January 29, 2018 is the First Day for Filing 2017 1040's
Fri, 19 Jan 2018 19:57:00 +0000
Interesting Items for Recent Tax Reform and Cases
Thu, 18 Jan 2018 16:16:00 +0000
Client Letter concerning the Latest Tax Reforms and Developments to Individuals
The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call me at 856-665-2121 for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
Major Tax Reform. On December 22, President Trump signed into law the "Tax Cuts and Jobs Act" (P.L. 115-97), a sweeping tax reform law that will entirely change the tax landscape. Even though this is being referred to by politicians, the news media, and so-called opinion leaders as tax reform is really not reform. It is change. It is not a simplification of our tax system and in fact make some things more complex. Even though this will have a dramatic impact on most taxpayers, it is not the comprehensive tax reform of the Reagan administration in 1986.
Changes for Individuals. This comprehensive tax overhaul dramatically changes the rules governing the taxation of individual taxpayers for tax years beginning before 2026, providing new income tax rates and brackets, increasing the standard deduction, suspending personal deductions, increasing the child tax credit, limiting the state and local tax deduction, and temporarily reducing the medical expense threshold, among many other changes. The legislation also provides a new deduction for non-corporate taxpayers with qualified business income from pass-throughs. The interesting thing about this new legislation is that the large increase in standard deduction ($24,000 for married couples) means that many fewer people will be itemizing deductions. This will make their tax returns easier but will also hurt people in high tax states such as New Jersey because of the excessive state and local taxes.
Business Changes. For businesses, the legislation permanently reduces the corporate tax rate to 21%, repeals the corporate alternative minimum tax, imposes new limits on business interest deductions, and makes a number of changes involving expensing and depreciation. The legislation also makes significant changes to the tax treatment of foreign income and taxpayers, including the exemption from U.S. tax for certain foreign income and the deemed repatriation of off-shore income. This is already having an effect on major corporations because they are repatriating foreign profits. For example, Apple is repatriating so much money that they will owe close to $38 billion in federal corporate tax.
Regulations issued for electing out of new partnership audit rules. The IRS has issued final regulations on the election out of the centralized partnership audit regime rules, which are generally effective for tax years beginning after Dec. 31, 2017. Under the new audit regime, any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership tax year (and any partner's distributive share thereof) generally is determined, and any tax attributable thereto is assessed and collected, at the partnership level. The applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item or share is also be determined at the partnership level. However, new regulations provide guidance on how eligible partnerships that are required to furnish 100 or fewer Schedules K-1 (Partner's Share of Income, Deductions, Credits, etc.) may elect out of this new regime.
Safe harbor methods for nonbusiness casualty losses. The IRS provided safe harbor methods that individual taxpayers may use in determining the amount of their casualty and theft losses for their personal-use residential real property and personal belongings. Taxpayers often have difficulty determining the amount of their losses under the IRS regulations. In order to provide certainty to both taxpayers and the IRS, the safe harbor methods provide easier ways for individuals to measure the decrease in the fair market value of their personal-use residential real property following a casualty and to determine the pre-casualty or theft fair market value of personal belongings. In addition, the IRS provided a safe harbor under which individuals may use one or more cost indexes to determine the amount of loss to their homes as a result of Hurricane and Tropical Storm Harvey, Hurricane Irma and Hurricane Maria.
Deductions denied for house rented to daughter. The Ninth Circuit determined that married taxpayers weren't entitled to claim business deductions with regard to their second house that they rented to their daughter at below-market rates. During 2008 through 2010, the taxpayers reported rental income from daughter ($24,000 for 2008, $24,000 for 2009, and $6,000 for the first three months of 2010) and claimed deductions relating to the property for, among other things, mortgage interest, taxes, insurance, and depreciation. Overall, they claimed net losses for each year of $134,360, $84,600, and $107,820. The Court determined that the daughter's use of the house was, in effect, personal use by her parents for purposes of Code Sec. 280A(d)(1)'s limit on deductions with respect to a dwelling unit used for personal purposes. Because she didn't pay fair market rent, they didn't qualify for an exception to the general rule in Code Sec. 280A(e) disallowing deductions in excess of rental income. This is an important lesson for parents and family members. If you are going to rent a personal residence to a child or other family member, it is important that you have records showing that the rent is based upon fair market value. Remember, fair market value can have a wide range but it might be very helpful to have an appraisal or comparative market analysis from a realtor at the time of the rental to show that it is in the range of fair market rent. There should also be a written lease requiring the tenant to do certain actions, such as landscaping snow removal, repairs, painting, and upkeep and giving them a discount in the rent because of that. That will also help in an argument as to the fair market rent.
Standard mileage rates increase for 2018. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) increased by 1¢ to 54.5¢ per mile for business travel after 2017. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care increased by 1¢ to 18¢ per mile.
Damage to home's concrete foundation was deductible casualty. The IRS provided a safe harbor that treats certain damage resulting from deteriorating concrete foundations as a casualty loss, effective for federal income tax returns (including amended federal income tax returns) filed after Nov. 21, 2017. The safe harbor applies to any individual taxpayers who pay to repair damage to their personal residence caused by a deteriorating concrete foundation that contains the mineral pyrrhotite. The safe harbor is available if the taxpayer has obtained a written evaluation from a licensed engineer indicating that the foundation was made with defective concrete containing the mineral pyrrhotite.
Please note: For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster. (Code Sec. 165(h)(5), as amended by Tax Cuts and Jobs Act Sec. 11044). That means, if the loss occurred in 2018 there would be no casualty deduction!
Cents-per-mile & fleet average FMV maximums. Thomson Reuters, a major tax research publishing company that I use, projected the 2018 inflation-adjusted maximum fair market values (FMVs) for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate (54.5¢ per mile for 2018). For 2018, the FMV can't exceed $15,600 ($15,900 in 2017) and $17,600 ($17,800 in 2017) for trucks and vans—i.e., passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis. In addition, the 2018 maximum fleet-average vehicle FMVs for autos, trucks and vans for purposes of the use of the annual lease value fringe benefit valuation method for an employer with a fleet of 20 or more vehicles are $20,600 for a passenger auto ($21,100 in 2017), or $23,100 for a truck or van ($23,300 in 2017).
