, health insurance premiums aren’t deductible if they’re taken out of your paycheck pretax.

    The AGI threshold

    Before 2013, you could claim an itemized deduction for qualified unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items reduced by certain “above-the-line” deductions, such as those for deductible IRA contributions and student loan interest.

    As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI went into effect in 2014 for most taxpayers and was scheduled to go into effect in 2017 for taxpayers age 65 or older. But under the TCJA, the 7.5%-of-AGI deduction threshold now applies to all taxpayers for 2017 and 2018.

    However, this lower threshold is temporary. Beginning January 1, 2019, the 10% threshold will apply to all taxpayers, including those over age 65, unless Congress takes additional action.

    Consider “bunching” expenses into 2018

    Because the threshold is scheduled to increase to 10% in 2019, you might benefit from accelerating deductible medical expenses into 2018, to the extent they’re within your control.

    However, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

    Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction on your 2017 tax return. We can also help you determine whether bunching medical expenses into 2018 will likely save you tax.

    Claiming bonus depreciation on your 2017 tax return may be particularly beneficial

    Posted by Admin Posted on Feb 05 2018

    With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.

    Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.

    Pre- and post-TCJA

    Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.

    The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

    But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.

    A good tax strategy • or not?

    Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.

    On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

    What to do on your 2017 return

    The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.

    If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.

    If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

    State and local sales tax deduction remains, but subject to a new limit

    Posted by Admin Posted on Feb 01 2018

    Individual taxpayers who itemize their deductions can deduct either state and local income taxes or state and local sales taxes. The ability to deduct state and local taxes — including income or sales taxes, as well as property taxes — had been on the tax reform chopping block, but it ultimately survived. However, for 2018 through 2025, the Tax Cuts and Jobs Act imposes a new limit on the state and local tax deduction. Will you benefit from the sales tax deduction on your 2017 or 2018 tax return?

    Your 2017 return

    The sales tax deduction can be valuable if you reside in a state with no or low income tax or purchased a major item in 2017, such as a car or boat. How do you determine whether you can save more by deducting sales tax on your 2017 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.

    This isn’t as difficult as you might think: You don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).

    Your 2018 return

    Under the TCJA, for 2018 through 2025, your total deduction for all state and local taxes combined — including property tax — is limited to $10,000. You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.

    Also keep in mind that the TCJA nearly doubles the standard deduction. So even if itemizing has typically benefited you in the past, you could end up being better off taking the standard deduction when you file your 2018 return.

    So if you’re considering making a large purchase in 2018, you shouldn’t necessarily count on the sales tax deduction providing you significant tax savings. You need to look at what your total state and local tax liability likely will be, as well as whether your total itemized deductions are likely to exceed the standard deduction.

    Questions?

    Let us know if you have questions about whether you can benefit from the sales tax deduction on your 2017 return or about the impact of the TCJA on your 2018 tax planning. We’d be pleased to help.

    2 tax credits just for small businesses may reduce your 2017 and 2018 tax bills

    Posted by Admin Posted on Jan 30 2018

    Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.

    1. Credit for paying health care coverage premiums

    The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.

    The maximum credit is 50% of group health coverage premiums paid by the employer, if it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.

    The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.

    At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

    2. Credit for starting a retirement plan

    Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

    Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

    If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.

    Determining eligibility

    Providing employee benefits can help businesses attract and retain the best workers. But the cost can be out of reach for some small businesses. Two tax credits can help make benefits more affordable for eligible small employers: 1) a credit equal to as much as 50% of health coverage premiums paid, and 2) a credit of up to $500 for creating a retirement plan. Contact us to learn if you can take these or other credits on your 2017 tax return and to plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year.

    Can you deduct home office expenses?

    Posted by Admin Posted on Jan 23 2018

    Working from home has become commonplace. But just because you have a home office space doesn’t mean you can deduct expenses associated with it. And for 2018, even fewer taxpayers will be eligible for a home office deduction.

