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The IRS has released additional guidance in Notice 2021-20 on the Employee Retention Tax Credit (ERC) with clarifications on the retroactive changes for expanded eligibility applicable to 2020. Employers who received a Paycheck Protection Program (PPP) loan have been waiting on guidance on claiming the credit in combination with forgiveness of their loan. The provisions outlined here apply to retroactive claims for 2020 as well as providing a plan for those yet to seek forgiveness.

Summary of ERC

As a reminder, eligibility to claim the 2020 ERC requires a business to have experienced a significant decline in revenues during 2020.  Specifically, gross receipts for a calendar quarter during 2020 must have declined by 50% or more when compared to the same calendar quarter in 2019. Additionally, a company is eligible during any period where operations were suspended due to a government order.

Clarification on how to apply ERC with a PPP loan

The notice clarifies when and how PPP borrowers can claim the ERC on 2020 wages.

The ERC requires specific documentation and support of facts and circumstances in order to qualify and receive the credit. For assistance with claiming the ERC, contact us.

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.

Two ways to arrange a deal

Under current tax law, a transaction can basically be structured in two ways:

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

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

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.

Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.

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

Preferences of buyers 

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

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

Preferences of sellers

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

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

Obtain professional advice

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.

© 2021

Last spring, the CARES Act created the ERC for businesses that were affected by the COVID-19 pandemic. However, the CARES Act disallowed the credit for businesses that received a Paycheck Protection Program (PPP) loan. Fast forward to December 2020, when Congress declared that businesses that had obtained PPP loans could also qualify for the ERC. In addition, Congress extended the availability of the ERC into the first two quarters of 2021, with a few new favorable provisions. The credit is refundable, which means that qualified businesses are able to get cash to the extent that the credit exceeds the payroll tax liabilities. The chart below outlines the terms of the ERC for both the original and extended filing periods:

How does PPP loan forgiveness impact the ERC?

In a statement from the Internal Revenue Service (IRS), “[t]he eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.” The release of the new loan forgiveness applications on January 19, 2021, includes a provision to incorporate this change in guidance on a forward-looking basis. The revised loan forgiveness applications (Form 3508S, Form 3508EZ and Form 3508) note that a borrower should “not include qualified wages taken into account in determining the Employee Retention Credit.”

My PPP loan was already forgiven, what now?

As I previously noted, a business cannot “double dip,” or utilize the same wages to obtain PPP loan forgiveness while still benefiting from the ERC. However, the ERC was not available to PPP recipients prior to December 27, 2020. Accordingly, those businesses that applied for loan forgiveness would have included all eligible payroll costs paid or incurred during the covered period pursuant to the instructions in the loan forgiveness applications. Certainly, those businesses shouldn’t be penalized for already receiving forgiveness prior to this change in the law; however, this wouldn’t be the first time we’ve seen something like that with the evolution of the PPP.

On January 15, the American Institute of Certified Public Accountants (AICPA) sought clarification on this matter. In a letter to the IRS, the AICPA “recommends that the IRS and Treasury provide guidance stating that the filing of a PPP loan forgiveness application does not constitute an election to forgo the ERC with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.” It is clear — additional guidance is imminent.

What’s next?

As we await clarification from the IRS, businesses who have already received forgiveness on their PPP loans should first evaluate their eligibility for the ERC. After concluding their eligibility, businesses should begin gathering payroll reports, government shutdown orders and financial statements to calculate and claim their credits.

Borrowers of PPP loans who have yet to apply for loan forgiveness have an alternative path; those businesses looking to leverage the ERC now have an additional element to consider in their evolving journey to loan forgiveness. This change in guidance further emphasizes the importance of an intentional strategy to maximize the benefits of both programs, but also leaves questions unanswered for borrowers who have already received forgiveness on their PPP loans.

The Internal Revenue Service recently issued the 2021 optional standard mileage rates. These rates, which adjust every year to account for inflation of fuel costs, vehicle cost and maintenance, and insurance rate increases, will once again affect the way a company reimburses their mobile workers. Specifically, the IRS mileage rate is a guideline that businesses use to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. Beyond announcing the rate change, we have a few reminders and tips surrounding this reimbursement allowance.   

As of January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are: 

Have you considered… 

Remember, 

The IRS rate was intended to function as a reimbursement cap. Today, the rate holds businesses accountable, but it doesn’t account for fluctuations in vehicle prices across city, county, and state lines.  For companies whose employees use their vehicles for work, there is an alternative to the standard mileage rate. The Fixed and Variable Rate (FAVR) allowance preserves reimbursement equity and helps businesses avoid over- or underpayment to employees. To find out more about this IRS recommended reimbursement methodology or if you have any questions about the IRS Standard Mileage Rate, please contact one of our professionals today.

The employee retention tax credit (ERTC) is intended to provide liquidity to employers during the pandemic and was greatly expanded in the Consolidated Appropriations Act of 2021 thanks to Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act portion, opening the doors to more businesses to be able to qualify for and receive this credit who are facing significant hardship as a result of the coronavirus pandemic. Many changes from the original credit were enacted including an expansion in the amount of credit and business eligibility, and how it plays with the Paycheck Protection Program (PPP).   

Here’s what you need to know about this credit, how it works, and how to apply. Note that when a provision is designated as effective Jan. 1, 2021, it does not apply to any retroactive credit claims.   

Who is eligible for the ERTC? 

The following businesses and organizations engaged in a trade or business are eligible to qualify for the ERTC: 

How does my business qualify for the ERTC? 

An eligible organization can qualify for the ERTC if: 

The gross receipts test is Effective Jan. 1, 2021, this is an increase from the previous law and expands the threshold for eligible businesses. 

Effective Jan. 1, 2021, businesses with 500 employees or less are eligible to claim the credit even if an employee is working during the first two quarters of 2021 (an increase in the threshold from 100 employees in the original law). For affiliated companies sharing more than 50% common ownership, the 500 count is aggregated.   

What is the time period for the credit, and when can I start collecting? 

The passage of the bill at the end of December extended the availability of the ERTC through the first two quarters of 2021, allowing for more relief as the pandemic continues on. Qualified wages paid after March 12, 2020, and before July 1, 2021, are eligible for the credit.  

Additionally, the new law will allow for an advanced credit for companies with 500 or fewer employees, allowing these companies to monetize the credit before wages are paid. The amount is based on 70% of the average quarterly payroll for the same quarter in 2019, and if there is excess advance payment, companies will need to repay the credit to the government. 

How much credit can I receive? 

Effective Jan. 2021, 70% of qualified wages are eligible for the ERTC including the cost to continue providing health benefits (such as if an employee is on furlough). This is an increase from the 50% provided in the previous stimulus bill.  The qualified wage limit was increased to $10,000 per quarter per employee for the first 2 quarters of 2020.  Previously was $10,000 per employee for the entirety of 2020.  

Also, effective Jan. 1, 2021, the credit maxes out at an aggregate $14,000 per employee, or $7,000 for the first two quarters of 2021, and is available even if the employer received the maximum credit for wages paid to the same employee in 2020. This is an increase from the $5,000 max in the previous bill. 

Additionally, the credit is now available for certain pay raises including hazardous duty pay increases (previously not allowed and is retroactive).  

How does my PPP loan factor in? 

First and foremost, companies with PPP loans can now also claim the ERTC, and the change is retroactive to the effective date of the original law (March 12, 2020). Key to note is that the ERTC cannot be applied toward wages covered by the PPP.  

If, for example, your business received a PPP loan in 2020 and paid qualified wages in excess of the PPP loan amount, you could qualify and apply for the ERTC through an amended employment tax return (Forms 941X). This also applies to affiliate companies related to a PPP borrower. Furthermore, if your PPP payroll costs are not forgiven, those same payroll costs can be applied toward ERTC qualified wages. Your accountant can help you calculate and designate these costs.  

Claiming the ERTC, with or without a PPP loan, requires careful calculation and documentation. Contact us for assistance with this credit.  

The U.S. House of Representatives and U.S. Senate have passed the Coronavirus Response & Relief Supplemental Appropriations Act, and President Trump is expected to sign the bill immediately. The agreement comes after weeks of negotiations and two funding extensions to keep Congress open until a bill was passed with a $1.4 trillion government-wide funding plan. The $900 billion coronavirus relief portion includes another round of Paycheck Protection Program (PPP) funding, extended unemployment benefits, and direct payments to taxpayers. Here’s an overview of the key provisions in the bill.  

Updates to the PPP and changes for second round 

The Act designates $267.5 billion for this round of PPP funding, and the program specifically sets aside $25 billion for businesses with 10 employees or less as of Feb. 15, 2020. Regulations for this round of PPP funding are required to be released within 10 days of enactment. 

Borrowers who received PPP funding in the first round following the CARES Act will receive some additional updates to their existing PPP loans. Borrowers who would like to adjust their requested loan amount based on these updated regulations may do so, provided they have not yet received forgiveness. Here are the key updates: 

The second round of funding provided by this Act has a few key differences from the first round in the CARES Act. Key to note is that borrowers can apply for a second PPP loan through this program if they have fully used their first PPP loan and meet the employer size and gross revenue criteria listed below. PPP loans in this round are capped at $2 million. Here are the key differences: 

As with the first round of PPP loans, 60% of the funds must be spent on payroll over the covered period (8 or 24 weeks). 

Other provisions affecting businesses 

Provisions affecting individuals 

 Other provisions 

Further guidance and regulations are expected in various components of the bill and are due in periods of 10 to 45 days depending on the issue and reporting agency. Not included in the bill was aid for state and local governments, an agreement on liability protections for businesses, nor a continued freeze on payments and interest for federal student loans set to expire for many in February. Lawmakers have indicated they expect to pass another stimulus bill addressing some of these issues in early 2021.  

More guidance and updates are expected on the Coronavirus Response & Relief Supplemental Appropriations Act. Stay tuned for more details in the days and weeks to come. 

Please note that information and guidance on the PPP loan program is changing on a daily basis. The information provided in this article is current as of December 22, 2020. It is intended for general informational purposes only. Consult with your financial advisor about your specific situation. 

The pandemic created by the novel coronavirus has drastically changed the way we live and work. As more businesses are forced to send their employees home, work-from-home life has become a mainstay especially in knowledge-based jobs (jobs that do not require physical labor), and many of these industries are not going back to the workplace anytime soon. This can create wrinkles for both employers and employees when it comes to their tax situations.

Here’s what employers and employees need to know about remote work and the impact it can have on taxes.

Tax and labor considerations for employers with remote employees

Nexus – Employers who have transitioned their workforce to be remote must be conscious of potential nexus implications due to any employees now working from another state. Working out of state from the employer can create physical nexus which means the employer will be responsible for the taxes imposed from the employee’s location. This could include taxes on income, gross receipts, and sales and use from both the city and county level.

Some states have waived these nexus rules or have adjusted in light of COVID-19 including Minnesota, Indiana, Ohio, New Jersey, Mississippi, Pennsylvania, North Dakota, and the District of Columbia. Check with your CPA to ensure you’re following your state’s remote worker nexus law.

Labor and employment law – Changes in an employee’s location across state lines can result in new wage and hour rules, termination of employment considerations, noncompetition agreements, trade secrets protections, and paid sick and family leave rules. Employers will want to be mindful of worker’s compensation insurance as states usually require employers to register and obtain premiums to cover the employee in that state. Additionally, unemployment insurance is also required by states for employees even if the employer operates in a different state.

Remote worker supplies – Employers who purchased items and provided them to workers in order to move operations remotely may deduct those expenses on their tax return. As these supplies are usually purchased for non-compensatory business reasons, employees do not need to pay taxes on them. Employers who reimbursed employees for purchased supplies deemed “ordinary and necessary” should have accountability plans and policies in place to protect the employee from taxation.

Consistent and accurate communication with employees during this time is key in order to avoid employer and employee tax violations as tax updates continue to be released regarding nexus and tax responsibilities. Be mindful that employee tax obligations are not the employer’s responsibility, so remind your employees to stay vigilant about their personal tax situation.

Tax implications for employees working from home

Double-taxation – Double-taxation can be a large burden for employees living in one state and working in another. Double-taxation occurs when the resident state doesn’t provide and employee with a credit on their return for taxes paid to their employer’s state. States where this can occur include New York, Arkansas, Connecticut, Delaware, Nebraska, and Pennsylvania.

Home office deductions – The Tax Cuts and Jobs Act (TCJA) of 2017 removed the itemized home office deduction for unreimbursed expenses exceeding 2% of AGI. This means that even though new remote employees have had to procure supplies during the pandemic and they were not either directly purchased by the employer or the employee was not reimbursed, those expenses are not tax-deductible.

Self-employed individuals are still eligible for the home office deduction if they are purchasing their own supplies. If a contracting client purchases supplies for them, those would be tax-deductible for the client, but not the self-employed individual.

Relocation – If you’ve permanently relocated across state lines during the pandemic, you will need to file tax returns for both states in 2021. Even temporary relocations of six months or longer may require tax returns to be filed in two states. It is likely states will be monitoring these moves closely in order to recover lost revenue.

Employers who have never operated with remote workers prior to the pandemic could face significant headaches come tax time. Likewise, employees who are working in one state and living in another could face large tax bills in 2021. For assistance with your obligations as an employer or individual taxpayer, reach out to us.

On November 18, 2020, the Internal Revenue Service issued Revenue Ruling 2020-27 which provides needed clarity on a taxpayers’ ability to deduct eligible expenses for Paycheck Protection Program (PPP) loan forgiveness.

The Ruling notes that a taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

What if forgiveness is denied, in whole or part, or not requested?

In conjunction with the Ruling, the IRS issued Revenue Procedure 2020-51 to outline the steps for when:

1.) The eligible expenses are paid or incurred during the taxpayer’s 2020 taxable year,

2.) The taxpayer receives a covered loan guaranteed under the PPP, which at the end of the taxpayer’s 2020 taxable year the taxpayer expects to be forgiven in a subsequent taxable year, and

3.) In a subsequent taxable year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

The Rev Procedure provides for two safe harbors for taxpayers in the event forgiveness is denied, in whole or in part, or otherwise not requested that would allow for the deduction of expenses in either the 2020 or a subsequent tax year. 

Questions we still have

While the Ruling provides information on the deductibility of expenses and the tactical approach for borrowers whose forgiveness is denied or not requested, additional clarification is still needed. This guidance does not address the order in which the eligible expenses (payroll, rent, utilities and mortgage interest) lose the ability to be deducted.

Further, the guidance does not address other matters that could have significant tax implications including, but not limited to, the impact on the following:

Need Assistance in Choosing the Right PPP Loan Forgiveness Application?

We have put together a flowchart that can help: How to Select the Right Loan Forgiveness Application

This year has been unique and beyond comparison in many ways, and tax planning is just one of the implications of current events. Both individual and business taxes have the potential to be significantly impacted by the various legislation that has passed like the FFCRA and the CARES Act, the loan programs made available like the PPP and the EIDL, and the unemployment/stimulus programs that touched many Americans.  

It’s imperative that we take into account all these potential factors when implementing your tax plan for 2020. In this article, we’ll take a look at the main areas to consider, both common and pandemic-related, when planning for 2020 year-end taxes.  

Common and pandemic-related tax planning items for businesses to consider in 2020 

 Common and pandemic-related tax planning items for individuals to consider in 2020 

As mentioned in our previous article – Tax planning considerations: Election results, sunset provisions – changes to the tax code in the next two to four years may still be imminent depending on the finalizations of certain Senate elections. If those changes become a likely scenario, some adjustments may still be possible in this year’s tax plan to account for those potential tax code changes. Work with your CPA to have a plan for all scenarios.  

According to news outlets, as of this writing, Joe Biden will be the president-elect of the U.S. following the Electoral College vote on Dec. 14. Vote counting is still ongoing and election results have not yet been certified, but this news may have some taxpayers wondering what changes, if any, they should make in their tax planning to close out an eventful tax year.   

The likelihood of a major tax overhaul in the next two years is up in the air as the Senate is not yet decided and may not be until two Georgia run-off elections in January 2021. If Republicans retain the majority, it’s likely there won’t be many changes, but that doesn’t completely lock out any potential adjustments that could come in the next two to four years. Items of agreement on tax policy exist between both parties such as increasing the child tax credit. However, with provisions of the Tax Cuts and Jobs Act (TCJA) set to sunset in 2026, updates to the tax code will be on the horizon by the next election.  

Additionally, if the Republican Party indeed holds onto a 51-vote majority in the Senate, it is not unreasonable to imagine a legislative vote in which 2 republican senators vote against the majority of the Republican party to push a tax legislation bill through to the President.  Accordingly, between the possibility of a loss of Republican control in 2 to 4 years, the possibility of 2 Republicans voting for a tax reform bill, and the 2026 TCJA sunset, it is highly unlikely tax laws will become more favorable to taxpayers in the in future; thus, we believe there is an urgency to plan carefully and diligently in the last weeks of 2020. 

In this article, we’ll examine the key points of the President-elect‘s tax plan, the sunsetting TCJA provisions, and what to keep in mind as you execute your tax plan to close out the year.  

High-level overview of the President-elect Biden’s tax plan 

President-elect Biden has laid out several of his tax plans the past year on the campaign trail. Here’s what we know based on what he’s shared. 

For individuals: 

For businesses: 

TCJA provisions to sunset in 2026 

In addition to the President-elect’s plans, the TCJA is still in the spotlight. The TCJA was the most significant tax overhaul in decades when it was passed in 2017. However, as is the nature when dealing with budgetary constraints, many of the provisions of the TJCA are scheduled to sunset by 2026. Below we’ve highlighted a few of the anticipated changes. 

For businesses, approximately $4 trillion is expected in new taxes over the next 10 years as provisions begin to sunset including changes to: 

 For individuals, changes are coming for: 

Considerations for 2020 year-end tax planning 

It’s important to note that the above considerations are not an exhaustive list of tax items to review as we close 2020. Work with us to have a proactive plan in place that takes into account various potential scenarios that could manifest in the coming weeks and months. In our follow-up article – 2020 tax planning considerations for businesses, individuals – we’ve laid out some of the key provisions to take into account as you work with us on your end–of–year tax planning.

With all of the curveballs 2020 has thrown at the nation, the economy, and businesses, there’s never been a better time to get an early jump on year-end planning for your business. While all the usual year-end tasks are still on the docket, you’ll want to consider implications related to the Paycheck Protection Program (PPP), any disaster loan assistance you received, and changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  

We’ve put together a checklist of what you need to do now to prepare for a great year-end that includes annual tasks as well as 2020-specific tasks. Keep reading for assistance getting your financials organized, reviewing your tax strategy, and preparing for next year. 

Get organized 

1. Bring order to your books – Now is the time to collect, organize, and file all of your receipts for the year if you haven’t been staying on top of it. Get with your CPA to ensure everything is clean and in order before the end of the year to help avoid surprises come tax time.  

2. Examine your finances – This includes having your balance sheet, income statement, and cash-flow statements prepared and up to date. Reviewing this information allows you to see where your money went for the year so you can properly prepare for next year. 

3. Work with your CPA on your PPP loan forgiveness application – We are currently awaiting further guidance on the PPP’s impact to taxes, but it’s important to work with your CPA on your PPP loan forgiveness application. Knowing where your PPP loan lies can help determine how to spread out your cash flow for the remainder of the year. 

4. Organize all disaster loan assistance documentation – This includes your Economic Injury Disaster Loan (EIDL) documentation if you received an advance grant. EIDL advances must be added to your taxable income (unless different guidance is released), but you’ll be able to deduct any expenses paid with this grant.   

Review your tax strategy 

5. Review your taxes with your CPA – Do not put off your tax planning meeting with your CPA. Especially after the year you’ve had and any potential federal state aid your business received, your tax plan needs a review. Getting a jump on this early, well before the new year, can help you plan for what’s to come on Tax Day. It’s even more imperative to plan early for any tax obligations you may have at tax time as it’s likely the COVID-19 pandemic will continue to create a volatile environment for many industries’ revenue projections.  

6. Execute on year-end tax strategy adjustments such as: 

7. Prepare your tax documents – Once you’ve met with your CPA, it’s time to line up all the info you need to prepare your final tax documents or have your CPA take care of it. Be sure not to put this off to the last minute as it will be a complicated year for everyone. 