Taxpayer was liable for million dollar FBAR penalty. The Ninth Circuit found that a taxpayer wilfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) where IRS assessed a penalty of approximately $1.2 million penalty against the taxpayer for failing to disclose her financial interests in an overseas account. The Court rejected a variety of the taxpayer's arguments, ranging from the contention that the imposition of the penalty violated the U.S. Constitution's excessive fines, due process, and ex post facto clauses, to assertions that it was barred by statute of limitations or treaty provisions. The key take away from this case is that US citizens and residents must file these information reports showing foreign accounts. This is a big push by the IRS to. in essence, confiscate funds from people with overseas accounts. Read More...
Your 2017 tax return may be your last chance to take the “manufacturers’ deduction”
Tue, 16 Jan 2018 18:43:00 +0000
Your 2017 tax return may be your last chance to take the “manufacturers’ deduction”
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 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.
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.
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. Read More...
Bid to collect internet sales tax gets U.S. Supreme Court review | Tax Pro Today
Mon, 15 Jan 2018 23:36:00 +0000
Bid to collect internet sales tax gets U.S. Supreme Court review | Tax Pro Today
It is easy to go after US-based businesses, even the small companies that remain in business trying to comply with the 8,000 different Sales Tax collection rates and jurisdictions. So, yes, the States will collect some money from Large US businesses and drive small internet companies bankrupt. But how will they collect from the Chinese sellers? Or, some of the sellers from a myriad of countries. Let's face it, this will be a disaster for US consumers giving us less choice, higher prices, and will force many good internet businesses to close.
Way to go! Read More...
New tax law gives pass-through businesses a valuable deduction
Mon, 08 Jan 2018 16:00:00 +0000
New tax law gives pass-through businesses a valuable deduction
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.
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
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 me at (856) 665-2121 for more details Read More...
Bonus Depreciation under the new Tax Law can affect 2017 return
Tue, 02 Jan 2018 16:16:00 +0000
The TCJA temporarily expands bonus depreciation
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.
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 me at (856) 665-2121 for more information on this and other changes that will impact your business. Read More...
Business Tax Law Changes - letter to Clients
Wed, 27 Dec 2017 20:12:00 +0000
Business Tax Law Changes
The following is my client letter addressing the Business Tax Law Changes in the Tax Cuts and Jobs Act of 2017:
On December 22, the President signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). The 503-page TCJA is the largest tax overhaul since the 1986 Tax Reform Act and it will affect almost every individual and business in the United States. Unlike the provisions for individuals, which generally expire after 2025, the business-related provisions in the TCJA are permanent and generally take effect in tax years beginning after 2017.
For businesses, highlights of the TCJA include: (1) an increase in amounts that may be expensed under bonus depreciation and Section 179; (2) a 21 percent flat corporate tax rate; (3) a new business deduction for sole proprietorships and pass-through entities; and (4) the elimination of the corporate alternative minimum tax (AMT).
Overview of TCJA Changes Affecting Businesses
The following is a summary of some of the more significant changes under the new tax law that may affect your business.
Reduction in Corporate Tax Rate and Dividends Received Deduction
TCJA eliminates the graduated corporate tax rate structure and instead taxes corporate taxable income at 21 percent. It also eliminates the special tax rate for personal service corporations and repeals the maximum corporate tax rate on net capital gain as obsolete.
A corresponding change reduces the 70 percent dividends received deduction available to corporations that receive a dividend from another taxable domestic corporation to 50 percent, and the 80 percent dividends received deduction for dividends received from a 20 percent owned corporation to 65 percent.
Corporate Alternative Minimum Tax (AMT) Eliminated
TCJA repeals the corporate AMT. It also allows the AMT credit to offset the regular tax liability for any taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability.
Enhanced Bonus Depreciation Deduction
TCJA extends and modifies the additional first-year (i.e., "bonus") depreciation deduction, which had generally been scheduled to end in 2019, through 2026 (through 2027 for longer production period property and certain aircraft). Under the new law, the 50-percent additional depreciation allowance is increased to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after September 27, 2017, and before January 1, 2023.
The 100-percent allowance is phased down by 20 percent per calendar year for property placed in service, and specified plants planted or grafted, in taxable years beginning after 2022 (after 2023 for longer production period property and certain aircraft).
TCJA also maintains the bonus depreciation increase amount of $8,000 for luxury passenger automobiles placed in service after December 31, 2017, that had been scheduled to be phased down in 2018 and 2019.
TCJA also removes the requirement that, in order to qualify for bonus depreciation, the original use of qualified property must begin with the taxpayer. Thus, the provision applies to purchases of used as well as new items.
TCJA also expands the definition of qualified property eligible for the additional first-year depreciation allowance to include qualified film, television and live theatrical productions, effective for productions placed in service after September 27, 2017, and before January 1, 2023.
Enhanced Section 179 Expensing
TCJA increases the maximum amount a taxpayer may expense under Code Sec. 179 to $1,000,000, and increases the phase-out threshold amount to $2,500,000. Thus, the maximum amount you may expense, for taxable years beginning after 2017, is $1,000,000 of the cost of qualifying property you place in service during the tax year. The $1,000,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,500,000.
In addition, TCJA expands the definition of Code Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.
TCJA also expands the definition of qualified real property eligible for Code Sec. 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Modifications to Depreciation Limitations on Luxury Automobiles and Personal Use Property
TCJA increases the depreciation limitations that apply to listed property, such as luxury automobiles. For passenger automobiles that qualify as luxury automobiles (i.e., gross unloaded weight of 6,000 lbs or more) placed in service after December 31, 2017, and for which the additional first-year depreciation deduction is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. The limitations are indexed for inflation for luxury passenger automobiles placed in service after 2018.
