Tuesday, May 8, 2018

New tax law, new money tricks

Four months into living under the new tax law, it’s time for you to learn some new tricks that just might save you some money.
Before 2018, making a charitable donation likely lowered your income and lowered your taxes. In a very real way, Uncle Sam was your partner in giving. He’s not quite the partner he used to be!
Since January 1 and the dawn of our new tax law, you may not be enjoying any tax benefits from your charitable donations. That is, unless you change your method of giving.
When you donate to charity, you basically list out your donations and add them up. Using tax lingo, you itemize them. Other itemized deductions include things such as your mortgage interest, your property taxes, your state income taxes and your out-of-pocket medical expenses. The old tax law and the new one preserved these itemized deductions.
But the new law made three notable changes to your deductions.
First, it now limits the combined deductibility of your property taxes and state income taxes to $10,000.
Second, it completely wiped out the deductibility of your miscellaneous expenses. This means your investment management fees and the cost of your tax preparation aren’t deductible anymore. (Tip: talk to your adviser.)
These two changes may have lowered your total itemized deductions.
The third change is the near doubling of the “standard deduction” that every taxpayer gets automatically. For example, for an older, married couple, the new standard deduction is nearly $27,000. Last year, it was around $15,000.
Given the larger standard deduction, compared with your possibly lower itemized deductions, you may not even itemize your deductions at all. Therefore, it’s possible that your donations won’t increase your deductions and you’ll receive no tax break for having made them.
Thankfully, as always, there are some tricks to get around the new tax law that can help you preserve the tax deductibility of your charitable giving.
For those older than age 70.5, you can donate to charity directly from your IRA. These are known as “qualified charitable distributions” and they work to satisfy, in part or in whole, your annual required minimum distribution (RMD) from your IRA. The best part is, the money you give directly to charity out of your IRA doesn’t count as income on your tax return. Just like that, your charitable gift will lower your tax bill!
For those under age 70.5, that strategy isn’t yet in your bag of tricks. Instead, you might consider “bunching up” years worth of your charitable donations into a single year. The objective is to deliberately boost your itemized deductions above your new standard deduction, at least for that year, and reap some tax benefits for your giving.

Friday, May 4, 2018

A new game in town: How businesses can maximize the 20% pass-through deduction

The recently enacted Tax Cuts and Jobs Act (TCJA) is one of the largest pieces of federal tax legislation since 1986. Many of the provisions in the act are not permanent and are scheduled to expire after Dec. 31, 2025.

One of the more controversial income tax topics and the one with the most potential impact, could be the new Internal Revenue Code Section 199A deduction, also referred to as the 20 percent pass-through deduction.

In an effort to keep the tax rates of pass-through businesses somewhat in line with corporate tax rates (which were reduced to 21 percent under the TCJA), individuals, trusts, and estates who are eligible owners of pass-through businesses can deduct 20 percent of qualified business income (QBI). Taxpayers who are eligible for the deduction are owners of sole proprietorships (Schedule C), sole owners or tenants in common owners of rental real estate (Schedule E), partnership or LLC owners (Form 1065), and S-Corporation owners (Form 1120S).

Qualified business income
The term “qualified business income” means, for any taxable year, the net amount of income, gains, deductions, and loss with respect to any qualified trade or business of a taxpayer. The term “trade or business” is not defined by statute or regulations, but is rather determined by a “facts and circumstances” test.

In general, to qualify as a trade or business, an entity must show profit motive, continuous and regular activity that has begun, and the sale of goods or services.

To prevent abuse of the deduction, the new QBI rules include certain limitations. A limitation on the amount of the pass-through deduction is imposed on income derived from certain specified service businesses (including lawyers, doctors, accountants, consultants, and financial advisors but excluding engineering and architecture firms).

The pass-through deduction for owners of these personal service businesses begins to be phased out when the owner’s taxable income (from all sources and not from just the personal service business) exceeds $315,000 for married taxpayers filing jointly ($157,500 for a single person) and is completely eliminated when taxable income reaches $415,000 married filing jointly ($207,500 for a single person). The deduction cannot exceed the taxpayer’s taxable income and is available even to taxpayers who take a standard deduction.

For non-specified service businesses, the QBI deduction may also be limited if the business does not employ a substantial number of employees or invest in a substantial amount of property (this limitation is referred to as the “wages and property” limitation).
Taxpayers who are able to take advantage of the full 20 percent QBI deduction will effectively be taxed on only 80 percent of each dollar. This savings could reduce their top marginal tax rate on income from pass-through entities from a 2018 top tax rate of 37 percent to a reduced rate of 29.6 percent (37 percent x 80 percent).