8. Automate your tax function – Instead of spending valuable time and energy on manual tasks and repetitive processes this year, consider investing in data analytics and automation tools to optimize and streamline your in-house accounting and tax functions. There’s never been a better time to invest in technology that will help you become more efficient and accurate. 

Plan for the future  

9. Evaluate your goals – There’s no doubt that 2020 likely threw a wrench in many of your goals for the year. However, you should still review the goals you set last year and see if you’ve met or made progress on any of them. This will help with 2021 business planning. 

10. Set goals for the new year – No one knows how 2021 will play out, and it’s unlikely the market or business will return to normal in the first part of the year. Take into consideration the challenges you’ve faced so far in the pandemic as you plan for 2021. Work with your trusted advisor to determine several back-up plans for what if scenarios in case of any state or national lockdowns.  

In a year like no other, it’s crucial to prepare like no other so you’re not met with any surprises or devastating fees. Contact us today to set up your tax and business planning appointment.  

The Tax Cuts & Jobs Act (TCJA) of 2017 made many significant changes for business tax deductions including the disallowing of the business deductions for most entertainment expenses. After a period of comments and proposed regulations, the IRS has released long-awaited final regulations for the treatment of meals and entertainment deductions, and businesses should apprise themselves of these changes.  

The main change with the TCJA was the removal of certain entertainment expenses as tax deductible for a business. Prior to the TCJA, entertainment expenses were eligible for an up to 50% deduction in expenses directly related to the active conduct of a trade or business or for expenses incurred before or after a bona fide business discussion. The TCJA eliminated this deduction for activities considered to be entertainment, amusement, or recreation as well as removed the reference to entertainment as part of the 50% limitation of deductibility for food or beverages.  

The final rules clarify that taxpayers may continue to deduct 50% of business meals if the taxpayer or an employee of the taxpayer is present, as long as the meal is not considered extravagant. Meals for current or potential business customers, clients, consultants, or similar business contacts are eligible. Food and beverages provided during entertainment events must be purchased separately from the event to qualify, otherwise they are considered part of the entertainment.   

Note that the TCJA did not repeal the exception for certain recreational activities that benefit employees, reimbursed expenses, entertainment treated as employee compensation, or includable gross income of a nonemployee as compensation or as a prize or award, which must be properly reported by the taxpayer. 

Separating meals and entertainment and aligning them in the right buckets for deduction can be tricky. Contact us for assistance in determining what qualifies.   

If a relative needs financial help, offering an intrafamily loan might seem like a good idea because they allow you to take advantage of low interest rates for wealth transfer purposes. But if not properly executed, such loans can carry negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to help avoid any unwelcome tax surprises:

1. Create a paper trail. In general, to avoid undesirable tax consequences, you need to be able to show that the loan was bona fide. To do so, document evidence of:

Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by also documenting the loan payments received.

2. Demonstrate an intention to collect. Even if you think you may eventually forgive the loan, ensure the borrower makes at least a few payments. By having some repayment history, you’ll make it harder for the IRS to argue that the loan was really an outright gift. And if a would-be borrower has no realistic chance of repaying a loan, don’t make it. If you’re audited, the IRS is sure to treat such a loan as a gift.

3. Charge interest if the loan exceeds $10,000. If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR). Be aware that interest on the loan will be taxable income to you. If no or below-AFR interest is charged, taxable interest is calculated under the complicated below-market-rate loan rules. In addition, all of the forgone interest over the term of the loan may have to be treated as a gift in the year the loan is made. This will increase your chances of having to use some of your lifetime exemption.

4. Use the annual gift tax exclusion. If you want to, say, help your daughter buy a house but don’t want to use up any of your lifetime gift and estate tax exemption, you can make the loan and charge interest and then forgive the interest, the principal payments or both each year under the annual gift tax exclusion. For 2020, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. But you will still have interest income in the year of forgiveness.

Here is an example of how an intrafamily loan can save on taxes:

A $2 million interest-only loan is made from parent to child at an interest rate of 0.38%. If the loan proceeds are invested and grow at a rate of 5%, after repayment of interest and principal in year 5, the child is left with approximately $510,000 estate and gift tax-free. This arrangement also offers the flexibility to utilize the gift tax exemption at any time.

5. Forgive or file suit. If an intrafamily loan that you intended to collect is in default, don’t let it sit too long. To prove this was a legitimate loan that soured, you’ll need to take appropriate legal steps toward collection. If you know you’ll never collect and don’t want to file suit, begin forgiving the loan using the annual gift tax exclusion, if possible.

© 2020

The unprecedented global pandemic and record unemployment has resulted in a dramatic drop in interest rates. Many people focus on the Fed rate and mortgage rates, and rightfully so, but for some, the focal point should be on the historically low IRS interest rates.

The IRS posts various interest rates, generally on a monthly basis. The Applicable Federal Rate (“AFR”) and the Internal Revenue Code Section 7520 Rate (“7520 Rate”) are among the most important. Many tax strategies are a function of calculations driven by the AFR and 7520 rates. Some strategies work best in high rate environments while other work best in low rate environments. Accordingly, any time the IRS rates dramatically rise or fall, we should take notice and consider tax planning.

The May 2020 IRS Rates include:

Short-Term AFR: 0.25%

Mid-Term AFR: 0.58%

Long-Term AFR: 1.15%

7520 Rate: 0.80%

These rates are exceptionally low. To provide some context for comparison, the May 2019 Rates were: Short-Term AFR 2.39%, Mid-Term AFR 2.37%, and Long Term AFR 2.74%. Viewing this from a historical perspective, the May 2019 rates were low in their own right, but clearly the rates today, just one year later, are materially lower.

The remainder of this paper outlines three strategies that work particularly well in low interest rate environments. Although we have elected to highlight three strategies specifically, low interest rate tax strategies are not limited to just these three. Accordingly, we encourage you to contact our office to discuss your specific set of circumstances.

Charitable Lead Trusts

A Charitable Lead Trust (“CLT”) is a split interest trust, meaning there are two categories of beneficiaries: (1) a current beneficiary and (2) a remainder beneficiary. The current beneficiary receives distributions from the CLT for a period of time (the “Term”) and must be a charitable organization, such as a public charity, a church, most schools and universities, and even a private foundation operated by the donor. The remainder beneficiary receives all the assets remaining in the CLT after the Term expires and is generally the donor or the donor’s children. Depending on the design of the CLT, the donor may receive an income tax deduction in the tax year the CLT is established in an amount equal to the present value of all payments that will go to charity during the CLT’s term. Accordingly, it can generate a substantial income tax deduction for gifts that have not yet gone to the charity. This gives the donor the ability to continue investing and growing the CLT assets, thereby ultimately benefiting the donor who will receive the assets back upon expiration of the CLT term.

Why CLTs during low interest rates?

The donor’s income tax deduction is a present-value calculation. We take the sum of all scheduled future charitable distributions and discount that number to present value using a calculation based on the 7520 Rate. The lower the 7520 Rate, the lower the discount. The lower the discount, the greater the deduction. Accordingly, in today’s environment, all other factors being exactly the same (i.e. same growth rate, same amount to charity, etc.), a CLT today will generate a significantly higher income tax deduction, than the same CLT when interest rates are higher.

Grantor Retained Annuity Trusts

Grantor Retained Annuity Trusts (“GRATs”) are estate planning trusts that provide a tremendous opportunity to transfer wealth from one generation (“Generation 1”) to the next (“Generation 2”), often without incurring gift or estate taxes. GRATs are established with Generation 1 assets for a period of time (the “Term”). During the Term, the GRAT makes distributions to Generation 1. At the end of the Term, if designed properly, the assets remaining in the GRAT transfer to Generation 2 free of gift, estate, or transfer taxes. Many individuals will establish a series of GRATs in order to provide necessary lifetime cash flow to Generation 1.

Why GRATs during low interest rates?

Payments made from the GRAT to Generation 1 are based on the IRS rates. The donor makes the “bet” that the assets inside the GRAT will grow at a rate higher than the IRS rates. Lower rates mean a lower hurdle, a lower hurdle means more wealth can transfer to Generation 2 tax-free.

Sales to Intentionally Defective Grantor Trusts

Intentionally Defective Grantor Trusts (“IDGTs”), are irrevocable estate planning trusts that are generally utilized by high net worth business owners and those with assets likely to significantly increase in value (such as stock and real estate). The IDGT will purchase the asset from the individual primarily in exchange for a promissory note (there are no income taxes due on the sale because the IDGT is disregarded for income tax purposes). The IDGT will make installment payments to the individual for the term of the promissory note. The assets in the IDGT are outside of the individual’s estate, therefore any growth in the asset from the time it is sold remains outside of the individual’s estate for estate tax purposes.

Why IDGTs during low interest rates?

Similar to any traditional lending arrangement, the IDGT promissory note must yield interest. Because this is a related-party transaction, the IRS mandates a certain minimum interest rate, which is based on the AFR. The lower the AFR, the lower the required monthly payments, and thus more taxable wealth remains outside of the Grantor’s estate.

Next Steps?

Don’t let this exceptionally low interest rate environment get away. Please contact your Heritage financial advisor, CPA, or attorney to schedule a planning session.

This article has been edited by Hamilton Tharp LLP. This article originally appeared on the HWM newsletter.

As consumers become more conscious of their environmental footprint, and look for ways to save money, more and more electric vehicles can be seen on the roads today stretching from coast to coast. At this point, most taxpayers know or have heard of an electric vehicle tax credit program, but what they may not know is that there are specific conditions and limitations that must be met, and that some vehicles have actually phased out of the program. So, before you consider an electric vehicle for your next purchase, make sure it qualifies.

Here’s a rundown of what you need to know about the electric vehicle tax credit, how it works, and what qualifies.

What vehicles qualify for the electric vehicle tax credit?

The new car or truck must:

· Have at least four wheels and gross vehicle weight of less than 14,000 pounds

· Draw energy from a battery with at least 4 kWh hours and recharged from an external source

· Purchased after 2010 and begun driving in the year claiming the credit

· Be primarily used in the U.S.

Two or three-wheeled vehicles purchased in 2012 or 2013 and used within that year may qualify under section 30D(g) if they draw from a battery with at least 25 kWh and charged from an external source.

How much is the electric vehicle tax credit?

The tax credit for an electric vehicle can range from $2,500 to $7,500 depending on the vehicle with higher credit amounts for specific battery capacities and vehicle sizes. For two or three-wheeled vehicles, the credit is 10% of the purchase price up to $2,500.

How is the tax credit applied to me?

The non-refundable tax credit is filed on your federal tax return (for individuals on your 1040), and your liability determines how much credit you qualify for. The non-refundable caveat means that in order to receive the full $7,500 credit, your tax liability must be at least that much. If your liability is only $3,000, you’ll only receive $3,000. You won’t receive the difference in a refund check.

Can I get a tax credit on a used or leased vehicle?

Unfortunately, the answer is no to both of those circumstances. The credit only applies to the new purchase and the person who actually owns it. Used vehicle purchases, even transfers to family members don’t qualify, and if you lease, the credit actually goes to the manufacturer

offering the lease. Some manufacturer dealers offer lower prices on leased electric vehicles as a result of the incentive, but are not forced to do so.

Does the tax credit run out?

As sales of electric vehicles increase, the tax credit will phase out. Once a manufacturer reaches 200,000 qualified vehicles, the credit begins to phase out with a step-down process over the course of a year. No tax credits are available for Tesla vehicles sold after Dec. 31, 2019, as they hit their mark in July 2018, and no credits are available for GM vehicles after March 31, 2020, as they hit their mark as well. You can see a list of the vehicles available for credits at fueleconomy.gov.

Are there state tax credits available?

Some states and regions do offer tax credits for electric vehicles and alternative-fuel vehicles, but these often apply to businesses. Individuals may receive incentives such as carpool lane access or free parking. Some states offer rebates for retail buyers. The U.S. Department of Energy offers a chart of state incentives.

For Californians, a $2,000 or $1,000 rebate is available depending on which type of electric car you purchase. Fully electric cards usually receive the higher rebate with hybrids on the lower end. Hydrogen fuel vehicles are eligible for a $4,500 rebate in California. These rebates are in addition to the federal tax credit and can reduce the out of pocket cost for a car by close to $10,000. You can learn more about California’s Clean Vehicle Rebate Project on their website.

For assistance with the electric vehicle tax credit and determining any extra state or local incentives, reach out to us.

Employers can now defer payroll tax withholding on employee compensation for the last four months of 2020 and then withhold the deferred amounts in the first four months of 2021, confirms a recent update from the IRS. President Trump’s memorandum on Aug. 8 gave employers the ability to defer payroll taxes for employees affected by the COVID-19 pandemic in an effort to provide financial relief.   

The guidance directs that employers can defer the withholding, deposit, and payment of the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3102(a) and Railroad Retirement Act Tier 1 under Sec. 3201 from employee wages from Sept. 1 to Dec. 31, 2020.  

Employers must then withhold and pay the deferred taxes from wages and compensation during the period from Jan. 1, 2021, and April 30, 2021, with interest, penalties, and additions to tax to begin accruing starting May 1, 2021. Included in the notice is a line that indicates, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee,” such as if an employee leaves the company before the end of April 2021, but does not provide details on what that entails.  

Employees with pretax wages or compensation during any biweekly pay period totally less than $4,000 qualify for the deferral. Amounts normally excluded from wages or compensation under Secs. 3121(a) or 3231(e) are not included in calculating the applicable wages. The determination of applicable wages should be made on a period-by-period basis.  

Companies may choose whether or not to enact the payroll tax deferral. We are closely monitoring updates related this and other presidential executive orders and will communicate if more information becomes available. For questions or assistance with this payroll tax deferral, contact us.  

In an effort to help businesses cope with the impact of COVID-19, the CARES Act passed by Congress in March of this year eliminated some of the restrictions on the business interest deduction set in place in 2017 by the Tax Cuts and Jobs Act (TCJA). Now, the IRS has released much-needed guidance and final regulations for business interest expense deductions.

Limiting the business interest deduction was originally a way of helping pay for the TCJA and began with tax years starting after Dec. 31, 2017. The deduction was limited to the sum of:

The final regulations state that the deduction does not apply to:

Taxpayers must use Form 8990 to calculate and report their deduction and the carry-forward amount of disallowed business interest expense.

Additional regulations released by the IRS cleared up some of the remaining questions including issues related to the CARES Act. These additional regulations can be used with limitations until the final regulations are published in the Federal Register.

Additionally, a safe harbor was created in Notice 2020-59 that allows taxpayers engaged in a trade or a business managing or operating qualified residential living facilities to treat that as a real property trade or businesses in order to qualify as an electing real property trade or business.

Reach out for assistance with understanding and reporting your business interest expense.

 

Economic downturns are an almost inevitable reality for nearly every business owner. Decisions made far away from your community, catastrophic and unpredictable weather events, and even global pandemics as we’ve seen this year can disrupt the health and viability of a business. During these challenging times, business owners have to make difficult decisions about the future of their business that not only affect them but also their employees, vendors, clients, and communities. It’s an enormous responsibility to bear, but you don’t have to go it alone.

Your CPA advisor is your best resource for tackling the challenges of an economic downturn. As an outside party, they can help you make smart business decisions that protect your vision and mission while remaining financially responsible. Your CPA can help you:

Optimize your books

Never underestimate the power of good bookkeeping. By keeping your books in order, your CPA can help you plan and project for the future at each stage of an economic downturn. This includes planning for temporary closures and tiered re-openings (and potentially a back-and-forth of both depending on the state of the country and market). When your books are clean and up to date, you can better project how events and decisions will impact your finances on a weekly, monthly, and quarterly basis. Your CPA can help you flex the numbers on fixed and variable expenses to account for increases in costs, decreases in income, and potential changes to payroll. Knowing your numbers intimately can help you make better-informed decisions.

Minimize your tax burden

During times of economic crisis, staying abreast of new and changing tax legislation will be essential to projecting tax burden and uncovering tax savings opportunities. Your CPA is the best person to handle this because they know your business and your industry inside and out and can help you uncover tax savings opportunities that are unique to your circumstances. They do all the research, and you reap the rewards. With a CPA’s assistance, you achieve deductions and credits you may not have realized were available and develop a plan to defer costs where allowed depending on your business, industry, and location. Taxes are not an area you should or need to face alone during an economic downturn. Your CPA has done the homework, so you don’t have to.

Rationalize your decision making

When markets are in flux and your business is facing unprecedented challenges, the decisions you make can make or break your business. But you don’t have to go it alone. Your accountant can help you make data-informed decisions whether that be how to pay vendors, when and how to apply lines of credit, and the best ways to use your capital. Negotiating contracts with vendors that meet your needs and theirs during a downturn will not only achieve cost savings but also preserve relationships – your CPA can help develop a plan that makes sense. Knowing when to engage lines of credit can help you make better moves that you can either afford to pay back later, or maybe prevent you from taking on credit you can’t handle – your CPA can guide you in this process. Knowing where to allocate capital will be key to maintaining operations, and you may need guidance on what expenses to cut and what to keep such as marketing and payroll – your CPA can help you project the ramifications. With your CPA by your side, you don’t have to operate in a silo of decision-making.  

Maximize your sense of relief

Most of all, your CPA can provide perspective, alleviate business back-end burden, and help advise you on financially feasible and sound decisions when much of the world feels like it’s in chaos. You have a lot to focus on during a downturn including how to handle your customers and employees in a changing marketplace. Having someone who can help you stay fiscally viable as you work through tough times, and develop a plan for future success, provides a welcome peace of mind.

You don’t have to go through any economic downturn alone. Your CPA can help you shoulder the challenges and weather the storms so you can continue doing what you do best – running your business.

In the midst of the uncertainty and instability that the COVID-19 pandemic has created for businesses and individuals, some relief is available for taxpayers in the form of deductible losses thanks to the preexisting Internal Revenue Code (IRC) Section 165(i). While the CARES Act and FFCRA have received much of the attention, taxpayers may also find relief thanks to Section 165(i) which allows for losses sustained as a result of the pandemic in 2020 to be claimed on the taxpayer’s 2019 tax return.

This deduction is triggered by a federally declared disaster, like the pandemic which was declared a national emergency on March 13, 2020. In the case of this deduction, losses attributed to federally declared disasters can be deducted on the previous year’s return. While not often used, this deduction comes at the right time for businesses struggling during the pandemic.

In order to claim the Section 165(i) deduction, losses must:

While some taxpayers will fit into this deduction, the rules and procedures are complex.

Examples of deductible losses as a result of COVID-19 vary from costs related to running your business during a pandemic like investments in personal protective equipment and cleaning supplies and services, to the closure of stores and facilities and disposal of unsaleable inventory. Other eligible costs include certain termination payments, losses from property sales or exchanges, abandonment of leasehold improvements, and nonrefundable event payments, to name a few.

To make the Section 165(i) election, taxpayers must include Form 4684, “Casualties and Thefts,” with their return within six months from the due date for filing the taxpayer’s federal income tax return for the disaster year.

We can assist you with identifying your deductible expenses and following the complex rules and procedures for making this election. Reach out for assistance.

With personal income tax representing 61% of California’s total general fund revenue sources, it is no surprise that the California Franchise Tax Board in the last few years has become more aggressive in its enforcement and interpretation of California residency law, using residency audits to do so.

What is California Residency Audit?
According to California’s residency laws, residents must pay state tax on their worldwide income, no matter the source of the income. Meanwhile, part-year residents are only required to pay taxes on income received while a resident of the state. Therefore, a person’s “residence” under California law is the key to understanding their state income tax liability. For this reason, the FTB conducts residency audits that will determine a person’s residency.

The 3 Types of “Residency” According to California Residence Law
When the FTB conducts a residency audit, the outcomes are generally broken down into three different categories. These are resident, nonresident, or part-year resident. The audit is simply meant to help determine which category taxpayers fall into.

According to California residency is defined as an individual who is in the state for anything else other than a temporary or transitory purpose or domiciled in California but physically outside the state for a temporary or transitory purpose. While the above definition might seem very straightforward, in reality the law is broadly written and leaves room for interpretation. As a result, if the FTB says you are a state resident, the burden now lies with you to prove them wrong.