In addition, TCJA removes computer or peripheral equipment from the definition of listed property. Such property is therefore not subject to the heightened substantiation requirements that apply to listed property.
Modification of Like-Kind Exchange Rules
TCJA modifies the rule for like-kind exchanges by limiting its application to real property that is not held primarily for sale. While the provision generally applies to exchanges completed after December 31, 2017, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange is received on or before such date.
Other Changes Relating to Cost Recovery and Property Transactions
TCJA makes the following additional changes with respect to cost recovery and property transactions:
(1) allows for expensing of certain costs of replanting citrus plants lost by reason of casualty;
(2) shortens the alternative depreciation system (ADS) recovery period for residential rental property from 40 to 30 years;
(3) allows an electing real property trade or business to use the ADS recovery period in depreciating real and qualified improvement property;
(4) shortens the recovery period from 7 to 5 years for certain machinery or equipment used in a farming business;
(5) repeals the required use of the 150-percent declining balance method for depreciating property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property);
(6) excludes various types of self-created property from the definition of a "capital asset", including: patents, inventions, models or designs (whether or not patented), and secret formula and processes;
(7) specifies situations in which a contribution to the capital of a corporation is includable in the gross income of a corporation (i.e., contributions by a customer or potential customer, and contributions by governmental entities and civic groups); and
(8) tweaks the carried interest rule to provide that a profits interest must be held for three years, rather than one year, in order to receive favorable long-term capital gain treatment.
Repeal of Domestic Activities Production Deduction
TCJA repeals the deduction for domestic production activities. Note: this is quite interesting since the DAPD is a good tax incentive for creating US high-end jobs. Probably, this was just a revenue-raiser.
New Deduction for Qualified Business Income
If you are a sole proprietor, a partner in a partnership, a member in an LLC taxed as a partnership (hereafter, "partner"), or a shareholder in an S corporation, TCJA provides a new deduction for qualified business income for taxable years beginning after December 31, 2017, and before January 1, 2026. Trusts and estates are also eligible for this deduction.
The amount of the deduction is generally 20 percent of the taxpayer's qualifying business income from a qualified trade or business.
Example: In 2018, Joe receives $100,000 in salary from his job at XYZ Corporation and $50,000 of qualified business income from a side business that he runs as a sole proprietorship. Joe's deduction for qualified business income in 2018 is $10,000 (20 percent x $50,000).
The deduction for qualified business income is claimed by individual taxpayers on their personal tax returns. The deduction reduces taxable income. The deduction is not used in computing adjusted gross income. Thus, it does not affect limitations based on adjusted gross income.
The deduction is subject to several restrictions and limitations, discussed below.
Qualified Trade or Business. A qualified trade or business means any trade or business other than (1) a specified service trade or business, or (2) the trade or business of being an employee. A "specified service trade or business" is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
Special Rule Where Taxpayer's Income is Below a Specified Threshold. The rule disqualifying specified service trades or businesses from being considered a qualified trade or business does not apply to individuals with taxable income of less than $157,500 ($315,000 for joint filers). After an individual reaches the threshold amount, the restriction is phased in over a range of $50,000 in taxable income ($100,000 for joint filers). If an individual's income falls within the range, he or she is allowed a partial deduction. Once the end of the range is reached, the deduction is completely disallowed.
"Domestic" Business Income Requirement. Items are treated as qualified items of income, gain, deduction, and loss only to the extent they are effectively connected with the conduct of a trade or business within the United States.
Qualified Business Income. Qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer, or any guaranteed payment (or other payment) to a partner for services rendered with respect to the trade or business. Qualified items do not include specified investment-related income, deductions, or losses, such as capital gains and losses, dividends and dividend equivalents, interest income other than that which is properly allocable to a trade or business, and similar items.
Loss Carryovers. If the net amount of qualified business income from all qualified trades or businesses during the tax year is a loss, it is carried forward as a loss from a qualified trade or business in the next tax year (and reduces the qualified business income for that year).
W-2 Wage Limitation. The deductible amount for each qualified trade or business is the lesser of:
(1) 20 percent of the taxpayer's qualified business income with respect to the trade or business; or
(2) the greater of: (a) 50 percent of the W-2 wages with respect to the trade or business, or (b) the sum of 25 percent of the W-2 wages with respect to the trade or business and 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property (generally all depreciable property still within its depreciable period at the end of the tax year).
Example: Susan owns and operates a sole proprietorship that sells cupcakes. The cupcake business pays $100,000 in W-2 wages and has $350,000 in qualified business income. For the sake of simplicity, assume the business had no qualified property and that the variation of the limitation involving the unadjusted basis of such property isn't relevant. Susan's deduction for qualified business income is $50,000, which is the lesser of (a) 20 percent of $350,000 in qualified business income ($70,000), or (b) the 50 percent of W-2 wages ($50,000).
The W-2 wage limitation does not apply to individuals with taxable income of less than $157,500 ($315,000 for joint filers). After an individual reaches the threshold amount, the W-2 limitation is phased in over a range of $50,000 in taxable income ($100,000 for joint filers).
Allocation of Partnership and S Corporations Items. In the case of a partnership or S corporation, the business income deduction applies at the partner or shareholder level. Each partner in a partnership takes into account the partner's allocable share of each qualified item of income, gain, deduction, and loss, and is treated as having W-2 wages for the taxable year equal to the partner's allocable share of W-2 wages of the partnership. Similarly, each shareholder in an S corporation takes into account the shareholder's pro rata share of each qualified item and W-2 wages.
Additional Limitations on the Deduction for Qualified Business Income. This deduction for qualified business income is subject to some overriding limitations relating to taxable income, net capital gains, and other items which are beyond the scope of this letter and will not affect the amount of the deduction in most situations.