Plan ahead
Given the substantial tax benefit available for those who are eligible taxpayers, there may be significant planning opportunities to explore to take advantage of the deduction.
Appropriate strategies could include:
  • Reducing income through pension contributions or expensing capital purchases to reduce the amount of income exceeding the threshold amounts and increase the deduction.
  • Increasing business income by paying off debt or increasing W-2 wages in non-specified service businesses.
  • Adding qualified property or spinning out practice buildings or equipment into separate entities.
With the QBI deduction set to expire on Dec. 31, 2025, now is the time to explore possible opportunities to maximize the 20 percent pass-through deduction and generate income tax savings over the next eight years.

Thursday, May 3, 2018

New tax law creates confusion about entertainment deductions

FROM www.financial-planning.com

The tax rules related to meals and entertainment have changed, and left some uncertainty in the gap between the old law and the new.
Before the new tax law took effect, the deduction allowed for entertainment expenses was limited to 50% of the amount otherwise deductible. Under the new law, the deduction for entertainment is completely repealed. Prior to the act, a 50% deduction was allowed for expenses related to business meals that were not lavish or extravagant. The confusion results from the issue of whether such business meals fall under the entertainment umbrella, or are still deductible.
“It now raises the question of what is an entertainment expense,” says Nathan Smith, director at the accounting firm CBIZ MHM. “Taxpayers have to be certain as to what falls under that category. It made no difference before, since there was a 50% deduction either way. Now, if it’s entertainment, it’s totally nondeductible.”
Until the IRS comes out with guidance in the area, the confusion will remain, according to Smith: “Some would argue that taking a client out for a meal clearly falls under entertainment. You could make a strong case for that by looking at the legislative notes for prior legislation, which suggest that meals are entertainment. On the other hand, the committee reports for the current law passed last December indicate they did not intend to change prior-law treatment for business meals. But the actual law that’s on the books doesn’t say this.”
“The consensus is that business meals are not caught under the entertainment umbrella and remain 50% deductible, which is what the committee report indicated, but it’s not the law,” he continues. “Nothing in the code says that meals are only entertainment and can be nothing else. The 50% deduction for business meals will likely remain, but we just don’t know for sure.”
“It will be some time before we see guidance on this,” says Meredith Kowal, senior manager of R&D tax credit services at the accounting firm Aprio.
“It comes down to intent — are you really entertaining customers or are you having a business discussion to solve an issue,” she explains. “Documentation is increasingly important this year, as it will provide more opportunity to deduct items now considered ‘gray area’ due to the vague rules.”
“The IRS will provide more guidance in the coming months,” she says. “What it will come down to is whether there is a business purpose, and what is the business purpose? What people don’t realize is that extravagant entertainment — such as a luxury suite at a ballgame — has always been disallowed. The luxury suite portion was disallowed in the past but the regular ticket price was deductible.”
And contrary to common misconceptions, internal expenses such as holiday parties, and team-building outings that boost employee morale are still fully deductible, Kowal indicates. “And sponsorships are often included in the same contract as a suite or box,” she says. “While the suite or box is no longer deductible, the sponsorship is still deductible.”
“My interpretation now, without more clarification, is that a meal is a meal, and entertainment is entertainment,” says Emily Matthews, principal at Boston-based Edelstein & Co. “So if you’re going to a game, the tickets are not deductible, but if you go to dinner beforehand and talk about business, that’s trickier. Arguably the meal would be 50 percent deductible, but there is some clarity to be had there.”
“Clearly the idea is to cut back on entertainment side, but to allow for the business meal to take place,” says Roger Harris, president of Padgett Business Services. “Make sure that while you’re eating you’re discussing business matters. If the conversation is boring and you feel like falling asleep, it’s probably deductible.”

Wednesday, May 2, 2018

New Tax Law Increasing Need for Specialized Tax Professionals

When President Donald Trump signed the new Tax Cuts and Jobs Act into law last December, it included the most sweeping changes to tax structures for corporations in decades, leading companies to assess the impact on their financial statement disclosures and creating additional financial reporting and audit risk considerations to both companies and their external auditors.
With studies showing tax account complexity and judgement errors as common reasons for tax-related misstatements, the Big 4 accounting firms have been focused on addressing the latest tax accounting developments and ASC 740, a set of financial accounting and reporting standards, for the effects of income taxes that result from a company's activities during the current and preceding years.
Companies, when facing increased strain in their internal tax department, may consult with specialized tax professionals to achieve better control over tax accounting issues. Companies typically use either one or a combination of (1) their external auditor, (2) other consultants including tax and law firms, or (3) their internal tax departments for tax compliance and planning services.
In addition to the reduction in the corporate tax rate from 35 to 21 percent, tax professionals face a new tax regime for foreign earnings and a mandatory earnings repatriation tax, new limits on interest and net operating loss deductions, the elimination or expansion of deductions, the retirement of tax credits and the creation of even more.