    Changes under the TCJA

    For employees, home office expenses are a miscellaneous itemized deduction. For 2017, this means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses (such as unreimbursed work-related travel, certain professional fees and investment expenses) exceed 2% of your adjusted gross income.

    For 2018 through 2025, this means that, if you’re an employee, you won’t be able to deduct any home office expenses. Why? The Tax Cuts and Jobs Act (TCJA) suspends miscellaneous itemized deductions subject to the 2% floor for this period.

    If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income. Therefore, the deduction will still be available to you for 2018 through 2025.

    Other eligibility requirements

    If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.

    Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.

    2 deduction options

    If you’re eligible, the home office deduction can be a valuable tax break. You have two options for the deduction:

    1. Deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space. This requires calculating, allocating and substantiating actual expenses.

    2. Take the “safe harbor” deduction. Only one simple calculation is necessary: $5 × the number of square feet of the office space. The safe harbor deduction is capped at $1,500 per year, based on a maximum of 300 square feet.

    More rules and limits

    Be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction on your 2017 return or would like to know if there’s anything additional you need to do to be eligible on your 2018 return, contact us.

    Meals, entertainment and transportation may cost businesses more under the TCJA

    Posted by Admin Posted on Jan 23 2018

    Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

    Meals and entertainment

    Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

    Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.

    Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.

    Transportation

    The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

    The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

    Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

    Assessing the impact

    The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

    Personal exemptions and standard deductions and tax credits, oh my!

    Posted by Admin Posted on Jan 16 2018

    Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down. The TCJA also makes a lot of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes. One interrelated group of changes affecting many taxpayers are those to personal exemptions, standard deductions and the child credit.

    Personal exemptions

    For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up.

    For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.

    Standard deduction

    Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

    For 2017, the standard deductions are $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

    The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)

    For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

    Child credit

    Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

    The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

    The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

    Tip of the iceberg

    Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond. And what’s discussed here is just the tip of the iceberg. For example, the TCJA also makes many changes to itemized deductions. For help assessing the impact on your tax situation, please contact us.

    Your 2017 tax return may be your last chance to take the “manufacturers’ deduction”

    Posted by Admin Posted on Jan 16 2018

    While many provisions of the Tax Cuts and Jobs Act (TCJA) will save businesses tax, the new law also reduces or eliminates some tax breaks for businesses. One break it eliminates is the Section 199 deduction, commonly referred to as the “manufacturers’ deduction.” When it’s available, this potentially valuable tax break can be claimed by many types of businesses beyond just manufacturing companies. Under the TCJA, 2017 is the last tax year noncorporate taxpayers can take the deduction (2018 for C corporation taxpayers).

    The basics

    The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts (DPGR).

    Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

    The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

    Calculating DPGR

    To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of DPGR exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t • unless less than 5% of receipts aren’t attributable to DPGR.

    DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as tangible personal property (for example, machinery and office equipment), computer software, and master copies of sound recordings.

    The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

    Learn more

    Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2017 return. We can also help address any questions you may have about other business tax breaks that have been reduced or eliminated by the TCJA.

    Full article: Don’t be a victim of tax identity theft: File your 2017 return early

    Posted by Admin Posted on Jan 15 2018

    The IRS has just announced that it will begin accepting 2017 income tax returns on January 29. You may be more concerned about the April 17 filing deadline, or even the extended deadline of October 15 (if you file for an extension by April 17). After all, why go through the hassle of filing your return earlier than you have to?

    But it can be a good idea to file as close to January 29 as possible: Doing so helps protect you from tax identity theft.

    All-too-common scam

    Here’s why early filing helps: In an all-too-common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

    A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

    Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

    The IRS is working with the tax industry and states to improve safeguards to protect taxpayers from tax identity theft. But filing early may be your best defense.

    W-2s and 1099s

    Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2017 interest, dividend or reportable miscellaneous income payments.