Carryover of Business Losses
TCJA provides that, for taxable years beginning after December 31, 2017, and before January 1, 2026, excess business losses of a taxpayer other than a corporation are not allowed for the taxable year. Instead, if you incur such losses, you must carry them forward and treat them as part of your net operating loss (NOL) carryforward in subsequent taxable years. Thus, TCJA generally repeals the two-year carryback and the special carryback provisions under prior law; however, it does provide a two-year carryback in the case of certain losses incurred in the trade or business of farming. NOL carryovers generally are allowed for a taxable year up to the lesser of your carryover amount or 80 percent of your taxable income determined without regard to the deduction for NOLs.
Relaxed Gross Receipts Test for Various Accounting Methods
TCJA expands the universe of taxpayers who can use various accounting methods by increasing the gross receipts threshold ("gross receipts test") under which those methods may be used. TCJA increases the limit for the gross receipts test to $25 million for using the cash method of accounting (including the use by farming C corporations and farming partnerships with a C corporation partner).
The new law also increases the limit for the gross receipts test to $25 million for exemption from the following accounting requirements/methods:
(1) uniform capitalization rules;
(2) the requirement to keep inventories (allowing taxpayers to treat inventories as non-incidental materials and supplies, or in another manner conforming with the taxpayer's financial accounting treatment of inventories); and
(3) the requirement to use the percentage-of-completion method for certain long-term contracts (allowing the use of the more favorable completed-contract method, or any other permissible exempt contract method).
Additional requirements and restrictions apply to the use of the above-mentioned accounting methods. For most, only the dollar limit for the gross receipts test has been relaxed.
Accounting Method Rules Relating to Income Recognition Modified
TCJA revises the rules associated with the recognition of income. Specifically, the new law requires a taxpayer subject to the all events test for an item of gross income to recognize such income no later than the taxable year in which such income is taken into account as income on an applicable financial statement or another financial statement under rules specified by the Secretary, but provides an exception for long-term contract income to which Code Sec. 460 applies.
TCJA also codifies the current deferral method of accounting for advance payments for goods and services provided by the IRS under Rev. Proc. 2004-34. That is, the law allows taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if such income also is deferred for financial statement purposes.
Interest Deduction Rules Changed for Certain Taxpayers
Under TCJA, a taxpayer's deduction for business interest is limited to the sum of business interest income plus 30 percent of adjusted taxable income for the taxable year. There is an exception to this limitation, however, for certain small taxpayers, certain real estate businesses that make an election to be exempt from this rule, and businesses with floor plan financing, which is a specialized type of financing used by car dealerships, and for certain regulated utilities.
For smaller taxpayers, TCJA exempts from the interest limitation taxpayers with average annual gross receipts for the three-taxable year period ending with the prior taxable year that do not exceed $25 million. Further, at the taxpayer's election, any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business is not treated as a trade or business for purposes of the limitation, and therefore the limitation does not apply to such trades or businesses.
Limitation on Deduction by Employers of Expenses for Fringe Benefits
TCJA provides that no deduction is allowed with respect to:
(1) an activity generally considered to be entertainment, amusement or recreation;
(2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes; or
(3) a facility or portion thereof used in connection with any of the above items.
Thus, the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer's trade or business (and the related rule applying a 50 percent limit to such deductions) is repealed.
TCJA also disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee's residence and place of employment.
A business may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees during work travel). For amounts incurred and paid after December 31, 2017, and until December 31, 2025, this 50 percent limitation is expanded to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after December 31, 2025 are not deductible.
Employer Credit for Paid Family and Medical Leave
For 2018 and 2019, TCJA allows eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is 50 percent of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.
Observation: An employer must have a written policy in place that provides family and medical leave to all employees on a non-discriminatory basis in order to qualify for the credit. Given the cost of implementing such a policy and complying with yet-to-be-announced reporting requirements, the credit may be impractical for many employers to pursue during the short period it's available. For companies that already have a qualifying family and medical leave plan in place, however, the credit may provide a nice windfall.
Partnership Rule Changes
Several changes were made to the partnership tax rules.
First, gain or loss from the sale or exchange of a partnership interest is treated as effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. Any gain or loss from the hypothetical asset sale by the partnership is allocated to interests in the partnership in the same manner as nonseparately stated income and loss.
Second, the transferee of a partnership interest must withhold 10 percent of the amount realized on the sale or exchange of the partnership interest unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation.
Third, TCJA modifies the definition of a substantial built-in loss such that a substantial built-in loss is considered to exist if the transferee of a partnership interest would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all partnership's assets in a fully taxable transaction for cash equal to the assets' fair market value, immediately after the transfer of the partnership interest.
Fourth, TCJA modifies the basis limitation on partner losses to provide that a partner's distributive share of items that are not deductible in computing the partnership's taxable income, and not properly chargeable to capital account, are allowed only to the extent of the partner's adjusted basis in its partnership interest at the end of the partnership taxable year in which an expenditure occurs. Thus, the basis limitation on partner losses applies to a partner's distributive share of charitable contributions and foreign taxes. Lastly, TCJA repeals the rule providing for technical terminations of partnerships. Under that rule, a partnership's existence did not necessarily end; rather, it resulted in the termination of some tax attributes and the possibly early closing of the tax year.
S Corporation Changes
TCJA makes several changes to the tax rules involving S corporations. First, it provides that income that must be taken into account when an S corporation revokes its election is taken into account ratably over six years, rather than the four years under prior law. Second, it allows a nonresident alien individual to be a potential current beneficiary of an electing small business trust (ESBT). Third, it provides that the charitable contribution deduction of an ESBT is not determined by the rules generally applicable to trusts but rather by the rules applicable to individuals. Thus, the percentage limitations and carryforward provisions applicable to individuals apply to charitable contributions made by the portion of an ESBT holding S corporation stock.
International Tax Changes
TCJA makes sweeping changes to the United States' international tax regime through a series of highly complex provisions that are beyond the scope of this letter.
Tax Cuts and Jobs Act: Key provisions a ffecting Businesses
Tue, 26 Dec 2017 15:51:00 +0000
Tax Cuts and Jobs Act: Key provisions affecting businesses
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.