Tuesday, May 1, 2018

5 Moves to Reduce Your 2018 Taxes

FROM consumerreports.org

If you submitted your taxes on time, you’re probably keenly aware of your financial situation and ready to move on. But it may be a good idea to think about taxes a little longer and start figuring out how to reduce them next year.

The Tax Cuts and Job Act that went into effect on Jan. 1 will help many people pocket more of their income thanks to its higher standard deductions and more generous tax brackets. But because it eliminates many itemized deductions, it makes things more complicated for others.
Here are five ways to reduce your 2018 taxes and pave the way for lower taxes in the future. 

Review Your Withholdings

Your paycheck should now reflect the new tax law, but that could change the number of withholding allowances you should take. To figure out how many you'll need, you should consider not just your income but also your spouse's income and any credits and deductions that you take.

If your household income comes mostly from your paycheck, the IRS’s new withholding calculator can help you estimate how much you should be withholding.
But if you also have income from other sources, such as rental income, investments, or a side business, the calculator won’t work. In this case, you may want to consult a tax expert.

Increase Your Retirement Fund Contributions

Because your tax bite could be lower in 2018, consider putting after-tax funds into a Roth 401(k) or IRA because there's less benefit now to making pretax contributions to a tax-deferred account.
But if the loss or reduction of itemized deductions, such as state income and property tax, will cost you more in taxes, consider making bigger pretax contributions to a traditional 401(k) or IRA to reduce your taxable income now.

Appeal Your Property Taxes

Asking for a reduction in your property tax could be worthwhile in parts of the country where taxes exceed the new law’s deduction limit of $10,000 on state and local taxes

The deadline to file an appeal varies by state and even jurisdiction. New Jersey’s April 1 deadline for 2018 has passed, California’s is July 1, and New York’s varies depending on the municipality. How homes are assessed for taxes also varies by location.  
To appeal your property tax, you'll have to prove that your home’s tax assessment is based on a valuation that is too high. You could pay a professional to do that for you or try to appeal yourself. One method is to identify comparable properties to yours that have sold recently; you can find those on real-estate websites. If the market values are significantly lower than the value used to come up with your tax assessment, you may have a case.
“The best time to appeal your property taxes is when you just bought your home or are about to sell it, because you know what it’s worth.
The potential savings can be significant. In New Jersey, where the average home sells for $400,000 or more and property taxes often exceed $10,000, the typical tax rate is about 2 to 3 percent of market value. “If you were to prove that your assessment was $50,000 too high, you’d save about $1,000 on your tax bill.”  

Plan Your Charitable Spending

Because of the near doubling of the standard deduction, the new tax law has significantly reduced the number of households that need to itemize their taxes.
But if you plan your charitable contributions, you might be able to get enough deductions that it pays to itemize. For example, instead of donating, say, $5,000 every year, try donating $10,000 in one year and nothing in the second year.
If that $10,000 contribution, when added to your other deductions, puts you over the standard deduction limit, you'll benefit. The next year you don't donate anything, so you'll probably take the standard deduction. 

While this won't help you increase your tax savings every year, this "bunching" strategy allows you to save more over time than you would just using the standard deduction every year. And it doesn’t require you to spend more just to reduce your taxable income. 
If the charities you donate to depend on your largesse every year, consider setting up a donor-advised fund with an investment company, a fairly simple process with minimal fees.
Your contribution to the fund counts as a charitable donation in the year you make it, but you get to choose when the money is distributed. That allows you to give money every year, even though you’re donating every other year.  