    If you don’t receive a W-2 or 1099, first contact the entity that should have issued it. If by mid-February you still haven’t received it, you can contact the IRS for help.

    Earlier refunds

    Of course, if you’ll be getting a refund, another good thing about filing early is that you’ll get your refund sooner. The IRS expects over 90% of refunds to be issued within 21 days. E-filing and requesting a direct deposit refund generally will result in a quicker refund and also can be more secure. If you have questions about tax identity theft or would like help filing your 2017 return early, please contact us.

    New tax law gives pass-through businesses a valuable deduction

    Posted by Admin Posted on Jan 09 2018

    Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).

    A 20% deduction

    For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.

    QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

    The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.

    The limitations

    For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:

    • 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
    • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

    Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.

    Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).

    The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

    Careful planning required

    Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details.

    The TCJA temporarily expands bonus depreciation

    Posted by Admin Posted on Jan 02 2018

    The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

    Pre-TCJA bonus depreciation

    Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

    In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

    TCJA expansion

    The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

    The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

    Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.

    For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.

    Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.

    Most individual tax rates go down under the TCJA

    Posted by Admin Posted on Jan 02 2018

    The Tax Cuts and Jobs Act (TCJA) generally reduces individual tax rates for 2018 through 2025. It maintains seven individual income tax brackets but reduces the rates for all brackets except 10% and 35%, which remain the same.

    It also makes some adjustments to the income ranges each bracket covers. For example, the 2017 top rate of 39.6% kicks in at $418,401 of taxable income for single filers and $470,701 for joint filers, but the reduced 2018 top rate of 37% takes effect at $500,001 and $600,001, respectively.

    Below is a look at the 2018 brackets under the TCJA. Keep in mind that the elimination of the personal exemption, changes to the standard and many itemized deductions, and other changes under the new law could affect the amount of your income that’s subject to tax. Contact us for help assessing what your tax rate likely will be for 2018.

    Single individuals

    Taxable income Tax
    Not over $9,525 10% of the taxable income
    Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
    Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
    Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
    Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
    Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000
    Over $500,000 $150,689.50 plus 37% of the excess over $500,000

    Heads of households

    Taxable income Tax
    Not over $13,600 10% of the taxable income
    Over $13,600 but not over $51,800 $1,360 plus 12% of the excess over $13,600
    Over $51,800 but not over $82,500 $5,944 plus 22% of the excess over $51,800
    Over $82,500 but not over $157,500 $12,698 plus 24% of the excess over $82,500
    Over $157,500 but not over $200,000 $30,698 plus 32% of the excess over $157,500
    Over $200,000 but not over $500,000 $44,298 plus 35% of the excess over $200,000
    Over $500,000 $149,298 plus 37% of the excess over $500,000

    Married individuals filing joint returns and surviving spouses

    Taxable income Tax
    Not over $19,050 10% of the taxable income
    Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050
    Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400
    Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000
    Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000
    Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000
    Over $600,000 $161,379 plus 37% of the excess over $600,000

    Married individuals filing separate returns

    Taxable income Tax
    Not over $9,525 10% of the taxable income
    Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
    Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
    Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
    Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
    Over $200,000 but not over $300,000 $45,689.50 plus 35% of the excess over $200,000
    Over $300,000 $80,689.50 plus 37% of the excess over $300,000

    Tax Cuts and Jobs Act: Key provisions affecting businesses

    Posted by Admin Posted on Jan 02 2018

    The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.

    Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.

    • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
    • Repeal of the 20% corporate alternative minimum tax (AMT)
    • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
    • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
    • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
    • Other enhancements to depreciation-related deductions
    • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
    • New limits on net operating loss (NOL) deductions
    • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
    • New rule limiting like-kind exchanges to real property that is not held primarily for sale
    • New tax credit for employer-paid family and medical leave — through 2019
    • New limitations on excessive employee compensation
    • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

    Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.

    Tax Cuts and Jobs Act: Key provisions affecting individuals

    Posted by Admin Posted on Dec 27 2017

    On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.