How the FTB Determines Residency Status
California residency law defines the class of persons that are expected to contribute tax revenue to the state. California’s Revenue and Tax Code (R&TC) § 17014 includes every person in the state of California except for those in California for “a temporary or transitory purpose.”

It is important to note that this definition of residency is very broad, and includes everyone currently in the state except for those remaining in the state for a temporary or transitory purpose. It also includes those people domiciled in the state of California but currently outside the state for a temporary or transitory purpose.

Much of the residency determination depends upon the definition of “a temporary or transitory purpose.” California Code of Regulations (CCR) § 17014(b) defines in great detail what “temporary or transitory purpose” means. It states that those domiciled in the state who leave for a short period of time for both business and pleasure are outside the state for “a temporary or transitory purpose,” and as such are to be taxed as California residents.

Those domiciled outside the state, but staying within the state for business, medical or retirement purposes that are long-term and indefinite in time will not be considered in the state for “a temporary or transitory purpose,” and will be subject to the state tax.

Nothing is more important than the health and safety of you and your loved ones as you deal with the COVID-19 pandemic. The coronavirus crisis has had a wide-reaching effect on just about every aspect of our lives. We’ve all been asked to adjust our daily routines. Unfortunately, our health and wellbeing aren’t the only things of which we need to be concerned. The sudden downward shift in our economy has had a devastating effect on employment. The U.S. is currently experiencing a jobless rate unseen since the Great Depression. If you, or someone close to you, lost a job as a result of the economic shutdown caused by COVID-19, we’re sure you’ve got questions. In this article, we’ll address some of those questions, particularly with respect to unemployment benefits.

In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act expands the states’ ability to provide Unemployment Insurance (UI) to those affected by COVID-19. You may be eligible for UI if you are unemployed through no fault of your own, meet certain work and wage requirements, and satisfy any additional state requirements. Under the new law, even self-employed individuals and independent contractors may qualify.

Normally, UI benefits are available for up to 26 weeks. The CARES Act allows states to extend that coverage up to 13 additional weeks. To help provide a little more support, states also are able to increase UI benefits by $600 per week. These extended benefits are available through 12/31/20.

UI benefits are administered at the state level, so each state sets its own eligibility guidelines. To find state-specific information regarding eligibility, benefits, and applications, go to: www.careeronestop.org/LocalHelp/UnemploymentBenefits/Find-Unemployment-Benefits.aspx

One very important thing to remember is that UI benefits are taxable income. In order to avoid an unexpected tax bill next April, you may need to make estimated tax payments or have federal income tax withheld from your UI payments. You’ll need to complete Form W-4V to have tax withheld. We can help you determine the best course of action.

Note: By 1/31/21, you should receive Form 1099-G from your state showing the amount of taxable UI benefits paid in 2020. This form will help us prepare your 2020 Form 1040.

Obviously, this information barely scratches the surface of unemployment benefits and how to best handle your exact situation. These are challenging times, to say the least. If you find yourself in the unfortunate position of being unemployed right now, please know we are here for you. If you’d like to discuss this issue further, please give us a call. We’d love the opportunity to speak with you over the phone, via an online meeting, or in-person if you are comfortable doing so. We can address this issue or anything else you want to discuss.  We are here to help!

The COVID-19 pandemic has thrown a wrench into many employer-sponsored health, flexible health, and dependent care plans as employees are seeing increased or decreased need, depending on the impact of the pandemic on their families. In response, the IRS is granting employees the ability to make midyear changes to some employer-sponsored health coverage, health flexible spending arrangements (FSAs), and dependent care assistance programs under Notice 2020-29.

Normally, changes are only allowed at the beginning of the plan year or from a qualifying event like marriage, childbirth, or a drastic change in plan cost. Now, employees can make the following changes according to the notice:

The notice also extends grace periods and carry-overs through year-end. Employees can cover medical expenses incurred through December 31, 2020, using unused funds in health FSAs, and dependent care expenses can be covered for the same period using dependent care assistance funds. Unused FSA or childcare funds as of the end of plan year or grace period may be applied to reimburse medical or dependent care expenses. Additionally, Notice 2020-33 increased the $500 carry-over amount allowed in most plans to $550.

Unlike other changes to employer-related programs and benefits in the FFCRA and CARES Act, employers may make these changes at their discretion, though the IRS encourages implementing them.

Employees should note these changes cannot be applied retroactively, however the notice did clarify that reimbursements for telehealth services for high deductible health plans may be applied retroactively to January 1, 2020.

The CARES Act allows employers to delay the payment of the employer’s share of Social Security payroll tax, which is 6.2% of wages up to the annual wage base ($137,700 in 2020). The deferral also applies to 50% of the equivalent taxes incurred by self-employed persons.  This only applies to taxes incurred from March 27, 2020, through December 31, 2020. Employers who opt to delay payment would need to deposit half of that delayed amount by December 31, 2021, and the other half by December 31, 2022. This payment deferral does not apply to the employee’s share of Social Security tax, the employee or employer’s share of Medicare tax, or to the Additional Medicare tax imposed on employees with Medicare wages in excess of $200K.

In addition, filing deadlines for reporting the employee and employer portions of Social Security and Medicare taxes have not been delayed by the Act.

Please note, an employer is ineligible for this payment deferral if it acquires a loan through the Paycheck Protection Program, for which all or part of the loan was or will be forgiven.

A reminder that your California property tax is due April 10, 2020. The penalty is a flat 10%. Most counties in California allow property owners to pay property taxes online. Please refer to your previous property tax invoices for further instruction or go to your county treasurer-tax collector website for Property Tax Payments.

For those property tax owners with property in San Diego, please click on the link to be redirected to the San Diego County Tax Collector. PAY HERE

For San Diego property tax payers who will be unable to pay their 2nd installment by the April 10, 2020 deadline due to COVID-19 related issues, the San Diego County Treasurer has recently released a penalty cancellation request. Each request will be reviewed on a case-by-case basis and requires documentation of how COVID-19 impacted the ability to pay by the deadline. The waiver is to be submitted with payment when the property owner is able to pay. Online application can be found at – https://www.sdttc.com/content/ttc/en/about-us/news/2020-coronavirus-response.html

Most other counties are offering possible late payment options, please check with your specific county tax collector where the property is located.

On Friday March 20, it was announced by Treasury Secretary Steven Mnuchin that Tax Day has been postponed from April 15 to July 15 to coincide with the delayed tax payment deadline at the direction of President Trump.

All taxpayers and businesses will have until July 15 to file and make payments without interest or penalties. Taxpayers expecting refunds are still encouraged to file as soon as possible to ensure a timely and maximum refund.

We are awaiting further guidance from the IRS and will keep you informed as this and other legislation continues to unfold over the coming weeks. Please call us if you have questions or concerns.

The April 15 tax payment deadline for individuals and corporations has been extended 90 days in an effort to provide relief by the U.S. government in the wake of COVID-19 for related business closures and self-isolation requests across the country. While tax payments are postponed, the filing deadline remains April 15. Six-month extensions to file can still be requested.

The extension to pay is capped and limited only to Federal income taxes due on April 15, 2020. Individuals, regardless of filing status, who owe $1 million or less and corporations that owe $10 million or less (Applicable Postponed Payment Amount) are eligible for the extended payment deadline. The thresholds cover many pass-through and small businesses. Interest, penalties and additions to tax related to the postponed payments will not begin until July 16, 2020. If an individual or corporation owes in excess of the amounts above, the excess amount of tax is due and penalties, interest and additions can be assessed to amounts above the Applicable Postponed Payment Amount.

Additionally, the IRS clarified that first quarter estimated tax payments due April 15, 2020, for the 2020 taxable year are postponed. However, second quarter payments are still due June 15. The 2019 Applicable Postponed Payment Amount includes both 2019 federal income tax due April 15, 2020 and first quarter 2020 estimated tax payments due April 15, 2020.  If the combined amount exceeds the $1 million or $10 million thresholds, the excess amount must be paid.

States are preparing their own responses to this news as they consider their own tax revenues in light of the economic changes from the virus. This federal relief is granted under IRC §7508A, which California conforms to. As a result, we believe California conforms to the July 15 payment extension. We have reached out to the FTB for confirmation. Some states are concerned that, with the federal filing deadline potentially in question, those with July fiscal years will have a challenge with revenue projections and budget estimates.

Not extending the filing deadline has raised some concerns in the CPA profession for clients who are elderly and confined to care facilities and cannot easily complete their returns.  We are closely monitoring the situation and await further guidance and clarification from the IRS. We will keep you apprised of any changes that impact you or our services.

The rate of tax returns filed as of March 6, 2020, was less than half of the number expected in a typical year suggesting that relief was needed for millions of Americans. While taxpayers who expect to receive refunds typically file early, those expecting to pay often wait until closer to the April 15 deadline. Those individuals and businesses with cash flow concerns will benefit most from the delay. Please contact our office for any questions on your eligibility to extend your tax payment

When the Tax Cut and Jobs Act went into effect in January 2018, many taxpayers stopped itemizing their returns. The reality, however, is that unique tax situations require a unique approach, and there may be some room for improvement in yours. Now that 2020 is in full focus, it is a great time to look at your giving strategy. If you are not sure you made the most of your charitable deductions in 2019, consider these incentives when setting your charitable contribution plan in 2020.

Although taxpayers that fall just below the standard threshold no longer need to itemize, those who hover around a higher tax bracket or well-exceed the standard deduction threshold should consider their situation with a professional to determine if they could benefit from a better plan. Consider the following incentives,

Deciding which charity to support in 2020?

The key to making your donations count is ensuring the organization you choose is an eligible charity. The Tax-Exempt Organization Search engine and the Interactive Tax Assistant on IRS.gov can help you choose organizations eligible to receive tax-deductible charitable contributions.

If you’re worried that making a large gift this year will harm your estate after 2025, you can rest assured. In November 2019, the Treasury Department and IRS issued final regulations confirming that taxpayers who make significant contributions between 2018 and 2025 can take advantage of the increased gift and estate tax exclusion amounts without concern over losing the benefit in 2026 and beyond.

The professionals in our office are well-versed in charitable contribution strategies, call us today to discuss how to make sure your donations count in 2020.

The Internal Revenue Service (IRS) recently debuted a new Form W-4 to the public. The new design aims to simplify the withholding system, replacing complicated worksheets with questions designed for the layman. The hope is that the form will help employees report more accurate amounts, allowing the IRS a better assessment of taxes paid.

One thing you might notice on the new Form is the absence of the word, allowance. The title of Form W-4 is now the Employee’s Withholding Certificate.

To help further your understanding of the redesign and its impact on employers, we have provided clarification around frequently asked questions regarding Form W-4 below.

As a reminder, the new forms go into effect in tax year 2020. Additional guidance is expected regarding payroll calculations needed based on the data fields on the new and old forms, as well as guidance surrounding employees that fail to submit a Form W-4 after 2019. If you have any questions about the new form, please give the professionals in our office a call today.

View the new Form W-4.

Many small business owners approach tax season with a can-do attitude. This entrepreneurial spirit is admirable, but when it comes to compliance, it is usually best to leave tax preparation to the experts. Being aware of common mistakes, like failing to comply with tax laws, violating tax codes, or incorrectly filling out forms, will help you avoid errors and unnecessary stress.

Underpayment of Estimated Tax

The Internal Revenue Service (IRS) requires businesses to make estimated federal income tax payments to account for the tax not recouped through a standard paycheck. Depending on how much you owe and your business type, you will need to make payments based on the amount of income you made from the business during the year and the amount of self-employment tax you owe based on that income. Failure to make the appropriate payment will incur accuracy-related penalties. Furthermore, business owners that do not substantiate their tax position or prove reasonable cause for their position will also incur a negligence penalty.

Employment Tax Deposits

What happens when a business owner yields their responsibility to meet employment tax obligations in favor of meeting payroll, debts of nonpayment, or trade obligations? Though it may not seem as important as other financial obligations, failure to comply with employment tax obligations will result in substantial penalties and possible criminal prosecution.

Reporting your total payroll tax liability and determining your payroll deposit schedule depends on running the right report. A good payroll software or outsourced payroll company can help you manage withhold employment taxes and ensure the electronic fund transfers are accurate and timely.

Filing Late

The IRS is a stickler for accurate and on-time payment. The latter is almost a rite of passage for many business owners that need more time to produce a precise return or take advantage of all their deductions. While it is ideal to file your return by the IRS due date when you have all the information, there are many instances that prevent this. Late payments are acceptable so long as the IRS knows it will receive payment via an extension. The critical difference between a late filer and a negligent filer is their intention. Business owners that need to file their taxes after the April deadline should make an extension request with Form 4868 by the tax filing deadline. If you forget to submit the request, you will incur a penalty of 5% of the amount due for every month or partial months your return is late.

Keep in mind that with your tax extension also comes another deadline. If you fail to make the payment again, you will incur the 5% penalty above. And finally, when you pay later, you pay more. Even with the extension, the IRS will collect interest on any amount outstanding after the April deadline. In addition to this interest payment, you may also pay a late-payment penalty of 0.5% per month of the late unpaid tax. If you want to minimize your total bill, consider paying at least 90% of your tax liability when you request the extension. We can help make the right decision around extending versus filing. If you have questions about which is best for you, please contact us.

Failing to Separate Business from Personal Expenses

This step is the year-long headache that reaches maximum tension at tax-time. In an effort to simplify, many business owners will use one credit card, thus making it difficult to distinguish legitimate business expenses from personal ones. Overlooking this critical step results in more than just tax errors. The time an owner needs to spend categorizing expenses is quite costly to the business, and inaccurate financial information will result in inaccurate financial statements. It may feel like it’s too late, but it is never too late. Start categorizing your aging personal and business expenses and take the proper steps to begin tracking them better in 2020.

Working with a reputable tax preparer year-round can mitigate a lot of the stress that comes with tax preparation. If you need assistance or would like to talk to one of the professionals in our firm, give us a call today.

The Internal Revenue Service recently issued the 2020 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2020, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates. For more information, please contact one of our professionals today.

The United States saw some of the most sweeping changes in December 2017 with the passing of the Tax Cuts and Jobs Act (TCJA).  Many of the amendments to the Internal Revenue Code are temporary in nature, set to expire at the end of 2025. For example, the basic exclusion amount (BEA), which doubled from $5 million to $10 million prior to being adjusted for inflation, will return to pre-2018 levels when the TCJA is set to expire. One major concern, raised by public comments, is what will happen to individuals taking advantage of the increased gift and estate tax exclusion amounts when the exclusion amounts drop to pre-2018 levels? Will they be adversely impacted?

For example, what would happen if a taxpayer chose to gift their entire $11.4 million (adjusted for inflation) lifetime exclusion amount during the TCJA? Rather than using up their basic exclusion amount at their time of death, a taxpayer may choose to use their basic exclusion amount during their lifetime by making large gifts.  Any unused portion would be used to offset or possibly eliminate estate taxes when a taxpayer perishes. 

Those concerns were laid to rest last month when the Treasury Department and the Internal Revenue Service issued final regulations confirming that individuals who plan to take advantage of the TCJA-increased basic exclusion amount will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. The final regulations also provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

For 2019, the inflation-adjusted BEA is $11.4 million. If you are considering making a large gift within the next few years it is important to understand how these changes will impact your personal or business operations. The professionals in our office can answer your questions, call us today!

On September 24, 2019, the IRS issued Revenue Procedure 2019-38 finalizing safe harbor allowance of rental real estate for the purpose of Section 199A deduction.  If all the safe harbor requirements are met, a rental real estate enterprise will be treated as a trade or business and the related rental income will be eligible for the 20% Section 199A deduction, subject to possible limitations.

The Revenue Procedure clarified that the following requirements must all be met by taxpayers or relevant passthrough entities to qualify for safe harbor –

Rental services that count toward the 250 hour requirement include:

Activities that do not qualify as rental services include:

If you have questions about the safe harbor requirements, call us today.

The Internal Revenue Service (IRS), Department of the Treasury (DOT), Employee Benefits Security Administration (ESA), and Department of Health and Human Services (DHS) recently issued a final ruling on the use of employer-funded health accounts. Effective January 1, 2020, employers of all sizes that do not offer a group coverage plan may use HRAs as a vehicle to help employees pay for health insurance premiums. This ruling extends beyond the current scope of health reimbursement arrangements (HRAs), which allows businesses to offer employer-funded accounts for employees to apply to out-of-pocket medical expenses and now allows employees to pay for insurance premiums.

The new ruling is expected to affect more than 800,000 employers and 11 million employees, making it a far-reaching update to the current system. Under the guidance, employers may offer two new types of HRAs:

The Benefits

Considerations:

To assist employers, the DOL issued this Individual Coverage HRA Model Notice: https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB87/individual-coverage-model-notice.pdf .

This notice is not exhaustive. If you would like more information on how your business might benefit from an ICHRA, give the professionals in our office a call. We can go over your options and determine if you satisfy the ACA’s affordability and minimum value requirements.

Whether you are an individual taxpayer or a small business owner, understanding your eligibility for tax credits is an essential facet of income tax planning. Unlike deductions, which only reduce taxes owed by the product of the amount of your deductions multiplied by your marginal tax rate, tax credits provide dollar-for-dollar tax reduction. The following post addresses key tax provisions and tax minimizing strategies to keep on your radar during year-end tax planning for 2019.

Individual Tax Credits

The Child Tax Credit

Thanks to the increase in phaseout thresholds made by the 2017 Tax Cuts and Jobs Act, many taxpayers can look forward to another year of the child tax credit. The child tax credit, which is $2,000 for every eligible child, is available to parents and guardians of children under 17 whose household falls within specified income brackets. In addition, up to $1,400 of the credit amount is refundable. This means that certain taxpayers can claim the credit even after their tax bill is reduced to zero. Households that include dependents over the age of 17 or for children you care for or whose support you provide may be eligible for a nonrefundable $500 family credit.  The child tax credit may be taken by taxpayers who claim the qualifying child as a dependent and is fully phased out when the adjusted gross income of a taxpayer reaches the amounts listed below.  For this reason, separated or divorced parents should plan for which parent can claim the dependency exemption for an eligible child. 

Educational Tax Credits

For taxpayers enrolled in an undergraduate program, the American Opportunity tax credit pays 100% of eligible tuition and required fees up to $2,000, plus 25% of the next $2,000, bringing the full tax credit to $2,500 per year. Partial tax credits are available to those that fall outside the income threshold.  Likewise, the Lifetime Learning tax credit offers students of graduate programs, vocational schools, and other nontraditional programs a 20% tax credit on up to $10,000 in qualified education expenses.

These credits are phased out for taxpayers with modified adjusted gross incomes in excess of the above amounts.  The number of years the lifetime learning credit may be claimed is not limited.

Retirement Savings Contribution Credit

This little-known tax credit is designed to stimulate private saving for retirement. Depending on filing status and AGI, qualifying taxpayers could be looking at as much as 10%, 20%, or 50%, or as much as $2,000, of your qualified retirement contributions per tax year. Contributions to a Roth/SIMPLE IRA, 401(k), Thrift Savings, SARSEP, 501(c)(18) or governmental 457(b) plans, as well as any voluntary after-tax employee contributions to your qualified retirement, 403(b) plans and ABLE accounts are eligible as long as you are the designated beneficiary.

Business Tax Credits

While businesses cannot feasibly have children, go back to school, or invest in retirement accounts, they do pay taxes. Business owners that want to go beyond deductions to reduce their taxes can claim tax credits. General business tax credits directly decrease taxes but are typically non-refundable, meaning, they can only lower your tax bill to zero. Below we have highlighted some of the most common General Business Tax Credits.

Energy Credits

The Rehabilitation, Energy, and Reforestation Investment Credit covers 10% of your expenditures, capped at $10,000 per year. These credits are available to qualified businesses that spent money renovating an old building, restocking existing forest and woodlands, or investing in alternative energy sources. Companies that either use or sell biodiesel, biofuel, or low sulfur diesel can claim Alternative Fuel Credits.