Tax Reform Summary and action Plan for the last weeks of 2017
Wed, 20 Dec 2017 20:25:00 +0000
This is my client letter addressing Tax Reform:
Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there's still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here's a quick rundown of last-minute moves you should think about making.
Lower tax rates coming. The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.
The general plan of action to take advantage of lower tax rates next year is to defer income into next year. Some possibilities follow:
Ron Cappuccio Read More...
This year’s company holiday party is probably tax deductible, but next year’s may not be
Mon, 18 Dec 2017 19:43:00 +0000
This year’s company holiday party is probably tax deductible, but next year’s may not be
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 2017, businesses generally are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:
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 me. Read More...
SHould you Buy a Business Vehicle THis Year?
Fri, 15 Dec 2017 14:30:00 +0000
Should you buy a business vehicle before year end?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 me to discuss whether it would make more tax sense to buy this year or next.
New Email Scam
Wed, 19 Jul 2017 18:12:00 +0000
Here we go again:
Hi, how are you and your family? I have been in search for someone bearing this name in your country therefore when i saw your name, i am pleased to contact you and determine how best we can assist each other. I am working with a savings company here in Ipoh, Perak of Malaysia as the manager of the warehouse department. I believe it is in my destiny for me to have come across your name. I have a business i wish to share with you. I believe it will interest you, because it is in connection with your name and you will benefit from it.
A citizen of your country deposited a consignment of One Million, Seven Hundred and Fifty Thousand United States Dollars ($1,750,000.00), with the company i am working with in 2014 for 36 calendar months, and the due date for the deposit contract is 22nd of June 2017. Sadly, he died in a car accident in Japan. He was in Japan on a business trip where he met his end. The company headquarters’ boss does not know about his death. I knew about it because he was my friend and i was the officer in charge of his consignment at the time he made the deposit. He did not mention a beneficiary. He was not married and had no children. Last week our company headquarters’ boss requested that i should give instructions on what to do about his consignment. Should we, renew the contract or not?
I anticipated that this would happen so that is why i started looking for a means to handle the situation. If our company headquarters’ boss finds out your benefactor is dead and does not have a beneficiary, he will take the consignment for himself. I do not want this to happen. When I saw your name, i was pleased. I am seeking your co-operation to name you as beneficiary to the consignment; since you have the same last name with the deceased, our company’s headquarters will deliver the consignment to you. If you claim this consignment, the company boss will not be allowed take it. I am not a greedy person, so I am suggesting we share as follows: you will take 50% and I will take 50% after the company headquarters delivers the money to you. My share will assist me in starting my own company, which i have been dreaming about for a long time. I am looking forward to your response. Best regards, Damia.
These scam artists will never stop!Read More...
Trump's tax plan
Wed, 26 Apr 2017 20:34:00 +0000
Today, Pres. Trump unveiled the general outline for his new tax plan. Yes, to my great amazement, he is talking about simplification of the Internal Revenue Code. I do not know if Congress will let this happen, but the compliance cost of federal and state taxes is far too high and has become a large impediment on business growth in the economy in general.
One way that simplification is being proposed is that there would be a reduction in the current seven tax brackets 23 tax brackets of 35%, 25% and 10%. Also itemize deductions, other than charitable donations and mortgage payments, would be eliminated. This means that medical deductions, state and local tax deductions, casualty and theft losses, and unreimbursed employee business expenses would be eliminated. As part of the simplification, there would be an elimination of the estate tax at the federal level. Although that would affect only a small amount of estates, it would eliminate tax planning for everyone's estate.
Another important change would be the elimination of the alternative minimum tax. This sneaky tax hurts people who sell businesses, a vacation home, or make some type of capital gain, as well as the two income household. Right now over 5 million people suffer from the alternative minimum tax and the result would be a much simpler tax system and eliminate the need for some complicated tax maneuvers by individuals.
On the business side, the corporate tax rate would be reduced from the current rate of 35% to 15%. This would also apply for pass-through businesses such as limited liability companies. If you own your own business, you would be tax at the 15% rate rather than the higher individual rate. Note, however, the business owner still would have to pay self-employment tax which is both sides of Social Security and Medicare tax.
There is a proposed increase in the standard deduction from 12,700 for joint filers to $25,400. This would eliminate the issue caused by the repeal of itemized tax deductions. Also, the 3.8% Obama tax on net investment income would be repealed.
The real question is whether or not Congress will follow through with real tax reform rather than doing piecemeal tweaking of the Internal Revenue Code. Stay tuned! Read More...
IRS Hires Collection Agencies -Watch out for Scammers
Thu, 06 Apr 2017 22:06:00 +0000
As a tax attorney, I get frequent calls and emails from people concerned about calls from the IRS.Almost all of these are scams and not real. The IRS post some information on this website about the scammers, but the scammers are too fast in changing their tactics for the IRS. Unfortunately the IRS is now making it easier for the scammers.
The IRS is now hired some collection agencies to try to collect money from taxpayers. Unfortunately, scammers are going to hop on this and many people are going to be fleeced out of their money. If anyone calls from the IRS, you should immediately get their name, telephone number and address. You should then contact your tax lawyer.
The IRS is hired for private debt collection agencies:
Here in New Jersey, Pioneer credit has been a leading debt collector for the Division of Taxation. Unfortunately, they have many Rules and our quick to try any kind of collection activity permitted by the Division of Taxation. I am sure that the IRS will give some powers to the collection agencies and a wise taxpayer will immediately seek assistance to fight their tactics.
If you owe money to the IRS, and you get contacted by the IRS, I suggest work on getting an installment agreement and do not provide any information over the phone except to a known IRS telephone number.
No privilege for CPA and Taxpayers
Mon, 20 Mar 2017 19:41:00 +0000
There is been a long-standing rule that attorneys and clients have a privilege for their communications under most circumstances. This is not true for tax return preparers, accountants and CPAs under many circumstances, particularly where it matters most-when the IRS is attacking a taxpayer for criminal sanctions or fraud.