    The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.

    • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
    • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)
    • Elimination of personal exemptions
    • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
    • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent
    • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
    • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)
    • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
    • Elimination of the deduction for interest on home equity debt
    • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
    • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
    • Elimination of the AGI-based reduction of certain itemized deductions
    • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
    • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent
    • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers
    • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)

    Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.

    401(k) retirement plan contribution limit increases for 2018; most other limits are stagnant

    Posted by Admin Posted on Dec 19 2017

    Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2018. But one piece of good news for taxpayers who’re already maxing out their contributions is that the 401(k) limit has gone up by $500. The only other limit that has increased from the 2017 level is for contributions to defined contribution plans, which has gone up by $1,000.




    Type of limit 2018 limit
    Elective deferrals to 401(k), 403(b), 457(b)(2)
    and 457(c)(1) plans
    $18,500
    Contributions to defined contribution plans $55,000
    Contributions to SIMPLEs $12,500
    Contributions to IRAs $5,500
    Catch-up contributions to 401(k), 403(b), 457(b)(2)
    and 457(c)(1) plans
    $6,000
    Catch-up contributions to SIMPLEs $3,000
    Catch-up contributions to IRAs $1,000

    If you’re not already maxing out your contributions to other plans, you still have an opportunity to save more in 2018. And if you turn age 50 in 2018, you can begin to take advantage of catch-up contributions.

    Higher-income taxpayers should also be pleased that some limits on their retirement plan contributions that had been discussed as part of tax reform didn’t make it into the final legislation.

    However, keep in mind that there are still additional factors that may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.

    If you have questions about how much you can contribute to tax-advantaged retirement plans in 2018, check with us.

    This year’s company holiday party is probably tax deductible, but next year’s may not be

    Posted by Admin Posted on Dec 19 2017

    Many businesses are hosting holiday parties for employees this time of year. It’s a great way to reward your staff for their hard work and have a little fun. And you can probably deduct 100% of your 2017 party’s cost as a meal and entertainment (M&E) expense. Next year may be a different story.

    The 100% deduction

    • For recreational or social activities for employees, such as holiday parties and summer picnics,
    • For food and beverages furnished at the workplace primarily for employees, and
    • That are excludable from employees’ income as de minimis fringe benefits.

    There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

    Additional requirements

    Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.

    If your company has substantial meal and entertainment expenses, you can reduce your 2017 tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

    Possible changes for 2018

    It appears the M&E deduction for employee parties — along with deductions for many other M&E expenses — will be eliminated beginning in 2018 under the reconciled version of the Tax Cuts and Jobs Act. For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction when you file your 2017 return, please contact us.

    What you need to know about year-end charitable giving in 2017

    Posted by Admin Posted on Dec 12 2017

    Charitable giving can be a powerful tax-saving strategy: Donations to qualified charities are generally fully deductible, and you have complete control over when and how much you give. Here are some important considerations to keep in mind this year to ensure you receive the tax benefits you desire.

    Delivery date

    To be deductible on your 2017 return, a charitable donation must be made by Dec. 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

    The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

    Check. The date you mail it.

    Credit card. The date you make the charge.

    Pay-by-phone account. The date the financial institution pays the amount.

    Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

    Qualified charity status

    To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

    The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

    Potential impact of tax reform

    The charitable donation deduction isn’t among the deductions that have been proposed for elimination or reduction under tax reform. In fact, income-based limits on how much can be deducted in a particular year might be expanded, which will benefit higher-income taxpayers who make substantial charitable gifts.

    However, for many taxpayers, accelerating into this year donations that they might normally give next year may make sense for a couple of tax-reform-related reasons:

    1. If your tax rate goes down for 2018, then 2017 donations will save you more tax because deductions are more powerful when rates are higher.
    2. If the standard deduction is raised significantly and many itemized deductions are eliminated or reduced, then it may not make sense for you to itemize deductions in 2018, in which case you wouldn’t benefit from charitable donation deduction next year.