If your business purchased and used a qualified plug-in electric vehicle or a vehicle that runs on alternative fuel, you could claim one or both vehicle credits. The Qualified Plug-in Electric and Electric Vehicle Credit is worth up to $7,500, while the Alternative Motor Vehicle Credit is worth up to $8,000. This credit is scheduled to phase out after manufacturers sell 60,000 qualifying vehicles. If you want to take advantage of this credit, keep in mind that this credit must be taken last and is subject to availability.

If you installed solar energy systems in your home or second residence, you may qualify for the Federal Energy Star Program which offers a credit equal to 30 percent of the total equipment cost. There are several implications to consider before taking this credit:

Improvement Tax Credits

The Work Opportunity Tax Credit (WOTC) is a federal, employment-based tax credit that is available to employers who hire individuals to begin work before January 1, 2020, from select target groups that might otherwise go untapped. For employees that face significant barriers to employment and work at least 120 hours in a year, businesses can claim 25% of the employee’s first-year wages, up to the maximum credit ($9,000 over two years). For employees who work at least 400 hours in a year, that percentage goes up to 40% of the employee’s first-year wages, up to the maximum credit.

The Empowerment Zone and Renewal Community Employment Credit nets businesses a credit of up to $3,000 for each full or part-time employee who lives and works in an Empowerment Zone. The credit is capped at 20% of the first $15,000 in wages.

Human Resource Tax Credits

The Small Employer Pension Plan Startup Costs Credit is worth up to $500, or 50% of your startup costs incurred to establish or administer an eligible plan or to educate employees about retirement planning. You can claim this credit for the first three years of your plan. Qualified businesses include those that employ fewer than 100 employees that received more than $5,000 in compensation; have not had a 401(k) plan for at least three years, and seriously intend to start a pension plan for employees.

The Family Leave Act Tax Credit expires in 2020, so businesses that want to take advantage of this incentive need to act soon. To qualify, a business that voluntarily offers up to twelve weeks of paid family leave each year to qualifying employees under a written policy may claim a partial tax credit toward wages paid during their leave. As defined, this paid leave goes beyond standard time off (vacation, sick time, other paid time off) and only applies to employees making less than $72,000. Employer eligibility is dependent on several factors. For instance, to receive the credit, the employer must offer at least two weeks of paid family leave each year to qualifying employee, and they must pay out at least 50% of typical wages. To those that do meet the requirements, the government will credit the benefit costs on a sliding scale, starting 12.5%.

Businesses should note that the credit does not apply if paid leave is mandated by state or local law.  A qualified employer must claim this credit unless an election out is made.  An employer’s deduction for wages and salaries is reduced by the amount of this credit that is claimed.

Research and Development Tax Credit

Businesses that engage in research to either improve a product or their business performance may be eligible for the federal Research and Development (R&D) Tax Credit. This credit allows businesses to take a credit of up to 13 percent of Contract Research Expenses for new and improved products and processes, including payroll. Qualified research must meet specific criteria and must satisfy three tests. (This is an excellent great option for owners looking to advance technology in their businesses.)

Tax credits are a fantastic way to save money, but they are neither easy to track nor simple to disseminate. All of these credits come with limits and qualifications that you must meet to receive the credit.

To find out if you qualify for these individual or business tax credits, contact one of the professionals in our office. We would love the opportunity to help you understand your tax credit eligibility as you prepare for the upcoming tax season.

The Taxpayer First Act (the Act) of 2019 was signed into law on July 1, 2019. The bill, having gone through a few changes on its way to the president’s desk, passed with bipartisan support – a rare thing in Washington these days. The law aims to reform the Internal Revenue Service (IRS) by making it more taxpayer-friendly and has been praised by the American Institute of Certified Public Accountants (AICPA). The summary of the bill, its titles and subtitles signal a much-needed pivot to the way the IRS fits into the 21st-century economic narrative. Among the areas of impact, the main themes include customer service, enforcement procedures, cybersecurity and identity protection, management of information technology, and use of electronic systems. While the following table is not exhaustive, it does highlight the key points of reform.

Issue Action
Customer Service   The IRS will adopt best practices of private sector customer service providers, starting with a comprehensive training plan. They will officially benchmark and track their endeavors and be responsible for measuring their success.
IdentiTy Theft Protection   The IRS is required to work behind the scenes and take their position front and center to assure greater identity protection. By 2024, any taxpayer will be able to request a personal identification number (PIN) to use when filing their tax return. The IRS is also legally bound to notify taxpayers of suspected fraud and point them in the right direction for next steps.  Finally, if a taxpayer’s return is adversely affected by identity theft, the IRS must provide a single point of contact to track the case and resolve the issue.  
Card Payments Now, taxpayers can skip the third-party service when paying their bill. The new law allows the IRS to accept direct payment as long as the taxpayer agrees to pay the processing fees. The IRS is also tasked with securing contracts with minimal fees.  
Information Protection The Act locks down taxpayer information as it relates to contractors, such as outside attorneys, when it is obtained by summons. Furthermore, by 2023, disclosures of tax information for third party income verification must be fully automated and accomplished in real-time.  
Independent Review Tax disputes will get a second look under the Act. Taxpayers with a legitimate claim now have legal access to an independent appeals process. The IRS is also required to provide written notice of denial to the taxpayer and Congress and turn over its case files to qualified individual and business taxpayers.
Audit Notice The IRS loves the word “reasonable.” When it comes to audit inquiries, the ambiguity of the term has now come to an end. The Act demands a 45-day notice requirement before contact with a third party can be made.  
Internet Filing The IRS has been tasked with creating a secure online user interface that allows taxpayers to prepare and file Forms 1099 electronically. The platform, which must be established by 2023, will also keep a historical record of submitted forms.   
Seizure limitations Small business owners that structure their bank deposits can rest a little easier. Legal deposits that fall below the $10,000 threshold are no longer subject to the threat of IRS seizure.
Consent The Act prohibits consent-based disclosures from being used for purposes other than their original intent. 

The Taxpayer First Act is a welcome change. The Act helps protect business owners from IRS seizures and allows them to avoid the expenses and time-consuming process of having to go through the courts to reclaim their assets. Perhaps the most critical component of the new law is the attention to cybersecurity and customer service. Small business owners will still need to interact with the IRS, but if the law accomplishes its goal, the process will be easier and safer.

How will this law impact my payroll compliance?

It is important to note that several of the Taxpayer First Act provisions will directly influence your company’s payroll operations.

  1. The IRS has been tasked with creating a secure online server for e-filing because the new law reduces the threshold for mandatory e-filing. Currently, businesses only need to file online if they employ 250 or more. The new law lowers the threshold to 100 in calendar-year 2021, and only 10 in calendar-year 2022 and on.
  2. The new law requires the IRS to verify individuals as they open accounts to use the new e-Service features. Because of the new information and identity protection measures outlined above, e-Services are expected to take a little bit longer than they have in the past. Accounting services personnel should factor this potential delay into their timelines.
  3. Although the IRS internet filing platform may not be up and running until January 1, 2023, the interface will be familiar, similar to the SSA’s Business Services Online.
  4. One of the law’s most significant changes directly impacts nonprofits. Under the Act, all tax-exempt organizations must e-file Form 990 and Form 8872. This provision, unlike many of the others, goes into for tax years beginning after July 1, 2019. Organizations whose tax year began July 1 will receive transition relief.
  5. Finally, it is worth mentioning that the law institutes a new position within the IRS, Chief of Appeals. This person will oversee the Independent Office of Appeals and report to the IRS Commissioner. The Chief and their office will embody independent review by seeking to resolve tax disputes outside the courtroom.

If you have questions about the law in its entirety or want to know how this legislation will impact your company’s payroll operation compliance, give the professionals in our office a call today.

For a chart which shows which meals and entertainment are deductible, please click here.

In a Technical Advice Memorandum, the IRS evaluated whether meals and snacks that the taxpayer provided to employees at its headquarters were includible in the employees’ wages. The taxpayer provided:

(1) meals without charge to all employees, contractors, and visitors, without distinction as to the employee’s position, specific job duties, ongoing responsibilities, or other external circumstances; and

(2) unlimited snacks and drinks in designated snack areas that were available to employees, contractors, and escorted guests.

The IRS ruled that generally the value of meals the taxpayer provided to its employees was includible in the employees’ wages because the taxpayer failed to show that the meals were provided for substantial business reasons or for the employer’s convenience. However, it ruled that meals provided to employees on call to handle emergency outages were for a substantial business reason and were therefore excludable from income.

The IRS also concluded that the snacks the taxpayer provided in its designated snack areas were outside of the scope of Sec. 119 because they were not meals prepared for consumption at a meal time, and because quantifying the value of snacks consumed by each employee was administratively impractical, they were excludable from employees’ gross income as a de minimis fringe benefit.

Summertime is a time of year when people rent out their property.  In addition to the standard clean up and maintenance, owners need to be aware of the tax implications of residential and vacation home rentals.

Receiving money for the use of a dwelling also used as a taxpayer’s personal residence generally requires reporting the rental income on a tax return.  It also means certain expenses become deductible to reduce the total amount of rental income that’s subject to tax.

Here are some basic tax tips that you should be aware of if you rent out a vacation or residential home:

Please contact us if you have any questions regarding vocational rentals.

The Internal Revenue Service recently revised the depreciation limits for business-use passenger vehicles first placed in service during calendar year 2019 and the amounts of income inclusion for lessees of passenger automobiles first leased in 2019. The updated amounts under Revenue Procedure 2019-26 are in table format below.

For passenger automobiles to which the Sec. 168(k) additional (bonus) first-year depreciation deduction applies and that were, and placed in service during calendar year 2019, the depreciation limits are as follows:

Passenger Automobiles (includes trucks and vans)

acquired before September 28, 2017                                    acquired after September 27, 2017

1st tax year                              $14,900                                   1st tax year                              $18,100

2nd tax year                             $16,100                                   2nd tax year                             $16,100

3rd tax year                              $9,700                                     3rd tax year                              $9,700

Each succeeding tax year       $5,760                                     Each succeeding tax year       $5,760

When no Sec. 168(k) additional (bonus) depreciation rules apply, the first-year limitation is $10,100 for the first year. In this case, limitations for subsequent years remain the same. The professionals in our office can answer the questions you may have on the updated auto depreciation limits, call on us today.

The Internal Revenue Service recently unveiled a draft version of Form W-4, Employee’s Withholding Allowance Certificate. The revised form is in response to changes made by the Tax Cuts and Jobs Act and aims to provide simplicity, accuracy and privacy for employees while minimizing burden for employers and payroll processors. It is open for review and feedback until July 1, 2019. 

We want to remind our clients that this is only a draft and the new form will not be used until 2020. However, we are closely following this and will continue to provide updates. Below is a high-level summary of what we know so far.

What’s being proposed? The new form will account for:

The final draft is expected to be released mid-to-late July. We will continue to monitor changes to Form W-4 and keep you abreast. In the meantime, we encourage taxpayers to make sure they have the right amount of tax taken out of their paychecks and thus avoid a larger tax bill next year. Taxpayers with major life changes, including marriage or a new child, should especially check their withholding amounts. 

Determining how much to withhold depends on your unique financial situation. The professionals at Hamilton Tharp can help, call us today for a paycheck checkup.

The Qualified Opportunity Zone Program has kept many investors paralyzed in uncertainty due to regulatory confusion. In the update below, we provide an overview of the highly sought-after guidance, which was recently released by the Internal Revenue Service (IRS) and the US Treasury Department… We have put together the following high-level overview of the 169-page guidance and will explain how the new clarifications will impact investors.

First let’s recap: Opportunity Zone Program

Definition

Eligibility

Considerations

Challenges

The original Opportunity Zone legislation left eager investors with more questions then answers. Below are some of the challenges that the guidance addresses.

Further Clarification

Below are a few of the key clarifications giving investors the confidence to move forward:

The IRS also provided several situations where deferred gains may become taxable. If an investor transfers their interest in a QOF, e.g., if the transfer is done by gift, the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QOF to an estate or a revocable trust that becomes irrevocable upon death.

We encourage you to read the update in its entirety as it includes additional guidance on the term “original use,” and addresses all the issues mentioned above. If you are still hesitant about moving forward with this investment opportunity, the professionals in our office can help provide clarity, address your concerns and answer any specific questions you may have.

Americans share at least one dilemma when it comes to retirement planning. From the worker to the employer to the policymaker, everyone is living longer. On May 23, 2019, the House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, receiving almost unanimous bipartisan support, offers the most significant shift to retirement plans and opportunities since the Pension Protection Act of 2006. In the bill, there are over 25 changes and provisions that expressly aim to encourage retirement savings among all workers. This bill, along with the Senate’s Retirement Enhancement Securities Act (RESA), addresses the apparent need for a worker’s wealth to run (and finish) the race with them. These documents may face modification before being signed into law, but one thing is clear: change is coming. Below we have prepared a synopsis of the changes that present the most opportunity. 

Pooled Employer Plans

Many businesses are without affiliation and are too small to offer a savings retirement plan on their own. The new bill will reduce fiduciary responsibility and lower the overall costs associated with providing 401(k) plans by expanding the option to run multi-employer plans through a plan administrator. Sec. 106 goes a step further to incentivize smaller businesses to offer a retirement savings plan. The Act introduces a $500 tax credit for automatic enrollment into their retirement plan.

Annuities

The SECURE Act eases the liability concern over offering annuities. Most businesses have shied away from annuity providers because of their inherent risk. Section 204 updates safe harbor provisions, thus opening the door for employees to take advantage of converting their 401(k) balances to a pension-like payout plan. Another provision of the bill will allow workers to transfer a defunct annuity contract to an IRA while maintaining contributions. The only criticism on this update is the broad guidelines surrounding annuity providers. Some fear that ambiguity will lead to insurance companies offering shoddy plans.

Required Minimum Distribution (RMD) Age

The current law requires that most individuals begin withdrawing a minimum distribution from their retirement savings at the age of 70.5. Six-months-past-70 has invited an unnecessary amount of confusion since its inception in the Tax Reform Act of 1986. The SECURE Act seeks to simplify matters by raising the RMD age to 72. If the RESA Act passes in the Senate, the age requirement will be raised even higher to 75.

IRA Contributions

One of the most confounding retirement rules is the age limitation on IRA contributions, currently set at 70.5. The SECURE Act repeals the age limitation for traditional IRA contributions.

Benefit to Parents

Section 113 removes the 10 percent penalty tax from qualified early retirement plan withdrawals. Parents will be able to take an aggregate amount of $5,000 within one year of the adoption or birth of a child, penalty free. Section 302 expands section 529 plans by allowing withdrawals of as much as $10,000 for repayments of some student loans.

Stretch Provisions

Currently, beneficiaries of inherited retirement plans like 401(k), traditional IRAs, and Roth IRAs can spread the distributions until their dying breath. The new revenue provisions (Section 401) changes the rules, requiring most beneficiaries to distribute the account over a 10-year period and pay any taxes due. The tax-generating change will accelerate the depletion of many inherited accounts but will not affect surviving spouses and minor children.  

Disclosures

Another administrative improvement provided in the Act requires employers to provide a lifetime income disclosure once every 12 months. The disclosures are meant to show the amount of monthly payments the participant or beneficiary would receive based on the total accrued benefit. 

Kiddie Tax

Under the current law, the unearned income of children would be taxed at their parent’s marginal tax rate. Section 501 repeals the “kiddie tax” measures that were added by the 2017 Tax Act. The new provision states that unearned income of children would not be taxed at trust rates. Taxpayers can retroactively elect to not pay the taxes. The bill benefits many Americans, including families of deceased active-duty service members, survivors of first responders, children who receive certain tribal payments, and college students receiving scholarships.

Other changes proposed in bill include increased penalties for failures to file and the portability of lifetime income options. The SECURE Act is as likely to pass as it is to undergo slight modifications. We will keep an eye on the state of the bill and keep you abreast of its status. In the meantime, our professionals are standing by to answer your questions and address your concerns.

Payroll fraud can put a huge dent in your bottom line – costing companies billions of dollars annually. Unfortunately, companies are often unaware that a corrupt employee is in their midst. According to data from the Association of Certified Fraud Examiner’s (ACFE) 2016 global fraud study, Report to the Nations on Occupational Fraud and Abuse, payroll fraud is an especially high risk for small organizations. In the United States, 131 cases of payroll fraud, representing 12.6% of all asset misappropriation schemes, were reported in 2016. While most fraud is uncovered within one fiscal year, payroll fraud tends to fly under the radar for an average of two years before detection and on average costs companies $90,000 per occurrence.

As business advisors, we stress the importance of internal controls to prevent fraud and theft and to ensure the accuracy of accounting data. However, many situations still exist in which organizations fail to establish adequate control systems to reduce transaction costs for many reasons. Whether it is a lack of information or a lack of personnel, the fact of the matter is that payroll fraud is usually perpetrated by a single or multiple insiders. The following strategies can help prevent and detect payroll fraud in your organization.

This is one of the most effective strategies, and if you do not already have one, we strongly recommend implementing processes that regularly check for schemes. Consider specialized software that combats ghost employee tactics by looking for red flags such as duplicate Social Security numbers, addresses or direct-deposit accounts. Another step is to be transparent with your audit plan. Making employees aware that you conduct such audits may be enough to deter them.

Compare payroll numbers against output. A spike in overtime hours during a slow month, for example, should prompt further investigation. We can help you analyze your data and identify any red flags.

This will prevent incompatible functions from being performed by the same individual, especially in the accounting department. Ask your payroll company if they allow multiple people to be in the authorization chain of command. Most payroll companies allow for multiple recipients of payroll reports; be sure you send final reports to an outside accountant and the owner.  If one employee handles payroll, we recommend hiring an outside person to input the information into the accounting system, acting as the internal control.

Check documents such as timecards and any other payroll documentation. You should be on the lookout for employees who are claiming excess hours and overtime as well as any other items that seem suspect. If employees know you are regularly checking time cards, they will be less likely to test the waters.

These are often overlooked. Make sure you collect the right documentation when adding new employees. Equally important is following protocol for terminated employees. While failure to remove a terminated employee from payroll is not fraud, controls will help you avoid the embarrassment of paying an employee after termination.

If you have concerns about payroll fraud in your organization, please call one of our professionals today. 

What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and highlights areas where it might be wise to make changes in your financial habits. If you have questions about your financial situation, we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors to clients all year long.

Whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments, cutting your tax bite, starting a business, or managing your debt, you can turn to us for objective answers to all your tax and financial questions.

We Can Help You Address the Issues that Keep You Up at Night

Where will your business be in five years? Would strategic budget cuts improve your company’s health? Are there ways you can boost revenue? If you are nearing retirement, do you have a buyer or successor in the wings? These are the kinds of questions that keep many business owners up at night. Fortunately, we can help you find financial peace.

Be Confident that You’re Making Tax-Advantageous Decisions

It’s tough to be proactive when tax laws are constantly changing. But it can be done! Our experienced team of CPAs can help you navigate the tax complexities affecting your business.

We review financial situations and develop creative strategies to minimize tax liabilities so you can meet your financial goals. Contact one of our professionals today.

Opportunity Zones allow Americans to combine their patriotism with their love of tax breaks.  The Opportunity Zone Provision gives taxpayers who have invested in the sale or exchange of a property in a Qualified Opportunity Zone Fund (QOZF) the opportunity to elect or defer paying taxes on the capital gains until they sell their investment.

The Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which defines Opportunity Zones (OZ) as low-income census tracts that have been nominated by governors and certified by the U.S. Department of the Treasury. This stimulus program invites investors to put their capital to work in areas that have struggled to bounce back from The Great Recession or have never had the opportunity to grow. This article will define Opportunity Funding and offer guidance on how to target qualified OZ investments.

Investor Benefits from Qualified Opportunity Zone Fund Investments

The innovative approach to spurring long-term private sector investments in low-income communities is available in over 8,700 Opportunity Zones in every state and territory. Investors can claim the QOZF tax advantage in the following ways:

  1. Investors can defer tax on any prior gains invested in a QOZF until the earlier of the date on which the investment in a QOZF is sold or exchanged, or December 31, 2026.  
  2. If the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOZF investment equal to its fair market value on the date that the QOZF investment is sold or exchanged.