Qualify Your Business for a 20% Tax Break

Owners of so-called “pass-through entities”—those who claim their business income on their individual income tax forms—may now be able to exempt 20 percent of that income from federal taxes.
If you make a significant income from your pass-through business, you’ll run into eligibility rules. Professionals like lawyers, accountants, and consultants don’t qualify once their incomes exceed $207,500 for an individual or $405,000 for a married couple filing jointly.
But single filers with total taxable income of less than $157,000 in 2018—and joint filers with taxable income under $315,000—can take advantage of the pass-through tax break regardless of their line of work. That goes for folks with side jobs and home-based businesses as well.
“For many individuals in the gig economy that have an established trade or business, this is very good news,” 
The key to maintaining that break as your business grows is to keep your taxable income below those thresholds, 
For instance, if you already can project your income exceeding the threshold for 2018, increase your pretax retirement contributions to a SEP individual retirement arrangement, an IRA for the self-employed. You could also replace bonds in your portfolio that generate taxable interest with tax-exempt bonds. Be aware, too, of the potential downside of selling appreciated assets that generate capital gains. “While long-term capital gains have a reduced tax rate, the ultimate impact may be higher due to a reduction in your pass-through deduction,” .
The new tax law also changed the rules on depreciating and expensing equipment. Now, if you want to reduce taxable income, you might just go buy some equipment and expense it. “I think you will see a lot more capital investment for flexible taxpayers,”. 

Monday, April 30, 2018

Changes in itemized deductions for 2018

As many of you are aware there were sweeping tax law changes that went into effect beginning in 2018.
These were approved very late in 2017 and many of the rule changes are still being clarified. The Tax Cut and Jobs Act of 2017 significantly changed many aspects of both the business income tax and individual income tax code. Changes occurred in many areas, especially in the area of deductions for individual income tax preparers.
A taxpayer is allowed to choose between the standard deduction or itemized deduction. The wise choice the higher of the two.
These deductions reduce taxable income and therefore the tax which a taxpayer must pay
There has been a substantial increase in the standard deduction.
For a married couple the standard deduction has been increased from $12,700 to $24,000, and for individuals and married filing separate taxpayers this standard deduction has been increased from $6,350 to $12,000. As in the past, if you are over 65 years old, blind or disabled you can tack on $1,300 each for married taxpayers and $1,600 for unmarried taxpayers.
There are new restrictions and changes in itemized deductions.
The deduction for state and local income taxes and real estate taxes combined is now limited to $10,000. This will present a substantial limit for many Ohio tax filers since we pay state and local income taxes as well as real estate taxes.
Another significant change that could adversely impact some taxpayers is the complete elimination of the ability to deduct “Job Expenses and Certain Miscellaneous Deductions.” This entire category of expenses is no longer deductible. Items that were previously deductible within this category include tax preparation fees, investment management fees, unreimbursed employee business expenses, job search expenses and safe deposit box fees.
Taxpayers who will be especially hard hit by this deduction elimination will be employees who incur substantial out-of-pocket unreimbursed employee expenses. Traveling salespeople, truck drivers, and employees who work from their own home office. Typical expenses which had been deductible in the past include mileage, travel expenses, business meals, tools, uniforms and home office expenses. Since this entire category of deductions has been eliminated, these taxpayers will no longer be able to claim this deduction. If the amount that was previously being claimed was significant, the corresponding tax impact will also be significant.
One of the implications of these changes is that many fewer taxpayers will elect to itemize.
The most common areas of itemized deductions are state, local and real estate taxes, mortgage interest and charitable contributions. Unless the total of these exceed the standard deduction amount, which is $24,000 for a married couple, then the couple should take the standard deduction. A couple will be hard pressed to surpass that figure with the sublimit of $10,000 on state, local and real estate taxes.
In other words, a typical couple would need to have over $14,000 in mortgage interest and charitable contributions combined for them to benefit through itemizing on their return.
There are a lot of new rules that have been enacted that will take years to fully understand and become the norm by which we operate by.
Gaining a better understanding of these new rules will help a taxpayer in planning their decisions which could impact their tax obligation.

Sunday, December 17, 2017

A 2017 federal tax deduction for prepaying anticipated 2018 state income taxes? Not likely!

In anticipation of enactment of the House and Senate proposed federal tax legislation, some commentators and tax practitioners are suggesting that — in view of the likely elimination of the state income tax deduction for 2018 and subsequent years — individual taxpayers prepay their 2018 state income tax liability and claim the deduction on their 2017 federal income tax returns. Aside from the problem that many high-income taxpayers will find benefits significantly limited because they will face the alternative minimum tax, we believe there is scant authority, if any, in federal tax law to support the position of deductibility of a prepayment of tax for a year that has not yet arrived.