     

    Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making — or the potential impact of tax reform on your charitable giving plans.

     

    Should you buy a business vehicle before year end?

    Posted by Admin Posted on Dec 12 2017

    One way to reduce your 2017 tax bill is to buy a business vehicle before year end. But don’t make a purchase without first looking at what your 2017 deduction would be and whether tax reform legislation could affect the tax benefit of a 2017 vs. 2018 purchase.

    Your 2017 deduction

    Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your 2017 deduction will depend on several factors. One is the gross vehicle weight rating.

    The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2017 is $510,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.03 million.

    But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2017, under current law, the depreciation limit is $3,160. And the amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.

    In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.

    Factoring in tax reform

    If tax reform legislation is signed into law and it will cause your marginal rate to go down in 2018, then purchasing a vehicle by December 31, 2017, could save you more tax than waiting until 2018. Why? Tax deductions are more powerful when rates are higher. But if your 2017 Sec. 179 expense deduction would be reduced or eliminated because of the asset acquisition phaseout, then you might be better off waiting until 2018 to buy.

    Also be aware that tax reform legislation could affect the depreciation limits for passenger vehicles, even if purchased in 2017.

    These are just a few factors to look at. Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to discuss whether it would make more tax sense to buy this year or next.

    7 last-minute tax-saving tips

    Posted by Admin Posted on Dec 05 2017

    The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2017 tax liability — you just must act by December 31:

    January 31

    1. Pay your 2017 property tax bill that’s due in early 2018. Make your January 1 mortgage payment.
    2. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the 10% of adjusted gross income floor).
    3. Pay tuition for academic periods that will begin in January, February or March of 2018 (if it will make you eligible for a tax credit on your 2017 return).
    4. Donate to your favorite charities.
    5. Sell investments at a loss to offset capital gains you’ve recognized this year.
    6. Ask your employer if your bonus can be deferred until January.

     

    Many of these strategies could be particularly beneficial if tax reform is signed into law this year that, beginning in 2018, reduces tax rates and limits or eliminates certain deductions (such as property tax, mortgage interest and medical expense deductions — though the Senate bill would actually reduce the medical expense deduction AGI floor to 7.5% for 2017 and 2018, potentially allowing more taxpayers to qualify for the deduction in these years and to enjoy a larger deduction).

    Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results. (Even with tax reform legislation, some taxpayers might find themselves in higher brackets next year.)

    If you’re unsure whether these steps are right for you, consult us before taking action.

    2018 Q1 tax calendar: Key deadlines for businesses and other employers

    Posted by Admin Posted on Dec 05 2017

    Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

    January 31

    * File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.

    * Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.

    * File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.

    * File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 12 to file the return.

    * File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 12 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)

    * File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.

    February 28

    * File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.)

    March 15

    * If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

    Even if your income is high, your family may be able to benefit from the 0% long-term capital gains rate

    Posted by Admin Posted on Nov 29 2017

    We’re entering the giving season, and if making financial gifts to your loved ones is part of your plans — or if you’d simply like to reduce your capital gains tax — consider giving appreciated stock instead of cash this year. Doing so might allow you to eliminate all federal tax liability on the appreciation, or at least significantly reduce it.

    Leveraging lower rates

    Investors generally are subject to a 15% tax rate on their long-term capital gains (20% if they’re in the top ordinary income tax bracket of 39.6%). But the long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.

    In addition, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe the net investment income tax (NIIT). The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.

    If you have loved ones in the 0% bracket, you may be able to take advantage of it by transferring appreciated assets to them. The recipients can then sell the assets at no or a low federal tax cost.

    The strategy in action

    Faced with a long-term capital gains tax rate of 23.8% (20% for the top tax bracket, plus the 3.8% NIIT), Rick and Sara decide to transfer some appreciated stock to their adult daughter, Maia. Just out of college and making only enough from her entry-level job to leave her with $25,000 in taxable income, Maia falls into the 15% income tax bracket. Therefore, she qualifies for the 0% long-term capital gains rate.