Opportunity Funds

The IRS states that all types of capital gains are eligible for the Opportunity Zones tax incentives through the use of Opportunity Funds, which invests at least ninety percent of its assets in Qualified Opportunity Zone Property. It is important to note that ordinary gains do not meet the qualification test. Furthermore, while a partnership may elect to defer part of all of a capital gain, the deferred portions of the gain will not be included in the distributed shares. 

Qualified Opportunity Zone Funds (QOZF) are subject to specific regulations as set forth by the IRS, namely the types of gains that may be deferred, the timeline by which the amounts by invested, and how investors may elect to defer specified gains. Here is a snapshot to get you started:

The IRS defines eligible Opportunity Zone Property as QOZF stock, QOZF partnership interest, or QOZF business property. Besides being located and operated in a QOZF, qualified opportunity property must also be new to the entity and abide by the following requirements:

It is important to note that specific trades and businesses cannot qualify as opportunity zone businesses, including, any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

Targeting Qualified Opportunity Zone Investments

To be able to invest in a QOZF, you must have a qualified gain (as noted above) from a previous sale to an unrelated party. A taxpayer then has 180 days from the date of the previous sale to invest in a QOZF. The investment must be made through a cash contribution and may consist of both tax-deferred (the previous gain) and non-tax deferred funds (additional amounts you wish to invest). Any cash contribution made of non-tax deferred funds will not receive the tax benefits noted above.

If you have allocated a gain from an asset sold within a pass-through entity, your 180-day investment window defaults to starting on the date of the pass-through entity’s tax year-end. Alternatively, taxpayers can elect to have their 180-day window begin on the actual date the partnership recognized the gain.

If you’ve decided to invest in a QOZF, understanding the landscape of the opportunity zone will help you assess the trajectory of growth for that area. Steve Glickman, the co-founder of the Economic Innovation Group thinktank that designed Opportunity Zones, developed an Opportunity Zone Index to help anxious investors take the next step.

Taxpayers must act soon to take advantage of this opportunity. According to the TCJA, investors have until 2020 to reap the full tax benefits of investing in a QOZF. If you’d like to learn more about investing in a QOZF, give us a call. We can help you better understand your options!

As April 15th approaches, taxpayers may rush to try and complete their returns, missing out on key opportunities for planning and strategy. While it’s ideal to file your return by the IRS due date when you have all the information, there are many instances that prevent this, such as taxpayers with K-1s from pass through entities. In many cases, K-1s from pass through entities are not received until well after the deadline or right before it.

We recently experienced a situation where a client, whose information was received too close to the deadline, did not want to file an extension. After speaking with one of our professionals, the client understood their unique situation and agreed to extend. After April 15th, we discovered that the client had not provided information on an $80,000 deduction! Without time for an accurate review, this deduction could have been missed.

Extending your return allows for the appropriate amount of time to plan for and prepare your return. If you find yourself in this scenario, it’s always better to extend your return.

Extending your return does not require that you have all the information to complete your return. Instead, you need enough key information to estimate your tax liability. Any payments due to the IRS are still due regardless of whether you extend.

Many taxpayers are concerned that an extension will increase their risk of an IRS audit. While there isn’t a direct correlation between extensions and audits, there is an increased risk of being audited if the taxpayer rushes to file a return by the deadline only to have to file an amended return at a later date.  The best reason to go on extension is if you need time to consider proper reporting, get professional advice, and file an accurate return. Amended returns are more likely to be scrutinized, so file once accurately if possible.  Filing a return without complete information can result in needing to amend your return, which always incurs additional fees.

It’s our goal to help clients make the right decision around extending versus filing. If you have questions about which is best for you, please contact us.

Furthermore, please note that any returns received after March 15th of this year will automatically be extended due to commitments we have already made to other clients whose information we have already received.

Catch Kim Spinardi, CPA, Michael Frost, and Ralph Nelson, JD, CPA discussing the new tax laws and how working with one firm that can handle your tax, financial planning and investing needs may be your greatest asset.

To watch, click here!

Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion on Real Talk San Diego’s “Your Wealth Hour” segment! 

The Treasury Department and the Internal Revenue Service recently issued final regulations and guidance addressing implementation of the new qualified business income (QBI) deduction (section 199A deduction). The guidance is an attempt to simplify this complicated deduction.Although one of the more complex changes in TCJA, this deduction has the potential to cut tax bills by up to one-fourth for eligible businesses. Below we have highlighted the major takeaways from the 247-page document released by the IRS last month.

If you are unfamiliar with this new deduction, which was created by the Tax Cuts and Jobs Act (TCJA), it allows entrepreneurs, self-employed individuals, and certain investors to deduct 20 percent of their business income from their taxable income. This is considered a “below-the-line” deduction, meaning it will not reduce your adjusted gross income.

Determining eligibility for this deduction depends on whether your business is considered a specified trade or business and is above or below the required threshold. The structure of your business also determines eligibility. Eligible structures include trust and estates, individuals, partnerships, s corporations and sole proprietors. The QBI deduction is not available for wage income or business income earned by a C corporation.

Calculating the QBI deduction also depends on whether a business is considered a “specified service.” A Specified Service Trade or Business (SSTB) includes services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or businesses in which the principal asset is the reputation of one or more employee (endorsements or appearance fees). It is important to note that the rules change if your business is not considered a specified service.

Understanding the Final Ruling Around 199A

Below we have listed the most pertinent details issued last month by the IRS:

Safe Harbor for Rental Real Estate Enterprises

Also included in the final regulations, the IRS issued a proposed revenue procedure that provides a safe harbor for rental real estate enterprises to be considered a trade or business and qualify for the deduction. A rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.

According to Notice 2019-7, a rental real estate enterprise will be treated as a trade or business if the following requirements are satisfied during the tax year:

There are exceptions and exclusions to consider, including:

While this deduction will make the rules more manageable for some businesses, these rules will require more planning and additional complexities for others, including larger pass-through entities.

There are still many questions left unanswered, such as:

The deduction is available for tax years beginning after December 31, 2017, and before January 1, 2026. There is speculation whether a future Congress will uphold individual provisions. To discuss your future options regarding the QBI deduction and your eligibility to take advantage of the real estate safe harbor, contact our office.

In July, the U.S. Supreme Court issued one of the biggest tax cases in decades, which dramatically expands when states can require out-of-state businesses selling to customers in their state to collect and remit sales and use taxes.  This change will have a huge impact on anyone selling items or services over the internet.

If you are selling items to customers in other states, it’s important that we talk soon so we can set up systems now to track what sales are being made where, and whether you might be required to register in any other state due to expanding filing requirements.  Getting ahead of these changes now can prevent you from being subjected to numerous fines and penalties later.

Prior to U.S. Supreme Court’s decision in Wayfair, Inc. vs. South Dakota, a state could only require a business to collect sales or use tax from customers if the business had some type of physical presence in the state, usually by owning, leasing or storing property in the state or having an employee or agent in the state.

Now states can require out-of-state sellers to collect and remit sales and use taxes if they make a minimum number of sales to customers in their state (in terms of dollars and / or transactions), even if they have no physical presence in the state.

This is a huge revenue raiser for the states and, not surprisingly, states are changing their requirements for out-of-state sellers on an almost daily basis.  To complicate matters even more, each state and each local taxing jurisdiction may have different rules.

Most small retailers making only a few sales into a state will not be impacted because states are providing exceptions for businesses only making a minimum level of sales (e.g., less than $100,000 in annual gross revenues and / or less than 200 annual transactions.

To determine exceptions for small retailers, click here to check this listing by state.

Please contact us if you need assistance in determining your out-of-state sales tax obligations.

Tax audit. These two simple words are enough to strike fear and loathing into the hearts of many business owners. But, in reality, the Internal Revenue Service (IRS) won’t arbitrarily make your company the subject of an audit investigation. In fact, according to IRS.gov, out of the 196 million returns filed in 2016, only 1.1 million (0.5%) came under examination in 2017.  You are more likely to be summoned for jury duty (1 in 10) this year.

Unless you’re operating below the board or completely ignoring best practices, you have little to fear. However, even the most prudent sometimes miss a step. From managing the filing cabinet to the people who hold the keys, ensuring your business doesn’t catch unnecessary attention from the government comes down to good habits. Here are a few ways you can minimize the likelihood that you’ll be audited or ensure a more positive experience should you be audited.

If the IRS contacts you about an audit, CPAs advise that you don’t panic. Remember, you are not going on trial, you’re simply being asked to verify some of the claims you made on your tax return. It’s best to remain calm and cooperative when dealing with the IRS.

It’s also a good idea to contact your local CPA for advice and assistance in case you are audited. He or she can help you understand the process and work with you to try to achieve the best resolution.

Today’s workforce is a gig economy. According to a study by intuit, by 2020 40% of American workers will be independent contractors.

Independent contracts can save businesses from the cost of benefits, office space, taxes and many other perks given to employees. Becoming an independent contractor can be very attractive to the individual performing those services as well because of the flexibility over their schedule and the choice in the work they will perform.

Today’s gig economy doesn’t come without implications. Many businesses still employ people and will continue to do so. It’s important to understand the effect of classifying individuals as employees or independent contractors. Many business owners fail to recognize the effect of classifying an individual as an employee or independent contractor. If you have misclassified the individual, you could expose yourself to significant tax liabilities.

As described by the IRS, an employee is anyone who performs services for you where you can control what will be done and how it will be done. Classifying workers as employees requires that a company withhold applicable Federal, state and local income taxes, pay Social Security, Medicare taxes, state unemployment insurance tax and pay any workers compensation fees. Employee status also requires filing a number of returns during the year with various taxing authorities and providing W-2’s to all employees by January 31. Not to mention, employees may also have rights to benefits such as vacation, holidays, health insurance or retirement plans.

Over the years, we have come to learn that there are a number of common myths that you should avoid in classifying your workers. The more frequent inappropriate decisions to classify an employee as an independent contractor include:

The IRS notes that simply because a worker does assignments for many companies does not necessarily suggest independent contractor status. The determination of whether a worker is an employee or an independent contractor rests primarily upon the extent that the employer has to direct and control the individual with regard to what and how an activity is to be accomplished. Generally, the employer controls how an employee performs a service. On the other hand, independent contractors determine for themselves how a given assignment is to be completed.

To aid business owners, the IRS has developed tests to be used as guiding points to indicate the extent and direction of control present in any employer/employee/independent contractor situation. The degree of importance of each factor varies depending on the occupation and the facts of the particular situation.

IRS Control Test
1. Behavioral Control 

Employee status is determined when the business can direct and control the work performed by the worker. Consider:

2. Financial Control

If the business can direct or control the financial and business aspects of the worker’s job, it may suggest employee status. Consider:

3. Relationship

The type of relationship is dependent upon how the worker and business perceive their interaction with one another. Consider:

In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

The Internal Revenue Service recently issued the 2019 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates. For more information, please contact one of our professionals today.

The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Here’s a look at some of the more important elements of the new law that have an impact on individuals.

IMPORTANT: California does not conform to the TCJA, therefore, we will still be requesting all of the information that we have in the past in order to properly prepare your federal and California tax returns. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.

TAX RATES
The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.

STANDARD DEDUCTION
The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions or may benefit from “bunching” deductions in alternate years.

EXEMPTIONS
The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions.

NEW DEDUCTION FOR “QUALIFIED BUSINESS INCOME”
Starting in 2018, taxpayers may be allowed a deduction up to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.

CHILD AND FAMILY TAX CREDIT
The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).

STATE AND LOCAL TAXES
The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018. Therefore, prepaying your state and property taxes before the end of the calendar year may not provide a tax benefit.

MORTGAGE INTEREST
Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.

MISCELLANEOUS ITEMIZED DEDUCTIONS
There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.

MEDICAL EXPENSES
Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.

MOVING EXPENSES
The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.

ALIMONY
For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.

HEALTH CARE “INDIVIDUAL MANDATE”
Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.

ESTATE AND GIFT TAX EXEMPTION
Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).

ALTERNATIVE MINIMUM TAX (AMT) EXEMPTION
The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.

As you can see from this overview, the new law affects many areas of taxation. Since the Treasury has not issued final regulations in many areas of the TCJA we anticipate extending several returns in order to avoid possible amendments after additional guidance is issued. Keep in mind that extending your return does not increase your chances of an audit but an amended return might! If you wish to discuss the impact of the law on your particular situation, please give us a call.

Keeping up with the complex credit landscape can be difficult for organizations with limited resources. The Tax Cuts and Jobs Act (TCJA) adds yet another another level of complexity to tax planning. In this article, we have outlined how the TCJA will impact key tax provisions and tax minimizing strategies.

Alternative Minimum Tax
The Alternative minimum tax (AMT) should be considered before you and/or your accountant begin to time income and deductions. AMT is a separate tax system that limits some deductions and disallows others, such as state and local income tax deductions, property tax deductions, and other miscellaneous itemized deductions that are subject to the 2 percent of AGI. Deductions may include investment advisory fees and non-reimbursable employee business expenses.

The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The AMT, originally intended to target high-income households, became problematic once it began affecting more and more taxpayers. The AMT failed to account for inflation. As wages increased, it eventually began to impact middle-income households.

To ensure that the AMT functions properly, the Tax Cuts and Jobs Act:

Under the Tax Cuts and Jobs Act, fewer taxpayers will be affected by the alternative minimum tax. You will want to speak with your tax professional regarding the changes made to the AMT exemption amounts.

Timing Income and Expenses
Strategic timing can reduce your tax liability, while poor timing can unnecessarily increase it.

If you don’t expect to be subject to AMT in the current or following year, consider income deferment. Deferring income and increasing deductible expenses for the current year can be a good strategy because it will postpone tax.  The opposite approach should be taken if you expect to be in a higher tax bracket, or if tax rates are expected to increase.

Whatever the reason for timing your income and deductions, here are some income items you may be able to control:

Followed by potentially controllable expenses:

Charitable Donations
Charitable donations in the form of cash or in-kind items can reap great tax benefits. While the new tax reform does not eliminate charitable deductions, it does limit the tax incentive for charitable contributions. The new plan increases the standard deduction and reduces the tax bracket, meaning fewer people will itemize their deductions.

There are several giving strategies to consider, including:

  1. Bunching. Taxpayers whose itemized deductions fall short of the standard deduction should consider bunching their charitable contributions every other year. This idea works out very well for donors, allowing those who fall below the deduction threshold to exceed it every other or every third year.
  2. Donor-Advised Funds (DAF). The itemized donor gives an initial, larger gift to a donor-advised fund and receives the allowed tax deduction. The contribution grows tax-free and serves as a charitable fund from which the taxpayer can recommend gifts to charity in subsequent years.
  3. Charitable Gifts. Under the new tax law, donors can still take an income tax deduction on the full fair market value of appreciated assets that have been gifted to charity.
  4. IRAs. Taxpayers 70.5 years of age and older can request a distribution of up to $100,000 per year directly from their IRAs to charity. This gift would help satisfy the annual required distributions from the IRA and be removed from the donor’s taxable income.

Before making a large donation to the charity of your choosing, discuss options with your tax professional.

Healthcare Breaks
The Tax Reform and Jobs Act changed the AGI threshold for medical expenses from 10 percent to 7.5 percent for 2017 and 2018 for all taxpayers.
If medical expenses were not paid through tax-advantaged accounts or were reimbursable by insurance and exceed 7.5 percent of your AGI, you can deduct the excess amount. Eligible expenses may include:

You may be able to save tax by contributing to one of these accounts:

Sales Tax Deduction
The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

Self-Employment Taxes
As a self-employed taxpayer, you may benefit from other above-the-line deductions. You can deduct 100% of health insurance costs for yourself, your spouse, and your dependents, up to your net self-employment income. You can also deduct retirement plan contributions and, if you’re eligible, an HSA. The Self-Employment Health Insurance deduction remained untouched in the Tax Cuts and Jobs Act, however employed taxpayers must itemize on their returns to claim it.

Estimated Payments and Withholdings
You can become subject to penalties if you don’t pay enough tax through estimated tax payments and withholding. Here are some strategies to help avoid underpayment penalties:

Tax Credits
Now is also a great time for organizations to re-evaluate their annual budgets to improve profit margins and consolidate spending. One strategy worth exploring is new or revised tax credits to help offset the amount owed to federal and state governments and take advantage of any county or city localized tax credits. Capturing 2018 credits, as well as retroactive 2017 tax credit opportunities, can help your organization reduce its liability, lower its tax rate, and improve the bottom line.

For example, the employer tax credit, which was created by the TCJA, is available to employers who offer paid family and medical leave to their employees who earned $72,000 or less in 2017 or 2018. To qualify, employers must have a written policy that

Whether you are an individual taxpayer or a small business owner, understanding your tax credit eligibility is important. If you have questions about these or other tax saving tips, please contact one of our professionals to schedule your year-end planning meeting.

The Treasury Department and the IRS recently announced that they are delaying any major changes for Form W-4, based on feedback they received from the payroll and tax communities.

Earlier in the year, the IRS released a draft version, making substantial changes to Form W-4, Employee’s Withholding Allowance Certificate. These proposed changes were originally scheduled to be made for tax year 2019. With the announcement, these changes are now planned for tax year 2020, with only minor changes expected to the 2019 version. The IRS has stated the 2019 version will remain largely consistent with the 2018 version. The IRS will work closely with stakeholders to make the more substantive adjustments to the 2020 W-4 that will accurately reflect the changes encompassed in the new tax law.

In the interim, we strongly encourage taxpayers to review their withholding situation to make sure they have the right amount of tax taken out of their paychecks and thus avoid a larger tax bill for 2018.

Click here to perform a quick “paycheck checkup” using the IRS withholding calculator.

Determining how much to withhold depends on your unique financial situation. The professionals at Hamilton Tharp can help, call us today for a paycheck checkup.

Listen to Lana Pflaum, CPA (around minute 6) provide insight on this very important topic. Hamilton Tharp, LLP is proud to have been asked to be a part of this discussion. Congratulations Lana!

https://www.facebook.com/YourWealthHour/videos/1835003159924259/

Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or insurance reimbursement.

According to the Internal Revenue Service, there are 12 things taxpayers can do to help reconstruct their records after a disaster:

On June 21, 2018, The U.S. Supreme Court issued its highly anticipated decision in the South Dakota v. Wayfair case. The verdict, declaring that states can impose sales tax nexus without requiring a seller’s physical presence in the state, will have serious implications for all sellers, not just online retailers.

The decision overturns the Supreme Court precedent in Quill Corp. v. Dakota which required retailers to have a physical presence in a state before a state could require the seller to collect sales taxes from in-state customers.

The court’s decision sides with states like South Dakota, that were ultimately missing out on billions of dollars in income by not collecting and remitting sales tax from online retailers who lacked a physical presence in their state. According to the U.S. Government Accountability Office, state and local governments could have gained up to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.

Historical Perspective

In 1992, North Dakota attempted to require Quill Corporation, a retailer with no physical presence in North Dakota, to collect and pay sales tax for doing business in the state. Having done business through mail orders and by phone, Quill was able to successfully argue that they should not be required to pay taxes in a state in which they had no physical presence. The courts agreed and thus the physical presence standard was born.

Since then, states have enacted a variety of nexus provisions to counteract the loss of revenue by out of state businesses that do not collect sales tax for the state. These types of provisions, which require remote sellers to collect tax or provide information about in-state customers, are known as remote seller nexus. This chart maps out the states that have passed legislation.

In the 1990’s no one could have anticipated how predominate online sales and e-commerce would become. What was once a fraction of interstate sales had become a $450 billion industry. Supreme Court Justice Anthony Kennedy displayed willingness to revisit the Quill case, recognizing the decision had become dated.  South Dakota identified the window of opportunity to re-challenge the 1992 Quill verdict. In a 5-4 ruling, the Supreme Court overturned Quill’s physical presence standard in Dakota v. Wayfair.

Who Will This Impact?

It is important to note that all sellers, not just online retailers, will be impacted by the overturn of the physical presence standard. This ruling will result in increased complexities for consumers, brick-and-mortar retailers, online retailers, accountants and the technology companies that develop accounting software.