Prior revenue rulings

Commentators have cited Rev. Rul. 71-190 and Rev. Rul. 82-208 as the basis for claiming a 2017 deduction for payments made in 2017 to be applied to a tax liability in 2018 — notably, a year that has not even arrived at the time of payment, let alone produced any income, deductions, credits, or other items to support a tax calculation. Any payment might be in the form of an estimated tax — to be credited against the 2018 tax liability when it is determined. Some states (e.g., Wisconsin) have a form for receiving a payment in advance. However, neither of those rulings addresses this type of situation. They both address a payment of taxes very late in a given tax year — for example in 2017 — with respect to that tax year (i.e., 2017 in this example). In fact, the latter ruling was adverse to the taxpayer (the payment was held not deductible) because the taxpayer had no reasonable basis to believe he owed additional state taxes and was apparently only attempting to reduce his federal tax for the year at issue.
Other tax professionals have cited the capitalization regulations — Regs. Sec. 1.263(a)-4(f) — as authority, as the regulations allow the deduction of expenses paid in advance where the tax benefit does not extend beyond 12 months. This is an exception to those regulations’ general requirement at Regs. Sec. 1.263(a)-4(d)(3) that prepaid expenses must be capitalized. However, not only is there no direct reference or example of a deduction for taxes paid in advance for a year that has not yet arrived, but the purpose of the regulations is to govern business-related expenditures “paid to acquire or create intangibles,” a very different situation from an advance payment of personal income taxes for a subsequent year. In fact, we believe the regulations have no applicability to the issue discussed here.
In addition, Regs. Sec. 1.263(a)-4(f)(4) provides that Regs. Sec. 1.263(a)-4(f)(1) does not apply to amounts paid to create (or facilitate the creation of) an intangible of indefinite duration. Where there is no liability yet in existence, the payment of an excessive 2017 estimated tax payment would apply against a future liability that is not limited in duration. There is no certainty, for example, as to whether the taxpayer would exist in order to recognize the income. The taxpayer may die in an accident early in 2018 before recognizing any income. It cannot be said that there is a liability for state income tax beyond Dec. 31, 2017.

Professional standards

Any deduction in 2017 for a payment of anticipated 2018 state income taxes is clearly a tax position that requires the CPA adviser-tax preparer to comply with AICPA Statements on Standards for Tax Services (SSTS) No. 1, Tax Return Positions, for preparation of a return and SSTS No. 7, Form and Content of Advice to Taxpayers, for advising on the position. In addition, tax preparers must comply with the preparer penalty provisions of Sec. 6694 (and the regulations thereunder) and Circular 230, Section 10.34, standards with respect to tax returns and documents, affidavits, and other papers, and Section 10.37 if the advice is provided in writing.
Basically, these professional standards with regard to taking and advising on a tax position are quite similar and consistent in that they require a tax preparer or tax adviser to identify substantial authority for any non-tax shelter position that he or she recommends or takes on a tax return that is not disclosed in some fashion. Lacking substantial authority, the tax preparer or tax adviser may recommend a tax position for which he or she believes there is a reasonable basis, provided disclosure is made in the return.
Disclosure is generally made by the taxpayer on either a Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement (where the taxpayer takes a position contrary to a regulation). Substantial authority has often been described by respected commentators as a 40% to 45% chance of prevailing administratively or judicially on the merits if challenged by the government. Reasonable basis has been similarly described as a 25% chance of prevailing. Both confidence thresholds are based on authorities set forth in Regs. Sec. 1.6662-4.
In interpreting authorities, the IRS and the courts have given significant weight to direct reference with respect to the tax treatment of an item in a return, and far less weight is given when a taxpayer argues the tax treatment should be based on analogous authority applicable to tax treatment of another item, however arguably similar. This would be particularly true with regard to attempting to assert analogous treatment of an item if Congress did not intend for the item to be in fact treated in a similar manner.
It is noted that Rev. Proc. 2016-13 does provide that the reasonable-basis and disclosure standard is satisfied for certain items entered on a tax return if the item is reflected on the proper line in the return and is entered in accordance with the form’s instructions. Among those items are state income taxes entered on Schedule A, Itemized Deductions. However, the procedure specifically states that it does not reflect law changes after Dec. 31, 2015. It does not insulate a taxpayer from penalties for claiming a deduction for which there is no liability. Therefore, we believe that the procedure would not insulate a taxpayer (and preparer or adviser) from the disclosure requirements with regard to a 2017 payment of 2018 taxes if the tax reform legislation is enacted. We believe this is particularly true as it would appear to attempt to secure a tax deduction for an amount that Congress does not intend to allow as a deduction.
Payments in 2017 of state tax liabilities projected for 2018 are not deductible on their 2017 federal income tax returns. There is simply no authority for that position, and Rev. Rul. 82-208 is authority against that position. The payment sent to a state or local government before 2018 to apply against 2018 tax liability is a mere deposit. Tax deductions are not available for deposits (Rev. Rul. 79-229).