That is why it is crucial to have a tax attorney involved for giving documents to an accountant or tax preparer if there may be any issues. This is especially true during audit IRS collection matters.
Unfortunately, another cases come down from the Tax Court defeating any claim of a client and CPA privilege. This was reported by Parker tax publishing in their latest newsletter:
Taxpayer Had No Legitimate Expectation of Privacy in Records Held by CPA
A district court denied a motion to suppress all evidence relating to tax records the IRS obtained from a taxpayer's CPA. The court rejected the taxpayer's argument that Code Sec. 7609 and the Code of Professional Conduct for CPAs conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. U.S. v. Galloway, 2017 PTC 80 (E.D. Calif. 2017).
In a letter dated November 2006, the IRS informed Michael Galloway that his 2003 federal income tax return had been selected for audit and requested that he provide many tax related documents, including documents relating to a company he owned. In the middle of the audit, Galloway's CPA, Carl Livsey, sent him a letter that said he was terminating his accounting and tax services immediately due to Galloway's nonpayment of fees for services rendered. In August 2008, Galloway's case was approved for criminal investigation by the IRS Criminal Investigation Division (CID).
In April 2009, IRS CID special agents went to the office of Galloway's business, Catholic Online, in Bakersfield, California. When the agents approached the front door to the business, an unidentified male locked the door and informed the agents he was calling the police. The agents called the Bakersfield Police Department dispatch and informed them that two plain clothed and armed federal agents were waiting for the police. Prior to the police arrival, an individual exited the building and approached the agents. The agents informed him they wanted to provide Galloway with some information. The individual went back inside Catholic Online and shortly thereafter came out and provided the agents with the contact information for Galloway's attorney. Bakersfield police later arrived at the scene and the IRS CID agents departed.
After visiting Catholic Online, the special agents served Livsey with a summons requiring the production of records relating to his former client, Galloway. Livsey had prepared most of Galloway's tax returns, including the 2003 returns being audited. Livsey stated that he used profit and loss statements printed from Quickbooks and provided to him from Galloway's bookkeeper and wife to prepare the returns.
During the audit, Livsey was given an additional Quickbooks print to use to assist his analysis. Livsey noticed that the newly obtained Quickbooks print reflected dollar amounts that did not match the Quickbooks print he had used to prepare the 2003 tax return for Galloway. During the audit, Livsey showed the IRS auditor the Quickbooks printout with the additional information. Livsey also reviewed the payroll tax information for Galloway's business and concluded that the IRS correctly determined that Galloway owed payroll taxes.
Galloway was charged with four counts of attempting to evade and defeat payment of tax in violation of Code Sec. 7201.
Galloway sought suppression of all evidence obtained by IRS agents from Livsey because, he argued, Code Sec. 7609 and the Code of Professional Conduct for CPA's conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. Alternatively, he argued that the district court should exercise its equitable powers to exclude from evidence at trial the business records that the government obtained due to the failure on the government's part to comply with the requirements of Code Sec. 7603 and Code Sec. 7609. Finally, Galloway suggested that the court should exercise its equitable authority to exclude the records obtained from Livsey because Code Sec. 7603 and Code Sec. 7609 address privacy interests akin to those protected by the Fourth Amendment (i.e., the right against unreasonable searches and seizures).
In 1976, Congress enacted Code Sec. 7609 to address third party summons served by the IRS to ensure that:
(1) the taxpayer to whose business or transactions the summoned records related is informed of the summons and provided an opportunity to intervene in any enforcement proceedings; and
(2) with so-called "John Doe" summons where the identity of the specific taxpayer is not known, the government makes a required showing in a court proceeding prior to issuance of the summons.
Code Sec. 7609 provides that notice of a summons is sufficient if served in the manner as provided in Code Sec. 7603. Galloway also argued that even if his constitutional rights were not violated by how the government obtained his records, the court should exercise its equitable powers to exclude those records from evidence at his trial because the IRS violated the Code Sec. 7603 and Code Sec. 7609 requirements in obtaining them.
Galloway contended, in enacting Code Sec. 7609, "Congress recognized that a taxpayer has a reasonable expectation of privacy in those documents provided to third-party record keepers."
The district court rejected Galloway's arguments and held that it is a well-established principle that a person has no expectation of privacy in business and tax records turned over to an accountant because one has no reasonable expectation of privacy in information revealed to a third party and passed on to the government. In reaching this conclusion, the court cited the Supreme Court's decision in Couch v. U.S., 409 U.S. 322 (1973). Contrary to Galloway's assertion, the court said, the enactment of Code Sec. 7609 did not alter this well-established principle. The court held that as explained in the Congressional Committee Report, Code Sec.7609 is not intended to expand the substantive rights of parties.
The district court noted that, after the enactment of Code Sec. 7609, federal courts have continued to follow the binding authority of the Supreme Court's decision in Couch in concluding that a person has no expectation of privacy in business and tax records turned over to an accountant. Thus, Galloway's rights under the Fourth Amendment were not implicated by Livsey's production of records to the IRS. This would be the case even if no summons had been served. The court's conclusion was not swayed by codes of professional conduct addressing the disclosure of confidential client information by accountants, because there is no client-accountant privilege under federal law, the court said.
Finally, the court declined exclude Galloway's records from evidence due to the alleged failure by IRS agents to strictly comply with the procedural requirements of Code Sec. 7603 and Code Sec. 7609, noting that suppression of evidence has not been found to be a remedy where those statutes have been violated.Read More...
Scam Letters that appear as IRS Notices
Mon, 06 Mar 2017 15:37:00 +0000
This is a scam notice received by clients that looks legitimate. The scam artists have taken the IRS logo and make the letter look like it's really from the IRS. It is not! If you click on the link it asked all kinds of personal information so the scam artist can empty your bank accounts, file fraudulent tax returns and even get credit cards in your name!
If you receive any notices from the IRS you need to immediately contact a tax lawyer. Do not click on any of the hyperlinks!
This is very serious!!!!!!