If your business sells products or services in multiple states, this ruling should warrant your attention. It will be imperative to be proactive, start by determining what the impact will be and plan accordingly. While it is unlikely that states will enforce sales tax economic nexus statutes immediately, we still urge all businesses to be prepared.

Looking Forward

While states aren’t required to collect tax from out of state retailers, many states are expected to follow South Dakota’s path since these standards were reviewed by the Court for the Wayfair decision. Some states have passed economic nexus standards that are already in affect or will take affect within the next year. But until Congress issues guidance or legislation, other states are left navigating their own course of direction.

The Multistate Tax Commission (MTC) negotiated a special program for online sellers to resolve prior sales tax liability. This program was designed for online sellers with sales and income tax obligations from previous unpaid taxes in 25 different states. The program, which ran from August 17, 2017 to November 1,2017, has expired. If you missed out on this program and would like to evaluate your options, contact us today.

If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. You may be able to claim a tax credit on your federal tax return. Here are some key IRS tips that you should know about education tax credits:

The AOTC is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any taxes.

The LLC is worth up to $2,000 on your tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.

If more than one student qualifies for a credit in the same year, you can claim a different credit for each student and choose whichever the credit results in greater tax savings. For instance, you can claim the AOTC for both students if both of them are qualify for AOTC.

The tuition and fees deduction is currently no longer available in 2018. It was extended for tax year 2017 by Congress through passing the Bipartisan Budget Act of 2018. The Tax Cuts and Jobs Act (TCJA) did not extend the tuition and fees deduction; we will have to wait and see if Congress will extend it near year end.

If this break is extended for 2018, it can reduce the amount of your income subject to tax by up to $4,000.

You may be able to deduct qualified education expenses for higher education paid during the year for yourself, your spouse or your dependent, UNLESS:

 

You may use qualified expenses to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student. To find out more on the rules that apply to each credit, contact one of our professionals today.

Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren’t sure if your school is eligible, ask your school if it is an eligible educational institution or see if your school is on the U.S. Department of Education’s Accreditation database.

In most cases, you should receive Form 1098-T, Tuition Statement, from your school by Feb. 1. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don’t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year. If someone else pays such expenses on your behalf, (like a parent), you still receive “credit” and therefore receive form 1098-T.

If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes.  To find out more about your F-1 Student Visa status, visit U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to Publication 519, U.S. Tax Guide for Aliens.

These credits are subject to income limitations and may be reduced or eliminated, based on your income.

Contact one of our professionals to see if you are eligible to claim education credits.

 

 

We wanted to make you aware of a valuable new tax credit made possible by the Tax Cuts and Jobs Act (TCJA). The credit is available to employers that provide paid family and medical leave to their employees. The amount of the credit is generally 12.5% of wages paid to an employee on leave. However, you must pay at least 50% of the wages normally paid to the employee while he or she is out on qualifying leave. The credit is increased by 0.25% (but not above 25%) for each percentage point the rate of pay is more than 50% of normal wages. So, if the leave payment rate is the same as the employee’s normal rate, a maximum credit of 25% will apply.

You must satisfy several requirements to take advantage of the credit. These include the following:

The maximum length of paid family and medical leave that can qualify for the credit is 12 weeks per employee, per tax year. Also, the total credit attributable to one employee can’t exceed the employee’s normal hourly rate for each hour (or fraction of an hour) of actual work performed multiplied by the number of hours (or fraction of an hour) family and medical leave is taken. The wages for an employee who isn’t paid an hourly wage rate are prorated to an hourly wage rate to determine the credit limit.

Assuming all of these requirements are met, the new employer credit for paid family and medical leave is a win-win situation. However, it’s only available for two years (unless extended by Congress). It’s important that you act now by reviewing your current leave policy and instituting a new policy if necessary. We can help you with that. Please contact us if you have questions or want more information on the new credit.

With hurricane season in progress, we would like to remind individuals and businesses to safeguard their records against natural disasters with four simple steps.

Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.

Keeping a backup set of records –– including, for example, bank statements, tax returns, insurance policies, etc. –– is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned into an electronic format. With documents in electronic form, taxpayers can save them to the cloud, download them to a backup storage device, like an external hard drive or USB flash drive, or burn them to a CD or DVD.

Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. It may be a good idea to compile a room-by-room list of belongings.

A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.

Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

We are Ready to Help

Don’t wait until disaster strikes. If you have questions about safeguarding your records, speak to one of our team members today. We can help individuals and businesses prepare for disaster-related issues.

One of the most difficult things for a family to deal with after a loved one’s death is sorting through the endless paperwork needed to get the estate in order. Of course, this can be avoided by creating a “family file” containing all of your important documents needed in the event of your death. This file can make an already difficult process easier on your loved ones. Additionally, it is important that your documents are in order to ensure prompt payout on any life insurance policies on which your family may be depending.

The first step in assembling this file is to determine its contents. Generally, you will want copies of all of your financial and legal documents. Your financial adviser should be able to assist you in identifying files and developing a list specific to your situation, but the following paragraphs provide some general insight.

The most important document to keep a copy of is your will. Making sure that your loved ones know where this document is kept can be vital to ensuring that your final wishes are carried out. Your will should be kept at an attorney’s office or in a safety deposit box at a bank. Be sure that your family is aware of its location. You may also want to keep a letter of instruction in your home. This letter is not legally binding but oftentimes contains instructions for your funeral arrangements and the names and contact information for people listed in your will.

Documents establishing ownership of your financial assets, properties and any business interests should be kept in one location. Oftentimes family members are not aware of – or cannot remember – all of your assets. This could lead to them remaining unclaimed after your death. You also should ensure that any log-in information for online access to the accounts is kept on file, as well as information related to any safety deposit boxes you have. This information can help your family contact the bank in the event of your death. You might also want to keep a copy of your tax return with this information as it can help identify your assets in case any are missing.

In addition, you will want to keep copies of any life insurance policies you have, as well as documentation for your retirement accounts such as a pension or 401(k). This information should include the policy name, number and an agent to contact. If you have life insurance through your employer, make sure that it is included. Employer-provided policies are often overlooked.

Finally, you should keep your healthcare documentation in a file known to your family. For example, if you have a durable power of attorney – a document that lets your family make healthcare decisions on your behalf if you are incapacitated – this, too, should be in that file. You should also be sure to update this document as healthcare and privacy laws may render your documentation obsolete.

The professionals in our firm can help you identify the documentation you need to help your family in the event of a death. Call us today.

What does your tax return say about your financial situation? The paperwork you file each year offers excellent information about how you are managing your money—and the areas where it might be wise to make changes in your financial habits.

By taking the proper steps, your tax return will be transformed from a passive bag of receipts to proactive tax planning to help you reach your goals. As we prepare to file your taxes, we often identify common planning mistakes and missed opportunities. Below are five red flags that may present problems.

Mistake 1: Holding Title to Your Assets

One of the most common financial planning mistakes we see is a failure to make a transfer on death (TOD) designation. How you title your assets matters. Consider an asset held in joint name. In the event of your passing, this asset will automatically become owned by whomever the joint owner is through rights of survivorship. If you wish to appoint this asset to someone else, the asset may need to pass through probate before the transfer can be made. Probate, the courts process of gathering and distributing a deceased person’s assets, can take anywhere from 6 months to 2 years to complete. You can avoid probate by making a transfer on death election. We suggest speaking with an attorney to determine if your state has probate laws.

Mistake 2: Holding Too Many Accounts

We often accumulate accounts as we do our financial planning. Changing jobs or advisors or diversifying your portfolio can result in a multitude of assets. If your pile of 1099’s is growing, it may be time to reevaluate your strategy. While it may have worked in the past, holding too many accounts can lead to recordkeeping problems. Consolidating accounts will not only reduce your bookkeeping but also make overseeing and monitoring your accounts more manageable.

Mistake 3: Capital Loss Carryforwards

Capital losses can be used to offset other gains, but only $3,000 of that loss can be deducted from all other income, per year. Losses exceeding this threshold can be carried forward and applied to future tax years. When we see losses carried over year after year, it often indicates a lack of coordination between a tax plan and investments. Your tax plan should harmonize with your investments. One approach is to create gains to utilize your carryforward losses.

Mistake 4: Not Understanding Your Trust Benefits

Beneficiaries of trusts will receive a K-1 form to report their share of income and losses. If you are the beneficiary of a trust, find out who is in control of these assets and determine what authority, if any, you have to make changes. We encourage the beneficiary of any trusts to be proactive by asking questions and learning more about what they have control over, especially since it will ultimately impact their financial situation.

Mistake 5: Pass-Through Income Considerations

Businesses with pass-through income status don’t have to pay business taxes at the entity level. Instead, all income passes through the owner’s individual tax return and is taxed by the IRS at the personal tax rate. Under the new tax code, owners, partners and shareholders of S-corporations, LLCs and partnerships will receive a tax break. As long as they aren’t part of the carve-out group, those who pay their share of the business’ taxes through their individual tax returns will have a 20 percent deduction starting in 2018.

This deduction is a great financial planning opportunity, but there are exceptions. Qualifying for the deduction depends on your income threshold and what field your business is in. High-earning professionals that exceed the income threshold, such as physicians and attorneys, will likely not qualify. Likewise, those who hold occupations that provide a personal service, except engineering and architecture, are prohibited from taking the deduction. These industries include health, law, accounting and financial and brokerage services.

We can help you determine if you are eligible for this deduction and whether the business is equipped to financially handle the death or disability of an owner. It is essential that businesses with a pass-through income structure have a formal succession plan and updated buy-sell agreement with partners.

If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors and who work with clients like you all year long. We can review your financial situation and develop creative strategies to minimize your tax liability and help you meet your financial goals. Contact one of our professionals today.

The partners and professionals at Hamilton Tharp, LLP would like to remind our clients to watch for IRS notices and letters. With IRS scams and identity theft on the rise, stopping identity theft and refund fraud is a top priority for the Internal Revenue Service. The IRS has many new safeguards in place to help fight against stolen identity refund fraud. These safeguards are designed to better authenticate the taxpayer’s identity and the validity of the tax return at the time of filing. If the IRS received your federal income tax return, but needs more information to verify your identity and process your tax return, they will send you Letter 4883C. There are many reasons why a return may appear to be suspicious to IRS systems, and the agency takes this precautionary step to help protect you.

If you received Letter 4883C, it is not fraud. It is a legitimate request, from the IRS, asking you to verify your identity. The letter will contain instructions to call the toll-free IRS Identity Verification telephone number at 800-830-5084. Before you call, gather the following items:

If you are unable to verify your identity with the customer service representative, you may be asked to visit an IRS Taxpayer Assistance Center in person. To find a Taxpayer Assistance Center closest to you, visit https://apps.irs.gov/app/officeLocator/index.jsp and enter your zip code into the office locator. Taxpayer Assistance Centers are closed on federal holidays. You will be asked to provide photo identification and a taxpayer identification number such as your social security number. You may also be asked to provide a copy of the tax return in question.

Remember, the IRS will never

We also remind our clients, this is the time of year they may see scam emails from their tax software provider or others asking them to update online accounts. Taxpayers should learn to recognize phishing emails, calls or texts that pose as familiar organizations such as banks, credit card companies, tax software providers or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers.

If you receive a suspicious email, check with us first. Never open an attachment or link from an unknown or suspicious source. It may infect your computer with malware or steal information. Remember, the IRS does not send unsolicited emails or request sensitive data via email.

The tax reform legislation that Congress signed into law on December 22, 2017, was the largest change to the tax system in over 3 decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. One of those changes, the elimination of a business-related deduction used for entertainment, amusement or recreation expenses, will make it costlier for business owners to entertain clients.

Previously, if an entertainment or meal expense was related to or associated with the active conduct of a trade or business, it was deductible up to 50 percent. Under the new tax code, these expenses are now considered the cost of doing business. In the chart below, we have highlighted the major changes.

 

Activity 2017 Old Rules 2018 New Rules
Qualified client meal expenses 50% deductible 50% deductible
Qualified employee meal expenses 50% deductible 50% deductible
Meals provided for employer convenience 100% deductible 50% deductible
Client entertainment expenses

Event tickets

Qualified charitable events

 50% deductible

50% deductible at face value

100% deductible

 No deduction for entertainment expenses
Office holiday parties 100% deductible 100% deductible

 

The elimination of this deduction will impact business owners who are accustomed to treating clients to golf outings or providing clients with tickets to sporting events or concerts. Businesses will have to re-evaluate their entertainment expenses related to their trade or business, as these items are no longer 50 percent deductible.

In consideration of the elimination of this deduction, we recommend creating separate accounts for meals and entertainment expenses. Educating employees to separate their expenses will be vital as business meals will remain 50 percent deductible until 2025.

Entertainment expenses are notoriously targeted by auditors. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals in our office can help ensure you are in compliance, call us today.

Have you noticed a slight jump in your paycheck recently? You’re not alone! Millions of Americans are receiving heftier paychecks due to the new tax law signed into law in December.

To help taxpayers check their 2018 tax withholding following the major changes in the tax law, the Internal Revenue Service recently released an updated Withholding Calculator and a new version of Form W-4.

The IRS encourages taxpayers to use these tools to make sure they have the right amount of tax taken out of their paychecks and thus avoid a larger tax bill for 2018.

The withholding changes do not affect 2017 tax returns due this April. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.

Determining how much to withhold depends on your unique financial situation. The professionals at Hamilton Tharp can help, call us today for a paycheck checkup.

Did you know taxpayers can check the status of their 2017 tax refund online? The “Where’s My Refund?” tool is available on irs.gov and through the IRS mobile app, IRS2GO.

Updating daily, “Where’s My Refund?” has the most up-to-date information about the status of your refund. The tool displays when the return is received, approved and sent. After the IRS approves the refund, an actual refund date is provided.

To check the status of your refund you will need three pieces of information:

Checking the Refund Status of Your California State Income Tax Return

The State of California Franchise Tax Board also provides a tool for individuals to check the status of their California state income tax return.

  1. Visit: https://www.ftb.ca.gov/online/refund/index.asp
  2. Download the FTB Mobile app, the official app of the Franchise Tax Board.

Remember, some tax returns require additional processing time. We’ve listed some of the most common circumstances below that can impact refund timing.

 

The Internal Revenue Service warns taxpayers of a new twist on an old scam in which criminals’ steal client data from tax professionals, file fraudulent tax returns and deposit the erroneous refund into the taxpayers’ real bank account. They will then use a variety of tactics to reclaim the refund from the taxpayer.  There are currently two versions of the scam.

Version One

Criminals posing as debt collection agency officials acting on behalf of the IRS contacted the taxpayers to say a refund was deposited in error, and they asked the taxpayers to forward the money to their collection agency.

Version Two

The taxpayer who received the erroneous refund gets an automated call with a recorded voice saying he is from the IRS and threatens the taxpayer with criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number. The recorded voice gives the taxpayer a case number and a telephone number to call to return the refund.

What should you do if you received an erroneous refund?

The IRS urges taxpayers to follow established procedures for returning an erroneous refund to the agency. The IRS also encourages taxpayers to discuss the issue with their financial institutions because there may be a need to close bank accounts. Taxpayers receiving erroneous refunds also should contact their tax preparers immediately.

Remember, the IRS will never

The professionals in our office are closely monitoring this evolving scam, we will keep you apprised.

The Internal Revenue Service, state tax agencies and the tax industry urges all employers to educate their payroll personnel about a Form W-2 phishing scam that made victims of hundreds of organizations and thousands of employees last year.

The Form W-2 scam has emerged as one of the most dangerous phishing emails in the tax community. During the last two tax seasons, cybercriminals tricked payroll personnel or people with access to payroll information into disclosing sensitive information for entire workforces. The scam affected all types of employers, from small and large businesses to public schools and universities, hospitals, tribal governments and charities.

Reports to phishing@irs.gov from victims and nonvictims about this scam jumped to approximately 900 in 2017, compared to slightly over 100 in 2016. Last year, more than 200 employers were victimized, which translated into hundreds of thousands of employees who had their identities compromised.

The IRS and its partners in the Security Summit effort hope to limit the success of this scam in 2018 by alerting employers immediately. The IRS can take steps to protect employees, but only if the agency is notified immediately by employers about the theft. Last year, the IRS created a new process by which employers should report these scams.

How the scam works

Best Practices for Employers 

To prevent falling victim of the Form W-2 Scam, employers can:

If the business or organization victimized by these attacks notifies the IRS, the IRS can take steps to help prevent employees from being victims of tax-related identity theft.

How to notify the IRS if you are a victim

The IRS established a special email notification address specifically for employers to report Form W-2 data thefts. Here’s how Form W-2 scam victims can notify the IRS:

Include the following:

Businesses and organizations that fall victim to the scam and/or organizations that only receive a suspect email but do not fall victim to the scam should send the full email headers to phishing@irs.gov and use “W2 Scam” in the subject line.

Be aware that cybercriminals’ scams are constantly evolving. Employers should be alert to any unusual requests for employee data.

Taxpayers might be eligible for a tax refund and don’t even know it!  Below are four tax credits that can mean a refund for eligible taxpayers:

  1. Earned Income Tax Credit. A taxpayer who worked and earned less than $53,930 last year could receive the EITC as a tax refund. They must qualify for the credit, and may do so with or without a qualifying child. They may be eligible for up to $6,318.
  2. Premium Tax Credit.Taxpayers who chose to have advance payments of the premium tax credit sent directly to their insurer during 2017 must file a federal tax return to reconcile any advance payments with the allowable premium tax credit. In addition, taxpayers who enrolled in health insurance through the Health Insurance Marketplace in 2017 and did not receive the benefit of advance credit payments may be eligible to claim the premium tax credit when they file.
  3. Additional Child Tax Credit. If a taxpayer has at least one child that qualifies for the Child Tax Credit, they might be eligible for the ACTC. This credit is for certain individuals who get less than the full amount of the child tax credit.
  4. American Opportunity Tax Credit. To claim the AOTC, the taxpayer, their spouse or their dependent must have been a student who was enrolled at least half time for one academic period. The credit is available for four years of post-secondary education. It can be worth up to $2,500 per eligible student. Even if the taxpayer doesn’t owe any taxes, they may still qualify. They are required to have Form 1098-T, Tuition Statement, to be eligible for an education benefit. Students receive this form from the school they attended. There are exceptions for some students.

Taxpayers need to file a 2017 tax return to claim these credits. If you are unsure of your eligibility to claim the tax credits mentioned in this article, the professionals in our office can help. Call us today.

We know identity theft is a frustrating process for victims. The IRS is taking this issue very seriously and continues to expand on their robust screening process to stop fraudulent returns.

What is identity theft?

Identity theft occurs when someone uses personal information such as your name, Social Security number (SSN) or other identifying information without your permission, to commit fraud or other crimes, such as claiming a fraudulent refund.

How do you know if your tax records have been affected?

Usually, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.

You may only become aware this has happened to you if you file your return later in the filing season and discover that two returns have been filed using the same SSN.

Be alert to possible identity theft if you receive an IRS notice or letter that states that:

What should you do if your tax records are affected by identity theft?

If you receive a notice from the IRS, contact us immediately. If you believe someone may have used your SSN fraudulently, we will notify the IRS immediately by completing the appropriate paperwork.

If you are a victim of identity theft, the Federal Trade Commission recommends that you

If your SSN number is compromised, the IRS recommends that you

How can you protect your tax records?

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, please let us know. We can assist you in contacting the IRS and other agencies to ensure your identity is safe.

How can you minimize the chance of becoming a victim?

If you become a victim of identity theft, the professionals in our office can assist you in dealing with the IRS and any other agencies with which you must communicate. Call us today.

The new tax reform legislation that was signed into law today was the largest change to the tax system in over 3 decades. The last time the U.S. tax code saw significant reforms was under President Reagan in 1986. Those reforms sought to simplify income tax, broaden the tax base and eliminate many tax shelters.

Under this new legislation, substantial changes have been made to both individual and corporate tax rates. While most of the corporate provisions are permanent, individual provisions technically expire by the end of 2025. This expiration date is causing speculation on whether a future Congress will uphold the Individual provisions.

