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
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 firstname.lastname@example.org.
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.
- Section 179 Deduction. For tax years beginning in 2018 through 2022, the House tax reform bill would increase the maximum Section 179 deduction to a whopping $5 million per year, adjusted for inflation. The maximum deduction would start to phase out at $20 million (adjusted for inflation). The Senate would increase the maximum annual Section 179 deduction to $1 million and increase the deduction phase-out threshold to $2.5 million (both numbers would be adjusted annually for inflation).
- Bonus Depreciation. Both the House and Senate tax reform bills would allow unlimited 100% first-year depreciation for qualified assets acquired and placed in service after 9/27/17 and before 1/1/23.
- Tax Rate on Pass-through Income. The House bill would install a maximum 25% federal income tax rate for income from a pass-through entity, subject to certain restrictions. The Senate bill would generally allow an individual taxpayer to deduct 17.4% of business income from a pass-through entity.
- Corporate Tax Rate. The House bill would tax C corporation income at a flat 20% rate for tax years beginning in 2018 and beyond. The rate for personal service corporations would be a flat 25%. The Senate bill would also install a flat 20% corporate rate, but it wouldn’t take effect until tax years beginning in 2019.
- Net Operating Losses (NOLs). Under both the House and Senate tax reform bills, taxpayers could generally use an NOL carryover to offset only 90% of taxable income (versus 100% under current law). Under both bills, NOLs couldn’t be carried back to earlier tax years but could be carried forward indefinitely.
- More Businesses Could Use Cash-method Accounting. The House tax reform bill would allow a C corporation or partnership with a C corporation partner to use the cash method of accounting if its annual gross receipts for the prior three years don’t exceed $25 million. The Senate bill would set the threshold at $15 million.
- Limits on Deducting Interest Expense. Under the House tax reform bill, deductions for business interest expense in tax years beginning in 2018 and beyond generally couldn’t exceed 30% of the business’s adjusted taxable income (subject to exceptions). Under the Senate tax reform bill, business interest expense for tax years beginning in 2018 and beyond would be limited to the sum of business interest income plus 30% of adjusted taxable income.
- Deductions and Credits. Both the House and Senate bills would eliminate the domestic production activities deduction and certain tax credits.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- Consulting or other self-employment income
- S. Treasury bill income
- Retirement plan distributions (to the extent they won’t be subject to early withdrawal penalties)
Followed by potentially controllable expenses:
- State and local income taxes
- Property taxes
- Mortgage interest
- Margin interest
- Charitable contributions
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.
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:
- Health insurance premiums
- Long-term care insurance premiums (limits apply)
- Medical and dental services
- Prescription drugs
You may be able to save tax by contributing to one of these accounts:
- HSA – You can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to a personal HSA. Contributions are $3,400 for self-only coverage and $6,750 for family coverage for 2017. As a bonus, if you’re age 55 or older, you may contribute an additional $1,000. Like an IRA, HSAs can bear interest or be invested, growing tax-deferred. Balances can be carried over from year to year, and withdrawals for qualified medical expenses are tax-free.
- FSA – An employer-sponsored Flexible Spending Account can be used to redirect pretax income. The plan pays or reimburses you for qualified medical expenses, not to exceed $2,600 in 2017. The balance that remains at the end of the year you lose, unless your plan allows you to roll the balance over (up to $500).
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).
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:
- Know the minimum payment rules
- Use the annualized income installment method
- Estimate your tax liability and increase withholdings
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:
- obsolete technology,
- inadequate processes and
- difficulty keeping up with the complex tax credit landscape.
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:
- Hiring and employment
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.
Equifax, one of the United States’ three major consumer credit reporting agencies, recently reported a breach that compromised the personal information of approximately 143 million Americans. The nature of this breach is particularly alarming because many consumers may not even know they are customers of the company. Equifax receives information from multiple sources including banks, lenders, credit card companies and retailers. Names, social security numbers, birth dates, addresses and driver’s licenses were among the information stolen from Equifax’s databases.
Credit card numbers for about 209,000 people were exposed, as was “personal identifying information” on roughly 182,000 customers involved in credit report disputes.
How to determine if you were one of the 143 million Americans affected
- Visit www.equifaxsecurity2017.com to find out if your information was exposed. Click on the “Potential Impact” tab. You will be asked to enter your last name and last six digits of your Social Security number.
- Whether or not your information was exposed, U.S. consumers can get a year of free credit monitoring. You have until November 20, 2017 to enroll.
- Keep in mind, if you sign up for Equifax’s offer of free identity theft protection and credit file monitoring, you may be limiting your rights to sue and be forced to take disputes to arbitration.
Additional steps you can take
- Review your transactions regularly. Monitor your credit card statements and credit report for any accounts or charges you don’t recognize. You can order a free report from each of the three credit bureaus once a year.
- Consider placing a credit freeze, making it difficult for someone to open a new account in your name.
- File your taxes early, before a scammer can.