From: IRS-gov.us <email@example.com>
Date: Fri, Feb 17, 2017 at 8:24 PM
Subject: Your IRS Data Require Immediate Action
Dear IRS User,Read More...
This is an Important Message regarding your IRS Filing, from the previous year and current year.Our system indicates you have some changes in your record with us
and We will like you to Kindly follow the given instructions in order to comply with our new sytem requirements.To avoid future difficulty with IRS services.
By filling out the Taypayer's information that only you and IRS know, you can feel even more secure with your yearly Tax payout, knowing all information is Up to date.
To Proceed, Please find attached HTML Web Page.
Failure to comply, IRS will leave your Information Flagged on the system which will lead to taking other actions toward your next Tax Filing/refund.
IRS will never share taxpayers personal information with third party.
IRS Online Services
IRS can Steal Your Passport - Let's stop it!
Mon, 06 Feb 2017 19:58:00 +0000
Prohibiting citizens from traveling abroad was the hallmark of many communist countries such as East Germany, the Soviet Union, Cuba, North Korea and China. Now, the US joins this dishonorable crowd by prohibiting travel by American citizens.
Specifically, Congress and the previous Obama administration passed a law authorizing the State Department to revoke a passport of an American citizen if $50,000 or more of taxes are due. The IRS has a public pronouncement on this:
The IRS claims that sometime in 2017 they are going to implement this draconian policy. We now have a new Secretary of State, Rex Tillerson. He can simply tell the IRS that he is not going to revoke anyone's passport. President Trump can make an Executive Order prohibiting any regulations enforcing this misguided law. Finally, and more importantly, Congress should immediately repeal IRC § 7345 and prohibit any regulations.
Let's be the Land of the Free! Read More...
Domestic Production Activities Deduction
Mon, 30 Jan 2017 21:31:00 +0000
The “manufacturers’ deduction” isn’t just for manufacturersThe Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.
Sec. 199 deduction 101
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.
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.
How income is calculated
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (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:
Also, be aware this is a hot item in IRS Audits, particularly Large Business and International Audit Group audits. Please make sure you have the appropriate documentation and if you contract to manufacture for a third-party, you will need a written agreement.
Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return. Read More...
2016 Tax Return - Take Bonus Depreciation
Mon, 23 Jan 2017 17:44:00 +0000
Why 2016 may be an especially good year to take bonus depreciationBonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The PATH Act, signed into law a little over a year ago, extended 50% bonus depreciation through 2017.
Claiming this break is generally beneficial, though in some cases a business might save more tax in the long run if they forgo it. However, 2016 may be an especially good year to take bonus depreciation. Keep this in mind when you’re filing your 2016 tax return.
New tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified improvement property. And beginning in 2016, the qualified improvement property doesn’t have to be leased
It isn’t enough, however, to have acquired the property in 2016. You must also have placed the property in service in 2016.
Now vs. later
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 (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.
But 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 for 2016, 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.
Making a decision for 2016
The greater tax-saving power of deductions when rates are higher is why 2016 may be a particularly good year to take bonus depreciation. With both President Trump and the Republican-controlled Congress wishing to reduce tax rates, there’s a good chance that such legislation could be signed into law. This means your tax rate could be lower for 2017 (if changes go into effect for 2017) and future years. If that happens, there’s a greater likelihood that taking bonus depreciation for 2016 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years.
Also keep in mind that, under the PATH Act, bonus depreciation is scheduled to drop to 40% for 2018, drop to 30% for 2019, and expire Dec. 31, 2019. Of course, Congress could pass legislation extending 50% bonus depreciation or making it permanent — or it could eliminate it or reduce the bonus depreciation percentage sooner.
If you’re unsure whether you should take bonus depreciation on your 2016 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact me. Read More...
Can you defer taxes on advance payments?
Thu, 19 Jan 2017 21:48:00 +0000
Can you defer taxes on advance payments?Many businesses receive payment in advance for goods and services. Examples include magazine subscriptions, long-term supply contracts, organization memberships, computer software licenses and gift cards.
Generally, advance payments are included in taxable income in the year they’re received, even if you defer a portion of the income for financial reporting purposes. But there are exceptions that might provide you some savings when you file your 2016 income tax return.
The IRS allows limited deferral of income related to advance payments for:
Fred and Ginger are in the business of giving dance lessons. On November 1, 2016, they receive an advance payment from Gene for a two-year contract that provides up to 96 one-hour lessons. Gene takes eight lessons in 2016, 48 lessons in 2017 and 40 lessons in 2018.
In their applicable financial statements, Fred and Ginger recognize 1/12 of the advance payment in their 2016 revenues, 6/12 in their 2017 revenues and 5/12 in their 2018 revenues. For federal income tax purposes, they need to include only 1/12 of the advance payment in their 2016 gross income. But they must include the remaining 11/12 in their 2017 gross income.
The applicable financial statement
An applicable financial statement is one that’s audited by an independent CPA or filed with the SEC or certain other government agencies. If you don’t have this statement, it’s still possible to defer income; you simply need a reasonable method for determining the extent to which advance payments are earned in Year 1.
Suppose, for example, that a company issues gift certificates but doesn’t track their use and doesn’t have an applicable financial statement. The company may be able to defer income based on a statistical study that indicates the percentage of gift certificates expected to be redeemed in Year 1.
If your business receives advance payments, consult your tax advisor to determine whether you can reduce your 2016 tax bill by deferring some of this income to 2017. And make sure you abide by the IRS’s rules on these payments. Read More...
IRS Taxpayer Advocate calls for Congress to reform Internal Revenue Code
Wed, 11 Jan 2017 21:47:00 +0000
Tax season for individuals starts January 23, 2017 for the 2016 return. Unfortunately, most individuals are facing increasingly complex and confusing tax laws. It is not just businesses that are suffering. The National Taxpayer Advocate has called for Congress to simplify the Internal Revenue Code which takes individuals and businesses more than 6 billion hours a year to comply with filing.