The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. To help you prepare, we have highlighted a few of the most pertinent details below. Please keep in mind, the purpose of this article is to summarize the key provisions.

Much more detail can be found here

What’s Changing?

Tax Bracket Rates. While taxpayers will still fall into one of seven tax brackets based on their income, the rates have changed. Some of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Standard Deduction. The standard deduction has nearly doubled. For single filers, it has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.

Personal Exemption. Under the prior tax code, a taxpayer could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents, thus lowering their taxable income. Under the new tax code, the personal exemption has been eliminated. For some families, this will reduce or counter the tax relief they receive from other parts of the reform package.

State and Local Tax Deduction. The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change, as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

The Child Tax Credit. The child tax credit has been expanded, doubling to $2,000 for children under 17. It’s also available to more people. Single parents who make up to $200,000 and married couples who make up to $400,000 can claim the entire credit, in full.

Non-Child Dependents. A new tax credit is available for non-child dependents. Taxpayers, such as elderly parents, can claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

Alternative Minimum Tax. Fewer taxpayers will be affected by the alternative minimum tax. The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The exemption will rise to $70,300 for singles, and to $109,400 for married couples.

Mortgage Interest Deduction. Going forward, anyone purchasing a home will only be able to deduct the first $750,000 of their mortgage debt. Down from $1 million, this will likely only affect people buying homes in more expensive regions. Current homeowners will likely be unaffected.

529 Savings Accounts. In the past, 529 savings accounts were untaxed and could only be applied towards college expenses.  Under the new tax code, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.

Alimony Payment Tax Deduction. The tax deduction for alimony payments will be eliminated for couples who sign divorce or separation paperwork after December 31, 2018.

Moving Expenses Deduction. The tax deduction for moving expenses is also gone, but there may be exceptions for members of the military.

Tax Preparation Deduction. Taxpayers can no longer deduct the cost of having their taxes prepared by a professional or the money they may have spent on tax preparation software.

Disaster Deduction.  Under the prior tax code, losses sustained due to a fire, storm, shipwreck or theft that insurance did not cover and exceeded 10% of their adjusted gross income, were deductible. Effective under the new tax code, taxpayers can only claim the disaster deduction if they are affected by an official national disaster.

Estate Tax. Prior to the tax reform, a limited number of estates were subject to the estate tax, a tax which applies to the transfer of property after someone dies. Now, even fewer taxpayers will be affected. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.

Health Insurance Mandate. The failure to repeal Obamacare earlier this year afforded the Republicans the opportunity to eliminate one of the health law’s key provisions with tax reform. Effective in 2019, the individual mandate, which penalized people who did not have health care coverage, was eliminated.

Corporate Tax Rate. Beginning in 2018, the corporate tax rate will be cut from 35% to 21%.

Pass-through Entities. The owners, partners, and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Those who pay their share of the business’ taxes through their individual tax returns will have a 20% deduction.

To ensure business owners do not abuse the provision, the legislation has included additional terms to this provision.

Multinational Corporations. The new tax bill is a shift towards globalization, changing the way multinational corporations are taxed. Companies will no longer pay federal taxes on income they make overseas. These companies will be required to pay a one-time fee, 15.5% on cash assets and 8% on non-cash assets, on any existing offshore profits.

Nonprofit Organizations. There is a new 21% excise tax on nonprofit employers for salaries they pay out above $1 million.

Sexual Harassment Settlements. Companies can no longer deduct any settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements.

Bonus Depreciation. The Bonus depreciation will increase from 50% to 100% for property placed in service after September 27, 2017, and before January 1, 2023, when a 20% phase-down schedule will begin. The previous rule that made bonus depreciation available only for new properties was also removed.

Vehicle Depreciation. The new tax bill raises the cap placed on depreciation write-offs of business-use vehicles. $10,000 for the first year a vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for each subsequent year until costs are fully recovered. The new limits only apply to vehicles placed in service after December 31, 2017.

 

What’s Staying the Same?

Student Loan Interest. You can still deduct Student Loan Interest – the deduction for this will remain max $2,500.

Medical Expenses. The deduction for medical expense was untouched. Rather, it was expanded by two years. Filers can deduct medical expenses that exceed 7.5% of their adjusted gross income.

Teachers. Teachers will continue to deduct up to $250 to offset what they spend on resources for the classroom.

Electric Car Credit. If you drive a plug-in electric vehicle, you can still claim a credit of up to $7,500.

Home Sellers. Homeowners that sell their house and make a profit can exclude up to $500,000 (or $250,000 for single filers) from capital gains. This still requires that it is their primary home and they have lived there for at least two of the past five years.

Tuition Waivers. Tuition Waivers, typically awarded to teaching and research assistants will remain tax free.

 

What Does All This Mean?

Although doubling the standard deduction will arguably simplify the process of filing taxes for individuals, it’s not true for all cases. There are still deductions and credits to consider. More so, filing for small businesses can potentially become more complicated. Each client scenario will be different and this has to be taken into account. The purpose of this article is to summarize the key provisions, much more detail can be found here. Depending on your situation, it may be beneficial to review your filing status as part of an overall tax planning strategy.

Again, please keep in mind that most of the items are effective January 1, 2018. The professionals in our office can answer questions you may have regarding the individual, estate and corporate tax provisions outlined in the Republican’s tax reform bill, contact your tax professional at Hamilton Tharp with any questions or email us at info@ht2cpa.com.

The IRS recently announced the 2018 cost-of-living adjustments for various retirement plan dollar limits.

The indexed amounts, and other commonly used limits, are listed below:

2018 2017 2016

IRAs
IRA Contribution Limit $5,500 $5,500 $5,500
IRA Catch-Up Contributions 1,000 1,000 1,000

IRA AGI Deduction Phase-out Starting at
Joint Return 101,000 99,000 98,000
Single or Head of Household 63,000 62,000 61,000

SEP
SEP Minimum Compensation 600 600 600
SEP Maximum Contribution 55,000 54,000 53,000
SEP Maximum Compensation 275,000 270,000 265,000

SIMPLE Plans
SIMPLE Maximum Contributions 12,500 12,500 12,500
Catch-up Contributions 3,000 3,000 3,000

401(k), 403(b), Profit-Sharing Plans, etc.
Annual Compensation 275,000 270,000 265,000
Elective Deferrals 18,500 18,000 18,000
Catch-up Contributions 6,000 6,000 6,000
Defined Contribution Limits 55,000 54,000 53,000
ESOP Limits

1,105,000

220,000

1,080,000

215,000

1,070,000

210,000

Other
HCE Threshold 120,000 120,000 120,000
Defined Benefit Limits 220,000 215,000 210,000
Key Employee 175,000 175,000 170,000
457 Elective Deferrals 18,500 18,000 18,000
Control Employee (board member or officer) 110,000 105,000 105,000
Control Employee (compensation-based) 220,000 215,000 215,000
Taxable Wage Base 128,400 127,200 118,500

The Internal Revenue Service recently issued the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2018, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.

As you know, tax reform is one topic you can’t escape these days. With proposals in both the House and the Senate, we thought it would be helpful to review some of the changes that could affect your business in 2018.

Other important changes have been proposed as well.  Please let us know if you have any questions regarding recommendations for the year-end.

 

The holiday season often prompts people to give money or property to charity. If you plan to give and want to claim a tax deduction, there are a few tips you should know before you give. For instance, you must itemize your deductions. Here are six more tips that you should keep in mind:

  1. Give to qualified charities. You can only deduct gifts you give to a qualified charity. You can deduct gifts to churches, synagogues, temples and registered charities.
  2. Keep a record of all cash gifts.  Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity, the date,  and amount of the contribution. Bank records include canceled checks, or bank, credit union and credit card statements. If you give by payroll deductions, you should retain a pay stub, a Form W-2 wage statement or other document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.
  3. Household goods must be in good condition.  Household items include furniture, furnishings, electronics, appliances and linens. These items must be in at least good-used condition to claim on your taxes. A deduction claimed of over $500 for a single item does not have to meet this standard if you include a qualified appraisal of the item with your tax return.
  4. Additional records required.  You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.
  5. Year-end gifts.  Deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2017. This is true even if you don’t pay the credit card bill until 2018. Also, a check will count for 2017 as long as you mail it in 2017.
  6. Special rules.  Special rules apply if you give a car, boat or airplane to charity. If you claim a deduction of more than $500 for a noncash contribution, you will need to file Form 8283 providing detail for each donation.

For individuals and businesses making year-end gifts to charity, please consider these tips. The professionals in our office can answer any questions you may have regarding year-end gifts to charity. Call on us today!

With Donald Trump in the White House and Republicans maintaining a majority in Congress, dramatic tax changes may be on the horizon. Most likely, many provisions will not go into effect until 2018 or later. However, it’s important to keep in mind that 2018 legislation can still impact 2017 tax planning.

During year-end planning for 2017, individuals will need to keep an eye on future legislative changes and be prepared to take prompt action, if necessary. Below you will find an overview of key tax provisions and tax minimizing strategies.

Alternative Minimum Tax

Alternative minimum tax (AMT) should be considered before you and/or your accountant begin to time income and deductions. AMT is a separate tax system that limits some deductions and disallows others, such as state and local income tax deductions, property tax deductions and other miscellaneous itemized deductions that are subject to the 2% of AGI. Deductions include investment advisory fees and non-reimbursable employee business expenses.

With proper planning, you may be able to avoid AMT, reduce its impact or even take advantage of its lower maximum rate. Speak with your tax professional on AMT projections for this year and next.

Timing Income and Expenses

Timing is everything when it comes to income and expenses. Smart timing will reduce your tax liability, while poor timing can unnecessarily increase it.

If you don’t expect to be subject to AMT in the current or following year, consider income deferment. Deferring income and increasing deductible expenses for the current year is typically a good idea because it will postpone tax. If you expect to be in a higher tax bracket, or if tax rates are expected to increase, the opposite approach rings true.

Whatever the reason for timing your income and deductions, here are some income items you may be able to control:

Followed by potentially controllable expenses:

Charitable Donations

Good deeds in the form of cash or in-kind items can reap great tax benefits. Generally, you may deduct up to 50% of your adjusted gross income for qualified charitable contributions. Tax savings can also be achieved through noncash donations. By giving gently worn items to a local resale shop, you can deduct the fair market value of the donated items. Before making a large donation to the charity of your choosing, discuss options with your tax professional.

Healthcare Breaks

If medical expenses were not paid through tax-advantaged accounts or were reimbursable by insurance and exceed 10% of your AGI, you can deduct the excess amount. Eligible expenses may include:

You may be able to save tax by contributing to one of these accounts:

Sales Tax Deduction

Taking an itemized deduction for state and local sales taxes instead of state and local income taxes can be valuable for taxpayers residing in states with no or low-income tax or who purchase a major item, such as a car or boat. Certain deductions are reduced by 3% of the AGI amount if your AGI surpasses the applicable threshold (not to exceed 80% of otherwise allowable deductions).

The thresholds for 2017 are $261,500 (single), $287,650 (head of household), $313,800 (married filing jointly) and $156,900 (married filing separately).

Self-Employment Taxes

As a self-employed taxpayer, you may benefit from other above-the-line deductions. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You can also deduct retirement plan contributions and, if you’re eligible, an HSA.

Estimated Payments and Withholdings

You can become subject to penalties if you don’t pay enough tax through estimated tax payments and withholding. Here are some strategies to help avoid underpayment penalties:

If you have questions about these or other tax saving tips, please contact your accounting professional to schedule your year-end planning meeting.

Around this time of year, many organizations are re-evaluating their annual budgets to improve profit margins and consolidate spending. One aspect of this process often includes exploring new or revised tax credits that can help offset the amount of money owed to the federal and state governments. Unfortunately, many organizations fail to recognize every tax credit they are eligible to receive. This oversight can happen for several reasons, including:

Whether you are an individual taxpayer or a small business owner, understanding your tax credit eligibility is important. The good news is that there are resources and processes designed to help you monitor and navigate the complex tax credit landscape.  Utilizing such tools can help capture 2017 credits as well as retroactive 2016 tax credit opportunities.

Both the federal and state government administer tax credit programs, each having defined eligibility requirements and refund amounts. In some instances, county and city governments even offer localized tax credits to encourage specific activities. The most common business tax credits nationwide include:

Taking advantage of tax credits from 2016 and the upcoming year can help your organization reduce its tax liability, lower its tax rate and improve the bottom line. For businesses that operate in multiple states, it is essential to understand the variations between credits because businesses based in certain states may be eligible to retroactively claim specific tax credits. For instance, 2016 tax credits that focus on job creation and property investments are still available.

Is your organization taking advantage of both state and federal tax credits? Consult with one of our tax professionals to ensure you are receiving the maximum amount due to you.

The IRS has announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Harvey and members of their families. This is similar to relief provided last year to Louisiana flood victims and victims of Hurricane Matthew.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, parts of Texas qualify for individual assistance. To qualify for this relief, hardship withdrawals must be made by Jan. 31, 2018.

More information about other tax relief related to Hurricane Harvey can be found on the IRS disaster relief page.

 

Summertime is a time of year when people rent out their property. In addition to the standard clean up and maintenance, owners need to be aware of the tax implications of residential and vacation home rentals.

Receiving money for the use of a dwelling also used as a taxpayer’s personal residence generally requires reporting the rental income on a tax return. It also means certain expenses become deductible to reduce the total amount of rental income that’s subject to tax.

Here are some basic tax tips that you should be aware of if you rent out a vacation or residential home:

The professionals in our office can answer your questions about residential and vacation home rentals, call us today!

Even though the tax filing season has ended for most taxpayers, The Internal Revenue Service recently issued a warning that tax-related scams continue. People should remain on alert to new and emerging schemes involving the tax system that continue to claim victims. Below we have listed four recent scams to be aware of and the tell tale signs of a scam.

EFTPS Scam
A new scam which is linked to the Electronic Federal Tax Payment System (EFTPS) has been reported nationwide. Con artists will call to demand immediate tax payment. The caller claims to be from the IRS and says that two certified letters mailed to the taxpayer were returned as undeliverable. The scammer then threatens arrest if a payment is not made immediately by a specific prepaid debit card. Victims are told that the debit card is linked to the EFTPS when, in reality, it is controlled entirely by the scammer. Victims are warned not to talk to their tax preparer, attorney or the local IRS office until after the payment is made.

“Robo-call” Messages
It is important to remember that the IRS does not call and leave prerecorded, urgent messages asking for a call back. In this tactic, scammers tell victims that if they do not call back, a warrant will be issued for their arrest. Those who do respond are told they must make immediate payment either by a specific prepaid debit card or by wire transfer.

Private Debt Collection Scams
The IRS recently began sending letters to a relatively small group of taxpayers whose overdue federal tax accounts are being assigned to one of four private-sector collection agencies. Taxpayers should be on the lookout for scammers posing as private collection firms. The IRS-authorized firms will only be calling about a tax debt the person has had – and has been aware of – for years. The IRS would have previously contacted taxpayers about their tax debt.

Scams Targeting People with Limited English Proficiency
Taxpayers with limited English proficiency have been recent targets of phone scams and email phishing schemes that continue to occur across the country. Con artists often approach victims in their native language, threaten them with deportation, police arrest and license revocation among other things. They tell their victims they owe the IRS money and must pay it promptly through a preloaded debit card, gift card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls” or via a phishing email.

Tell Tale Signs of a Scam:

The IRS (and its authorized private collection agencies) will never:

How to Know It’s Really the IRS Calling or Knocking

The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However, there are special circumstances in which the IRS will call or come to a home or business, such as:

For more information visit “How to know it’s really the IRS calling or knocking on your door” on IRS.gov.

If you think you are the target of a scam follow up with your accountant for further guidance.

Students and teenagers often get a job in the summer to earn extra spending money. If it’s your first job it gives you a chance to learn about work and paying tax. The tax you pay supports your home town, your state and our nation. Here are some tips students should know about summer jobs and taxes:

  1. Withholding and Estimated Tax. Students and teenage employees normally have taxes withheld from their paychecks by the employer.  Some workers are considered self-employed and may be responsible for paying taxes directly to the IRS. One way to do that is by making estimated tax payments during the year.
  2. New Employees. When you get a new job, you will need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use it to figure how much federal income tax to withhold from your pay.
  3. Self-Employment. Money you earn doing work for others is taxable. Some work you do may count as self-employment. These can be jobs like baby-sitting or lawn care. Keep good records of your income and expenses related to your work. IRS rules may allow some, if not all, costs associated with self-employment to be deducted. A tax deduction generally reduces the taxes you pay.
  4. Tip Income. All tip income is taxable. Keep a daily log to report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
  5. Payroll Taxes. Taxpayers may earn too little from their summer job to owe income tax. Employers usually must withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer, in a timely manner.
  6. Newspaper Carriers. Special rules apply to a newspaper carrier or distributor. If a person meets certain conditions, then they are self-employed. If the taxpayer does not meet those conditions, and are under age 18, they may be exempt from Social Security and Medicare taxes.
  7. ROTC Pay. If a taxpayer is in a ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive may not be taxable.
  8. Use IRS Free File. Taxpayers can prepare and e-file their federal income tax return for free using IRS Free File.  Free File is available only on IRS.gov. Some taxpayers may not earn enough money to have to file a federal tax return, by law, but may want to if taxes were withheld. For example, a taxpayer may want to file a tax return because they would be eligible for a tax refund or a refundable credit.  IRS Free File can help with these issues.

The professionals in our office can answer the questions you may have about part-time jobs from a tax perspective; call us today.

Did you know that members of the military may qualify for tax breaks and benefits? Special rules can lower the tax they owe or give them more time to file and pay taxes. In some circumstances, certain types of military pay are tax-free.

Below are 8 tips to find out who qualifies.

  1. Combat Pay Exclusion – Part or even all of someones combat pay is tax-free if they serve in a combat zone, or provide direct support. There are, however, limits for commissioned officers.
  2. Deadline Extensions –  Certain members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  3. Special Deductions include:
  1. Earned Income Tax Credit or EITC –  If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
  2. Signing Joint Returns – Normally, both spouses must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
  3. ROTC Allowances –  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
  4. Separation and Transition to Civilian Life – If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
  5. Tax Help – Keep in mind that most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.

The professionals in our office can help you determine if you qualify for one or more of these special rules, call us today.

A new interim guidance, recently issued by The Internal Revenue Service, provides small business owners some relief. According to Notice 2017-23, eligible businesses can take advantage of a new option which enables them to apply part or all of their research credit against their payroll tax liability. This is big news for taxpayers who previously could take only the research credit against their income tax liability.

This new option will be available for the first time to any eligible small business filing its 2016 federal income tax return this tax season as well as to those who have already filed. The new payroll tax credit is especially attractive to eligible startups that have little or no income tax liability. To qualify for the current tax year, a business must:

An eligible small business with qualifying research expenses has the option to apply up to $250,000 of its research credit against its payroll tax liability. This can be done by filling out Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return.  Don’t worry if you failed to choose this option and still wish to do so. Under a special rule for the 2016 tax year, eligible small businesses can still make the election by filing an amended return by Dec. 31, 2017.

Further details on how and when to claim the credit or more information on the research credit itself, contact one of our tax professionals today.

Dear Clients and Friends,

All Statements of Information for Limited Liability Companies (LLC’s) can now be processed online using a credit card!  In the past, these had to be paper filed and were usually missed by most entities and incurred penalties.   The form is due every two years (unlike corporations which are due annually) and are subject to a $250 penalty if not filed timely.   Please click the link below to see if your company has a filing requirement –

California Secretary of State

Statement of Information

Link to Online Processing:

http://bizfile.sos.ca.gov/http://bizfile.sos.ca.gov/

 

What does your tax return say about your financial situation? The fact is, the paperwork you file each year offers excellent information about how you are managing your money—and about areas where it might be wise to make changes in your financial habits. If you have questions about your financial situation, remember that we can help. Our firm is made up of highly qualified and educated professionals who serve as trusted business advisors and know how to work with clients like you all year long.

So whether you are concerned about budgeting; saving for college, retirement or another goal; understanding your investments; cutting your tax bite; starting a business; or managing your debt, you can turn to us for objective answers to all your tax and financial questions.