- Respond right away to letters from the IRS. Remember the IRS will never call.
We are closely monitoring this issue and will keep you informed of any new developments.
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:
- A vacation home or dwelling unit can be a house, apartment, condominium, mobile home, boat or similar property. It’s possible to use more than one dwelling unit as a residence during the year.
- If the property is “used as a home,” your rental expense deduction is limited. The dwelling unit is considered to be used as a residence if the taxpayer uses it for personal purposes during the tax year for more than the greater of: 14 days or 10% of the total days rented to others at a fair rental price. Rental expenses cannot be more than the rent received.
- You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
- If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use. Personal use means use by the owner, owner’s family, friends, other property owners and their families. Personal use includes anyone paying less than a fair rental price.
- Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
- If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. In this case you deduct your qualified expenses on schedule A.
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.
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.
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:
- Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. The IRS will usually first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
- Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
- Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
- Ask for credit or debit card numbers over the phone.
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:
- when a taxpayer has an overdue tax bill,
- to secure a delinquent tax return or a delinquent employment tax payment, or,
- to tour a business as part of an audit or during criminal investigations.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Special Deductions include:
- Reservists’ Travel. Reservists can use Form 2106 to deduct their unreimbursed travel expense when their duties take them more than 100 miles away from home, even if they do not itemize their deductions.
- Moving Expenses. Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
- Uniform. Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
- 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.
- 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.
- 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.
- 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.
- 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:
- have gross receipts of less than $5 million and
- could not have had gross receipts prior to 2012.
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:
One only needs to skim the daily news to realize that hackers are getting better and cybersecurity is more important than ever. The most recent cyberattack was a strain of ransomware that spread itself across all workstations in a network, causing a global epidemic. Luckily, a programmer developed an internal “kill switch,” which disabled the malware from spreading any further. Regardless of whether your system was impacted by this outbreak or not, there are many lessons to be learned. Principally, the need to reinforce fundamental security practices to prepare for the future.
Taking these recent outbreaks into consideration, it is evident that organizations need to make cybersecurity risk management a top priority. To help leaders in the accounting profession reach this goal, the American Institute of CPAs (AICPA) has unveiled a cybersecurity risk management reporting framework that will help companies and auditors communicate cyber risk readiness to stakeholders. The framework is long overdue; until now a common language for companies to communicate about their cybersecurity risk management was non-existent. The AICPA’s new framework includes three main resources:
- Description criteria used by management to explain the organization’s cybersecurity risk management program.
- Control criteria used by CPAs providing advisory or attestation services to evaluate and report on the effectiveness of the controls within a client’s program.
- Attest Guide, Reporting on an Entity’s Cybersecurity Risk Management Program and Controls, will be used to assist CPAs engaged to examine and report on an entity’s cybersecurity risk management program.
Cyber threats are constantly evolving, and unfortunately, your cash and customer information are desirable targets. Providing assurance to your team and stakeholders requires intentionality and a plan. Having strong cybersecurity measures in place will help safeguard sensitive information and the AICPA’s new reporting framework will help you better communicate your preparedness to key stakeholders. If you need any guidance in this area, please reach out to one of our tax advisors.
Do you know what will happen to your business when you retire? By necessity, many busy small business owners spend all of their time thinking about the here and now, with little opportunity to focus on the future. But your company’s long-term survival -— and your own retirement security -— may depend on establishing a realistic and workable exit strategy.
Set a retirement date
Here is your first question: When do you plan to quit working? You may have a general idea of the age range when you would like to retire, but now is the time to set a precise date. That gives you a timeline to work with, which will make all your other planning easier.
Consider your options
The next essential question: Who do you expect will take over your business? Many companies make one of two choices: either someone buys the company from you or a family member or employee takes over as chief executive when you retire. It is important to consider which one is the most realistic option so that you can ensure a smooth transition down the road. Depending on your plans, there are different steps you should take now to ensure a smooth transition.
If you plan to sell
If you are going to sell your company to another business or individual, you will need an accurate idea of what it is worth. You should get a business appraisal when you are ready to sell; but it may be a good idea to get one now, even if there are many years until your planned retirement. An appraisal can help to spot your company’s strengths and weaknesses so you can analyze how those attributes impact its overall worth.
The information in the appraisal can be used to make changes that improve operations, sales and revenues and make you a more competitive player in the marketplace. Those steps will help increase your company’s value and its appeal to potential buyers at the time you decide to sell.
If you plan to promote from within
It is always a good idea to have a current idea of your company’s worth, but there are also other necessary factors to consider if you are hoping that someone within your company will one day take over the reins of leadership. The first question, of course, is who will that person be? Is there a very talented younger employee who you believe could one day take over? If so, begin grooming him or her now. This includes introducing the employee to key clients, increasing his or her level of responsibility and including the person in decision making whenever possible.
Even if you expect to sell your business, it is a good idea to have a promising future leader ready to take over the reins. In most cases, a potential buyer will be happy to see that there is someone in place to carry on.