    However, the 0% rate applies only to the extent that capital gains “fill up” the gap between Maia’s taxable income and the top end of the 15% bracket. In 2017, the 15% bracket for singles tops out at $37,950.

    When Maia sells the stock her parents transferred to her, her capital gains are $20,000. Of that amount $12,950 qualifies for the 0% rate and the remaining $7,050 is taxed at 15%. Maia pays only $1,057.50 of federal tax on the sale vs. the $4,760 her parents would have owed had they sold the stock themselves.

    Additional considerations

    Before acting, make sure the recipients won’t be subject to the “kiddie tax.” Also consider any gift and generation-skipping transfer (GST) tax consequences.

    For more information on transfer taxes, the kiddie tax or capital gains planning, please contact us. We can help you find the strategies that will best achieve your goals.

    Accrual-basis taxpayers: These year-end tips could save you tax

    Posted by Admin Posted on Nov 28 2017

    With the possibility that tax law changes could go into effect next year that would significantly reduce income tax rates for many businesses, 2017 may be an especially good year to accelerate deductible expenses. Why? Deductions save more tax when rates are higher.

    Timing income and expenses can be a little more challenging for accrual-basis taxpayers than for cash-basis ones. But being an accrual-basis taxpayer also offers valuable year-end tax planning opportunities when it comes to deductions.

    Tracking incurred expenses

    The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2018. This will enable you to deduct those expenses on your 2017 federal tax return. Common examples of such expenses include:

    • Commissions, salaries and wages,
    • Payroll taxes,
    • Advertising,
    • Interest,
    • Utilities,
    • Insurance, and
    • Property taxes.

    You can also accelerate deductions into 2017 without actually paying for the expenses in 2017 by charging them on a credit card. (This works for cash-basis taxpayers, too.)

    As noted, accelerating deductible expenses into 2017 may be especially beneficial if tax rates go down for 2018.

    Prepaid expenses

    Also review all prepaid expense accounts. Then write off any items that have been used up before the end of the year.

    If you prepay insurance for a period of time beginning in 2017, you can expense the entire amount this year rather than spreading it between 2017 and 2018, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

    And there’s more …

    Here are a few more year-end tax tips to consider:

    • Review your outstanding receivables and write off any receivables you can establish as uncollectible.
    • Pay interest on all shareholder loans to or from the company.
    • Update your corporate record book to record decisions and be better prepared for an audit.

    To learn more about how these and other year-end tax strategies may help your business reduce its 2017 tax bill, contact us.

    You may need to add RMDs to your year-end to-do list

    Posted by Admin Posted on Nov 22 2017

    As the end of the year approaches, most of us have a lot of things on our to-do lists, from gift shopping to donating to our favorite charities to making New Year’s Eve plans. For taxpayers “of a certain age” with a tax-advantaged retirement account, as well as younger taxpayers who’ve inherited such an account, there may be one more thing that’s critical to check off the to-do list before year end: Take required minimum distributions (RMDs).

    A huge penalty

    After you reach age 70½, you generally must take annual RMDs from your:

    • IRAs (except Roth IRAs), and
    • Defined contribution plans, such as 401(k) plans (unless you’re still an employee and not a 5%-or-greater shareholder of the employer sponsoring the plan)

    An RMD deferral is available in the initial year, but then you’ll have to take two RMDs the next year. The RMD rule can be avoided for Roth 401(k) accounts by rolling the balance into a Roth IRA.

    For taxpayers who inherit a retirement plan, the RMD rules generally apply to defined-contribution plans and both traditional and Roth IRAs. (Special rules apply when the account is inherited from a spouse.)

    RMDs usually must be taken by December 31. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

    Should you withdraw more than the RMD?

    Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

    Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

    Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

    For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.