We Can Help You Address the Issues that Keep You Up at Night

Where will your business be in five years? Would strategic budget cuts in some areas improve your company’s health? Are there ways you can boost revenue? If you are nearing retirement, is there a buyer or successor in the wings? These are the kinds of questions that keep many business owners up at night. Fortunately, we can probably help you sleep a little easier.

We can review your financial situation and develop creative strategies to minimize your tax liability and help you meet your financial goals. Contact one of our professionals today.

Unincorporated, businesses are susceptible to high self-employment (SE) tax bills because of how they are taxed. One way around this is to convert your business to an S corporation. For many business owners, this is an appealing option. Before you make the switch, here is what you need to know.

The Basics: Certain income, such as sole proprietorship and partnership income, is subject to SE tax. Also subject to the SE tax are single-member limited liability companies (LLCs) and multimember LLCs. Effective 2017, the maximum federal SE tax rate of 15.3 percent applies to the first $127,200 of net SE income. That rate is inclusive of both the Social Security tax (12.4 percent) and the Medicare tax (2.9 percent).

The rate declines once SE income reaches $127,200 because the Social Security tax component is eliminated.  The Medicare tax will continue to accrue at the same rate of 2.9 percent. It will increase to 3.8 percent at higher income levels because of the additional Medicare tax (0.9 percent). As part of the Affordable Care Act, we anticipate the Medicare tax to disappear once the ACA is replaced.

For the purpose of this article, we make reference to the Social Security and Medicare taxes together as federal employment taxes.

How an S Corp can Lower SE Taxes: Converting your unincorporated business into an S corporation, can help lower your SE taxes. This is done by paying yourself a modest salary and then, distributing any remaining cash flow to shareholder-employees as federal-employment-tax-free distributions. This works in your favor because,

The employer is responsible for matching the amounts of Social Security tax and Medicare tax, paid directly to the U.S. Treasury. The combined FICA and employer rate for the Social Security tax is still the same as the SE tax rates you face as an individual, but the employer is now responsible for them.

Where the tax savings arise is on the cash distributions made to shareholder-employees because only wages are subject to federal employment taxes.

In terms of federal employment tax treatment, S corporations are in a better position compared to businesses that are conducted as sole proprietorships, partnerships or LLCs.

Your Considerations – Before you change your business structure, consider the following caveats.

  1. If you cannot prove your salary is reasonable, you are at a high risk of an IRS audit, back employment taxes, interest and penalties. To minimize the risk, collect evidence that proves someone hired externally to perform the same work would be paid the same salary.
  2. Modest salaries will reduce the maximum eligible contribution to your retirement accounts. One workaround would be to set up 401(k) plans, where modest salaries won’t prevent substantial contributions.
  3. Consider the added administrative tasks that are associated with operating as an S corporation. For example, S corporations are required to file a separate federal return. Also, there are state-law corporation requirements to abide by such as holding board of director’s meetings and keeping minutes.

Depending on the situation, converting your business to an S corporation can be a strategic move that reduces federal employment taxes. However, there are many legal implications to consider. The professionals in our office can answer the questions you may have. Call us today.

 

Income from Sole Proprietorship (LLC) $75,000
35% Tax Rate $26,250
15.3% Employer Matching Tax $11,475
Total Taxes: $37,725

 

Tax Savings on an S Corporation

Salary from S-Corporation: $40,000
Dividends: $35,000
Total Income: $75,000
35% Tax Rate: $26,250
15.3% Employer Matching Tax $6,120
Total Taxes: $32,370

 

Tax Savings: $5,355

 

Operating in one physical location is no longer ideal for businesses that want to remain profitable in the ever-changing landscape. To adapt, many businesses are straying away from traditional business models where they would typically operate in physical locations and moving towards virtual business models. As businesses expand their operations across state lines, it becomes increasingly complex for states to collect taxes.

To adapt, many states are making necessary updates to tax laws. For instance, several states have implemented the “economic nexus” standard, which requires businesses to file a state tax return regardless of whether they have a physical presence there.

The AICPA defines economic nexus as the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer becomes subject to the state’s taxing jurisdiction or taxing power. There are numerous business activities that can prompt a tax filing. We have listed the most common below. Consider which of these might apply to your business.

While the economic nexus standard can be helpful in determining if your business is subject to state tax, there is inconsistency between states that define economic benefit differently. To help provide some consistency, some states have gone a step further to set a “bright-line rule.” The purpose of such a rule is to define a standard, leaving little or no room for interpretation.

When determining if your business is subject to state tax, you must first identify in which states you have a filing requirement. Next, based on that states regulations, determine what income must be attributed to that state.

If you have questions regarding your state tax return filing requirements, please contact one of our professionals today.

The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.

Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.

Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.

The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.

  2016 2017 Change
HSA contribution limit Self: $3,350

Family: $6,750

 Self: $3,400

Family: $6,750

 Self: $50

Family: No Change
HSA catch up contribution (age 55+) $1,000 $1,000 No Change
HDHP minimum deductible Self: $1,300

Family: $2,600

 Self: $1,300

Family: $2,600

 No Change
HDHP maximum out of pocket Self: $6,550

Family: $13,100

 Self: $6,550

Family: $13,100

 No Change

 

Employers should remind employees who are contributing to or using their HSA:

There are other options available that employers can offer which take advantage of tax-free medical spending and reimbursement. The professionals in our office can clarify any questions you may have on HSAs. Call on us today.

The Internal Revenue Service, state tax agencies and the tax industry recently issued an urgent alert to all employers that the Form W-2 email phishing scam has evolved beyond the corporate world and is spreading to other sectors, including school districts, tribal organizations and nonprofits.

In a related development, the W-2 scammers are coupling their efforts to steal employee W-2 information with an older scheme on wire transfers that is victimizing some organizations twice. “This is one of the most dangerous email phishing scams we’ve seen in a long time. It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme,’’ said IRS Commissioner John Koskinen.

When employers report W-2 thefts immediately to the IRS, the agency can take steps to help protect employees from tax-related identity theft. The IRS, state tax agencies and the tax industry, working together as the Security Summit, have enacted numerous safeguards in 2016 and 2017 to identify fraudulent returns filed through scams like this. As the Summit partners make progress, cybercriminals need more data to mimic real tax returns.

Here’s how the scam works:

Cybercriminals use various spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their Forms W-2.  This scam is sometimes referred to as business email compromise (BEC) or business email spoofing (BES).

The Security Summit partners urge all employers to be vigilant. The W-2 scam, which first appeared last year, is circulating earlier in the tax season and to a broader cross-section of organizations, including school districts, tribal casinos, chain restaurants, temporary staffing agencies, healthcare and shipping and freight. Those businesses that received the scam email last year also are reportedly receiving it again this year.

New Twist to W-2 Scam: Companies Also Being Asked to Wire Money

In the latest twist, the cybercriminal follows up with an “executive” email to the payroll or comptroller and asks that a wire transfer also be made to a certain account. Although not tax related, the wire transfer scam is being coupled with the W-2 scam email, and some companies have lost both employees’ W-2s and thousands of dollars due to wire transfers.

The IRS, states and tax industry urge all employers to share information with their payroll, finance and human resources employees about this W-2 and wire transfer scam. Employers should consider creating an internal policy, if one is lacking, on the distribution of employee W-2 information and conducting wire transfers.

Steps Employers Can Take If They See the W-2 Scam

  • Organizations receiving a W-2 scam email should forward it to phishing@irs.gov and place “W2 Scam” in the subject line. Organizations that receive the scams or fall victim to them should file a complaint with the Internet Crime Complaint Center (IC3,) operated by the Federal Bureau of Investigation.
  • Employees whose Forms W-2 have been stolen should review the recommended actions by the Federal Trade Commission at identitytheft.gov or the IRS at www.irs.gov/identitytheft. Employees should file a Form 14039, Identity Theft Affidavit, if the employee’s own tax return gets rejected because of a duplicate Social Security number or if instructed to do so by the IRS.

The W-2 scam is just one of several new variations that have appeared in the past year that focus on the large-scale thefts of sensitive tax information from tax preparers, businesses and payroll companies. Individual taxpayers also can be targets of phishing scams, but cybercriminals seem to have evolved their tactics to focus on mass data thefts.

Be Safe Online

In addition to avoiding email scams during the tax season, taxpayers and tax preparers should be leery of using search engines to find technical help with taxes or tax software. Selecting the wrong “tech support” link could lead to a loss of data or an infected computer. Also, software “tech support” will not call users randomly. This is a scam. Taxpayer or tax preparers looking for tech support for their software products should go directly to the provider’s web page.

The professionals in our office can answer any questions you may have regarding Phishing scams. Call us today.

The Internal Revenue Service recently issued the 2017 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.

After much anticipation, the Department of Labor recently released a new rule which will change how employers compensate employees. Effective December 1, 2016, workers who earn above the previous threshold but below the new one will qualify to receive time-and-a-half for each hour they work surpassing 40 hours a week. An estimated 4.2 million salaried workers will become eligible for overtime pay under the new rule.

The new rule will:

  1. raise the salary threshold at which white-collar workers are exempt from overtime pay from $23,660 to $47,476;
  2. strengthen overtime protection for salaried workers already entitled to overtime;
  3. automatically update the salary threshold every three years, based on wage growth over time;
  4.  provide greater clarity for workers and employers.

Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements set by Department of Labor regulations. If you are unfamiliar with the criteria please refer to our exemption checklist which explains the job requirements to meet the overtime exemption.

The exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. The exemptions also do not apply to police, fire fighters, paramedics and other first responders.

Many businesses will be affected and must comply with the new rule. As a business owner, you have a variety of options to comply:

  1. Pay time-and-a-half for overtime work;
  2. Raise worker’s salaries above the new threshold;
  3. Limit workers’ hours to 40 per week;
  4. A combination of the above.

Below are four steps you can implement which will help integrate the changes successfully into your workflow.

  1. Review payroll and identify employees who are exempt.

The first step is to review your payroll and identify exempt employees whose salaries are below the new proposed thresholds for executive, professional and administrative white collar exemptions. It will also be important to identify employees who are currently classified as exempt from the overtime protections of the Fair Labor Standards Act because they must meet the duties test for their exemption to be recognized.

  1. Consider which positions to transition to non-exempt status.

Once you have reviewed your payroll and identified the employees who are exempt it will be essential to carefully consider which positions to transition to nonexempt status. Employers have two options: they can either increase the salary level to maintain an employee’s exempt status or transition the position to nonexempt status. When transitioning positions to a nonexempt status, ask yourself the following questions:

  1. Invest in automation to streamline timekeeping practices.

Anticipate more time to track for employees transitioning from exempt to nonexempt status. To ensure complete compliance with the Fair Labor Standards Act and state laws, consider investing in a time and attendance software. It will help track hours worked. Establishing a formal policy will also help track and record time. The policy should define:

  1. Communicate changes internally.

The final step is to communicate and educate staff of any policy changes. Don’t forget to include employees who are already nonexempt; they will also need a refresher. Communications and training programs must be timely. Consider having supervisors regularly administer audits to ensure employees are following protocol.

Employers have several months to prepare for the new rule. Our firm’s professionals can help you develop a strategy to ensure your business is in compliance. Call us today.

Is Your Business Prepared for the New 2017 Filing Deadlines For W-2 and 1099 Forms?

A reminder to employers and small businesses of the new January 31 filing deadline for Form W-2. A new federal law, aimed at making it easier for the IRS to detect and prevent refund fraud, will accelerate by a month the W-2 filing deadline for employers from February 28 to January 31.

The Protecting Americans from Tax Hikes (PATH) Act, enacted last December, includes a new requirement for employers. They are now required to file their copies of Form W-2, submitted to the Social Security Administration, by January 31. The new January 31 filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation such as payments to independent contractors. As it relates to Form 1099-MISC, the new filing deadline will only impact filers that report nonemployee compensation payments in box 7.

In the past, employers typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their copies of these forms. Also, there are changes in requesting an extension to file the Form W-2. Only one 30-day extension to file Form W-2 is available, and this extension is not automatic. If an extension is needed, a Form 8809 Application for Extension of Time to File Information Returns must be completed as soon as you know an extension is necessary, but by no later than January 31.

The new accelerated deadline is intended to help the IRS improve its efforts to spot errors on taxpayer filed returns. Receiving W-2s and 1099s earlier will make it easier for the IRS to verify the legitimacy of tax returns and properly issue refunds to taxpayers eligible to receive them. According to, the IRS it will make it easier to release tax refunds more quickly.

The January 31 deadline remains unchanged and has long applied to employers furnishing copies of these forms to their employees. We anticipate the new deadline will increase your businesses workload. To minimize stress, we recommend the following steps:

The professionals in our office can answer any questions you may have about the new filing deadlines and how they will impact your business, call us today at 858.481.7702

Taxpayers rejoice – after years of advocating for change, congress has finally passed legislation that modifies the deadlines of several common tax returns. The new due dates will go into effect for the 2017 Tax Filing Season (Tax year 2016). Many of our Law Firm clients will be positively affected by these changes.

The new dates have been a long time coming for taxpayers who have struggled to file accurate returns in a timely manner. Their tax advisors would often miss deadlines when forms (such as Schedules K-1,) would arrive behind schedule. The illogical flow of information not only impacted the punctuality but also the accuracy of returns. Tax advisors would often resort to using estimates because information from a flow through business was not available before the taxpayer’s income tax return was due.

With the modified dates, it is expected that owners of partnerships will be able to file their tax returns without requesting an extension. Below is a summary of the changes.

Calendar Year Businesses

For tax years that begin after December 31, 2015, returns of calendar year

Fiscal Year Businesses

The new law also modifies the time allowed for extension of time to file for the following returns:

For calendar year taxpayers

There may be initial pushback, but looking at the bigger picture the new filing and extension dates will improve the flow of information for both advisors and clients.

If you have questions about the new tax return due date changes, please contact one of our professionals today.

The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.

Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.

Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.

The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.

  2016 2017 Change
HSA contribution limit Self: $3,350

Family: $6,750

 Self: $3,400

Family: $6,750

 Self: $50

Family: No Change
HSA catch up contribution (age 55+) $1,000 $1,000 No Change
HDHP minimum deductible Self: $1,300

Family: $2,600

 Self: $1,300

Family: $2,600

 No Change
HDHP maximum out of pocket Self: $6,550

Family: $13,100

 Self: $6,550

Family: $13,100

 No Change

Employers should remind employees who are contributing to or using their HSA:

There are other options available that employers can offer which take advantage of tax-free medical spending and reimbursement. The professionals in our office can clarify any questions you may have on HSAs. Call on us today.

In July of 2015, Congress passed and President Obama signed a Highway Funding Bill that extended financing for transportation infrastructure. Section 2006 of that bill modifies the tax filing due dates for tax years beginning after December 31, 2015.  The filing deadlines for a variety of entities, including partnerships and C corporations, will change.

The revised filing deadlines is a long time coming for the AICPA, who has been advocating for years for more logical due dates. The current structure makes it is difficult for taxpayers and preparers to submit timely, accurate returns. With the help of state CPA societies, the AICPA lobbied congress to:

What the new filing deadlines mean for business owners
As a business owner and taxpayer, it is important to be aware of the new filing deadlines to make sure you are submitting timely information. The following two questions will determine your due date:

  1. What entity is your business considered?
  2.  When is your tax year end date?

The new due dates are effective for tax years beginning after December 31, 2015 with the exception of C Corporations with fiscal years ending on June 30. New date rules for C Corporations will go into effect for returns with taxable years beginning after December 31, 2025.

We have highlighted below some of the major changes. For a complete list of new due dates, please refer to our giveaway this month, a copy of the AICPA’s resource which includes a list of all original and extended tax return due dates.

Return Type Prior Due Dates New Due Dates
Partnership (calendar year) April 15 March 15
S Corporation (calendar year) March 15 No change
C Corporation (calendar year) March 15 April 15
FinCEN Report 114

(Replaces FBAR return)

 June 30 April 15
Individual Form 1040 April 15 No change
 

Extension Modifications for Calendar Year Filers
Form Extension
1065 6 Months
1041 5 ½ months
5500 3 ½ months
990 6 months
3520-A and 3520 6 months
FinCEN report 114 6 months
 

Extension Modifications for C Corporations
June 30 FYE 7 months
December 31 FYE 5 months
All other FYE’s 6 months
After 12/31/25 All revert back to 6 months

Will individual tax filers be affected by the new due dates?

Yes, those who file foreign bank account reports will notice a change. The due date for FBARs will move from June 30 to April 15. FBAR filers are also applicable to receive a six-month extension, similar to tax returns.

 Trust Returns

The extension dates for trust returns are receiving an extension. Trust returns are still due in April, but the extension will change from September 15 to September 30.

You will want to review your return-filing procedures and determine what changes need to be made to comply with the new dates. The professionals in our office can help you understand how this will affect your business; call on us today.

The Internal Revenue Service recently revised the depreciation limits for business-use passenger automobiles, trucks and vans first placed in service during calendar year 2016. The updated amounts under Revenue Procedure 2016-23 are in table format below.

The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2016 calendar year:

Passenger Automobiles

1st tax year                                 $3,160

2nd tax year                               $5,100

3rd tax year                                $3,050

Each succeeding tax year        $1,875

The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2016 calendar year:

Trucks and Vans

1st tax year                                 $3,560

2nd tax year                               $5,700

3rd tax year                                $3,350

Each succeeding tax year        $2,075

When bonus depreciation rules apply, the first year limitation is $11,160 for personal automobiles and $11,560 for trucks and vans. In both cases, limitations for subsequent years remain the same. The professionals in our office can answer the questions you may have on the updated auto depreciation limits, call on us today.

Effective Monday, July 11, 2016

Employees who perform at least two hours of work (within the geographic boundaries of the City of San Diego) in one or more calendar weeks of the year must be paid at least $10.50 per hour and must accrue one hour of paid sick time for every 30 hours worked within the City of San Diego.

As passed, the Ordinance provides that while employers can cap use of sick pay to 40 hours within a benefit year, sick pay must continue to accrue indefinitely. Additionally, the Ordinance currently does not allow for a front-loading or deposit method of providing sick pay. Both of these issues present challenges for employers as they attempt to align their current paid time off and sick pay policies with new San Diego requirements.

Fortunately, the San Diego City Council is attempting to address these challenges and, on July 11, 2016, approved an Implementing Ordinance at a first reading that will provide much needed clarification and flexibility for employers with San Diego employees. If the implementing Ordinance becomes effective, it provides the following key changes:

Finally, the proposed Implementing Ordinance establishes strong anti-retaliation provisions, provides increased damages and civil penalties and outlines enforcement procedures. The Ordinance is now effective, which means immediate compliance steps need to be taken, including ensuring all covered San Diego employees receive a minimum wage of $10.50 per hour as of July 11, 2016. However, since the law is in flux on key sick pay issues such as caps and accrual rates and favorable employer changes are anticipated, it would be smart for covered employers to consult with legal counsel to craft a customized compliance solution.

Miscellaneous deductions can cut taxes. These may include certain expenses you paid for in your work if you are an employee. You must itemize deductions when you file to claim these costs. So if you usually claim the standard deduction, think about itemizing instead. You might pay less tax if you itemize.  Here are some tax tips you should know that may help you reduce your taxes:

Deductions Subject to the Limit.  

You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income. These include expenses such as:

Deductions Not Subject to the Limit.  

Some deductions are not subject to the two percent limit. They include:

There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions. For more about this topic call one of our professionals.

The Internal Revenue Service recently issued the 2016 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

As of January 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:

The mileage rate for service to a charitable organization is not alterable by the IRS. Instead, it must be changed by statute passed by Congress.

It is important to remember that a taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. For more information, please contact one of our professionals today.

The IRS recently proposed several significant changes to the existing regulations under Section 6015 of the Internal Revenue Code. The regulations in Section 6015 provide guidance to married individuals who filed joint returns and later sought relief from joint and several liability.

There are several proposed regulation changes:

The proposed rules are not applicable until they are published in the Federal Register. At that time, they will be considered final. If you would like more information about the proposed regulations, please contact one of our professionals today.