There are many possible exit strategies available to small business owners. No matter which you choose, it will be a good idea to have an accurate sense of the company’s worth and to have a strong management team in place. Our firm’s professionals can help you develop a strategy to suit your business. Call us 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 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,
- For compensation paid to an S corporation employee, the FICA tax rate is 7.65 percent on the first $127,200. That rate is inclusive of both the Social Security tax (6.2 percent) and the Medicare tax (1.45 percent).
- Above $127,200, the rate drops to 1.45 percent because the Social Security tax component is eliminated. The Medicare tax component of 1.45 percent is indefinite.
- S corporation employees are required to pay an additional Medicare Tax of 0.9 percent at higher wage levels. The funds to pay FICA tax are withheld from employee paychecks.
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.
- 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.
- 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.
- 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)
|35% Tax Rate
|15.3% Employer Matching Tax
Tax Savings on an S Corporation
|Salary from S-Corporation:
|35% Tax Rate:
|15.3% Employer Matching Tax
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.
- Presence of employees, even without sales.
- Execution of contracts
- Others acting in an “agent” capacity
- Employees who work remotely
- Product delivery via a company-owned truck
- Data stored on a server
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.
|HSA contribution limit
Family: No Change
|HSA catch up contribution (age 55+)
|HDHP minimum deductible
|HDHP maximum out of pocket
Employers should remind employees who are contributing to or using their HSA:
- They have until April 15, 2018 to make contributions for the 2017 tax year.
- Unqualified medical expenses are subject to a 20% tax penalty
- Withdrawing from your HSA for nonqualified purposes are subject to income tax
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 email@example.com 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:
- 53.5 cents per mile for business miles driven, down from 54 cents for 2016
- 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
- 14 cents per mile driven in service of charitable organizations
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.
For Immediate Release:
For further information, contact:
Sarah Johnson Dobek (609) 890-0800
Christina Tharp Named Chairman of CPAsNET International Executive Committee
Boulder, CO – The Board of Directors has named Christina Tharp, CFO of HT2 ; Chairman of the International Executive Committee.
Tina is the Managing Partner of Hamilton Tharp, LLP, the Solana Beach, California-based public accounting and business consulting firm. As Chairman of the International Executive Committee she will be responsible for the strategic planning of the organization’s international alliances with Auditrust International.
CPAsNET’s newest partnership with Auditrust was conceived because of the increasing need of business who rely on their CPA firms to provide global resources and specialists. CPAsNET firms meet their client’s growing international demands by working within a system of international associates who help serves mid- market enterprises looking to expand their footprint.
“Tina was unanimously nominated and elected for this prestigious position” by her peers. Sarah Johnson Dobek, President of CPAsNET noted that: “Tina is well-respected within the organization, profession and international community of trusted financial advisors. A true trailblazer, Tina understands the importance of continued innovation and providing clients with the local, national and international perspective needed to prosper in challenging markets and times. The International Executive Committee will benefit from her expertise” said Dobek.
Tina has nearly a quarter century of experience in working with international financial issues and is the youngest member of CPAsNET to be elected to this post.,. In addition to holding her B.S. degree in Finance from San Diego State University she also serves on the Executive Committee of the Professional’s Education Network, an organization dedicated to providing opportunities to minority student seeking careers in the accounting professions.
Founded in 1994, CPAsNET is an association of independently owned public accounting and consulting firms who share resources to provide their clients with local, national and international perspectives.
With locations throughout the U.S., CPAsNET member firms collectively represent one of the 50 largest accounting firms in the nation. Through its strategic international affiliations, CPAsNET offers international support and guidance to member firms on all seven continents. For more information about CPAsNET, please call 609-890-0800 or visit CPAsNET.com.
About Hamilton Tharp
Founded in 1980, Hamilton Tharp has been serving entrepreneurs, businesses, professional athletes and high-net worth individuals with specialized services to help them reach their financial and life goals. The partners are members of the AICPA, the California Society of Certified Public Accountants and the Solana Beach Chamber of Commerce. For more information about Hamilton Tharp, please call (858) 481-7702 or visit www.ht2cpa.com/.
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:
- raise the salary threshold at which white-collar workers are exempt from overtime pay from $23,660 to $47,476;
- strengthen overtime protection for salaried workers already entitled to overtime;
- automatically update the salary threshold every three years, based on wage growth over time;
- 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:
- Pay time-and-a-half for overtime work;
- Raise worker’s salaries above the new threshold;
- Limit workers’ hours to 40 per week;
- A combination of the above.
Below are four steps you can implement which will help integrate the changes successfully into your workflow.
- 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.
- 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:
- What will be the basis for pay: hourly or salaried?
- Does this meet the minimum wage requirements?
- Will overtime be permitted? Is it necessary?
- 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:
- What is considered time worked?
- How is overtime approved?
- Who approves overtime?
- What are the consequences for failing to follow the policy?
- 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.