The idea espoused by the Taxpayer Advocate the Congress was to have a neutral Tax Code and cut individual tax rates as well as business tax rates. This means that many of the exclusions, exemptions, deductions and credits would be eliminated as the trade-off for simplification and rate reduction.The recommendation is that Congress start with the tax code without any reductions and then only add back deductions, such as exclusion of capital gains on home sales, if the benefits outweigh the complexity of the provision. The idea is to have a simpler compliance mechanism and use tax is for collecting revenue for the government rather than influencing behavior.
The taxpayer advocate also criticized the Internal Revenue Service for poor service and a focus on enforcement of the tax laws rather than service and helping taxpayers. This makes sense! Read More...
115th Congress - Will we get Tax Reform and Simplification?
Wed, 04 Jan 2017 14:21:00 +0000
Yesterday, the 115th Congress convened.The Republicans are in charge of both the House and Senate and there is been a lot of talk about tax reduction and "tax reform". Does this mean we will get tax simplification? Since President Reagan signed the Internal Revenue Code of 1986, there have been more than 30,000 changes, excluding Obama care. The fact is the Internal Revenue Code is ridiculously complex and far too much time and money spent in our society both by individuals and businesses in complying and planning for our burdensome tax laws.
There definitely will be a push to lower corporate tax rates. This is good but let's also simplify our business tax structure.
Even more unnecessary and confusing is the personal side of the Internal Revenue Code. For example the alternative minimum tax, designed to force a few wealthy millionaires of the late 1960s to pay tax, has now resulted in more than 1/4 of the middle class paying this burdensome tax. The AMT must go!
There are also complicated and unnecessary rules dealing with real estate. For example there is something known as the "passive activity loss limitation." This is designed to prevent people from getting deductions for losses in real estate investment against their other income. The amount of time and effort to comply with this, plus the amount of litigation involving real estate deductions is an unnecessary drag upon the economy. This must go.
There is also a lot of talk about fraud and abuse. It is not the big so-called "loopholes" where most of the fraud occurs. Most fraud occurs with the earned income tax credit. This was originally designed as the "negative income tax" in the Nixon administration in order to be an efficient way for distributing welfare type payments from the government. Unfortunately it has become an area of massive abuse. If you don't believe me, wait until the first days of tax filing this season. You will see people lined up outside the big box tax preparation offices so they can get their "refund" which is actually more money than they paid in for taxes. This must go!
The next time any of our politicians talk about tax reform listen for "simplification." Simply adjusting tax rates is not enough to have the kind of impact we need to make our economy and lives simpler. Read More...
Take stock of your inventory accounting method’s impact on your tax bill
Mon, 19 Dec 2016 16:43:00 +0000
Take stock of your inventory accounting method’s impact on your tax billIf your business involves the production, purchase or sale of merchandise, your inventory accounting method can significantly affect your tax liability. In some cases, using the last-in, first-out (LIFO) inventory accounting method, rather than first-in, first-out (FIFO), can reduce taxable income, giving cash flow a boost. Tax savings, however, aren’t the only factor to consider.
FIFO vs. LIFO
FIFO assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices. The LIFO method operates under the opposite assumption: It allocates the most recent costs to the cost of sales.
If your inventory costs generally rise over time, LIFO offers a definite tax advantage. By allocating the most recent — and, therefore, higher — costs first, it maximizes your cost of goods sold, which minimizes your taxable income. But LIFO involves more sophisticated record keeping and more complex calculations, so it’s more time-consuming and expensive than FIFO.
LIFO can create a problem if your inventory levels begin to decline. As higher inventory costs are used up, you’ll need to start dipping into lower-cost “layers” of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed you to defer. If you use LIFO and this phantom income becomes significant, consider switching to FIFO. It will allow you to spread out the tax on phantom income.
If you currently use FIFO and are contemplating a switch to LIFO, beware of the IRS’s LIFO conformity rule. It generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it will also depress your earnings and reduce the value of inventories on your balance sheet, which may place you at a disadvantage in comparison to competitors that don’t use LIFO. There are various issues to address and forms to complete, so be fully informed and consult your tax advisor before making a switch.
The method you use to account for inventory can have a big impact on your tax bill and financial statements. These are only a few of the factors to consider when choosing an inventory accounting method. Contact us for help assessing which method will provide the best fit with your current financial situation. Read More...
Mon, 12 Dec 2016 21:22:00 +0000
Help prevent the year-end vacation-time scramble with a PTO contribution arrangementMany businesses find themselves short-staffed from Thanksgiving through December 31 as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace a ghost town as workers scramble to use, rather than lose, their time off. A paid time off (PTO) contribution arrangement may be the solution.
How it works
A PTO contribution program 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.
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.
To offer a PTO contribution arrangement, simply amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.
To learn more about PTO contribution arrangements, including their tax implications, please contact us. Read More...
Is cash for keys cancellation of debt income?
Tue, 22 Nov 2016 19:31:00 +0000
When a house is foreclosed, or there is a deed in lieu of foreclosure, some mortgage companies make a deal with the owner or tenant. Usually the deal works like this: the owner agrees to leave the property on a certain date and broom swept condition without taking any of the appliances, copper pipes, etc. If the home was left in the promise condition, the homeowner or tenant will receive a certain stipend from the mortgage company. Sounds good, right?
Nevertheless, the mortgage company than typically issues a 1099 for the cancellation of indebtedness income for the amount of the foreclosure and an additional 1099-MISC for the alleged miscellaneous income and cash for keys. The IRS has taken the position that the cash for keys income as ordinary income and should be taxed. In the case of Bobo vs. Commissioner, the US Tax Court determined that the foreclosure and the additional cash for keys payment were really one transaction. Since in that case, the taxpayer had an actual loss on the sale of their home, even with cash for keys payment there was no additional income.
Any time taxpayer receives a 1099s for a home foreclosure, settlement with a credit card company, or other loan, the matter should always be reviewed with a good tax lawyer to see if they amount of the 1099s is actually taxable or not.