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Late December Tax Changes are Effective Now – and Retroactively!

 

 

By Bill Saylor, CPA           bsaylor@bvcocpas.com

Two major pieces of legislation were finalized and signed on December 20, 2019 and are effective now. Specifically, the Taxpayer Uncertainty and Disaster Tax Relief Act of 2019, part of omnibus spending legislation, extends more than 30 tax provisions that have previously languished since the passage of the Tax Cuts and Jobs Act in December 2017 and the SECURE Act which changes the rules for retirement accounts. The SECURE Act changes will be covered in a separate article.

Extender legislation is generally effective retroactively for tax years beginning after December 31, 2017 and through the 2020 year. Exceptions are noted below in the specific provision.

Individual provisions

  1. Exclusion from gross income of discharge of qualified principal residence indebtedness.
  2. Mortgage insurance premiums are again deductible with the deduction now phasing out starting for income above $100,000 ($50,000 for married filing separately.)
  3. Medical deductions threshold is reduced to 7.5% for years beginning after December 31, 2018.
  4. Qualified tuition and related expenses are again deductible above-the-line for individuals, up to $4,000 for married filing jointly individuals earning up to $130,000 or $2,000 for married filing jointly individuals earning up to $160,000.
  5. Nonbusiness energy property credit for 10% of certain qualified energy improvement and fixed amounts for certain energy-efficient property.

Major Business provisions

  1. Employer tax credit for paid family and medical leave provides a credit from 12.5% to 25% of eligible wages paid to qualifying employees with respect to family and medical leave.
  2. Work Opportunity Tax Credit benefits employers who hire one or more of ten targeted groups.
  3. Empowerment zone tax incentives
  4. Energy efficient homes credit allows contractors to claim $1,000 or $2,000 on qualifying new energy efficient home construction.
  5. Energy efficient commercial buildings deduction allows a deduction of $1.80 per square foot on qualified property or $0.60 per square foot if only certain subsystems qualify.
  6. Plus, the law includes a further 25 industry-specific provisions covering everything from racehorses to utilities.

If you are eligible for any of the above for 2019 please let your tax preparer know when you drop off your taxes. And, if you were eligible in 2018, please discuss the details with your tax preparer at that time; it may be worth amending your 2018 return to take advantage of these changes.

 

 

By Teela McCullar   tmccullar@bvcocpas.com

 

Now that business owners have had some time to digest the impacts of the 2017 Tax Act, some may be wondering if changing to a C corporation would give them a greater tax benefit with the reduced flat tax of 21%. Owners of an S corporation or partnership could potentially be taxed as high as an effective tax rate of 29.6% on their pass-through business income.

However, there are still some downsides to being a C corporation that should be considered.

One of the biggest downsides to a C Corp is double taxation. Though the impact is not as severe as it once was with the reduced tax rate, there is no getting around having the earnings of the corporation taxed twice: once within the corporation and again should the owner decided to take a dividend. Right now, for someone at the highest individual tax bracket, the maximum combined effective federal income tax they would pay on dividends received by their C Corporation would be 39.8%. Under the prior tax law this could have been as high as 50.47%.

Additionally, C Corps are not the best entity choice for a business that expects to incur losses. A C Corp cannot deduct losses and while they do carry forward, other entity types such as an S Corp or a partnership do allow owners to deduct losses in certain circumstances.

C Corps also are not a good entity type for any business that is holding assets that are likely to appreciate like real estate or intangibles (such as a patent or software). Again, this is due to double taxation. Should the corporation sell these appreciated assets, they will pay tax on the gain at the C Corp level and the owner will pay tax if they desire to pull out some of the proceeds.

Finally, though the C Corp tax rate reduction to 21% was considered “permanent”, there is already talk that the corporate tax rate will be on the chopping block should the office of the presidency switch parties in 2020. While a complete rollback of the 2018 tax law is unlikely, some of the Democratic presidential candidates have suggested increasing the corporate rate gradually to at least 28%. This rate would be even higher than it was prior to the tax law change where the minimum corporate tax rate started at 15% and went up from there.

All of these factors should be considered along with having your CPA running the numbers to see if a C Corporation makes sense for you.

 

By Tony Carolla    tcarolla@bvcocpas.com

 

Taxpayers face uncertainties regarding the effect that the Tax Cuts and Jobs Act will have on their 2018 return. The IRS has acknowledged this with the release of Notice 2019-11, Relief from Addition to Tax for Underpayment of Estimated Income Tax by an Individual.

To avoid an underpayment penalty prior to the 2018 tax year, an individual’s combined withholdings and estimated payments would need to be greater than or equal to the lesser of 90% of the current years tax or 100% of the preceding years tax. (110% if the individual’s adjusted gross income in the previous year exceeded $150,000). With the release of Notice 2019-11, the IRS has allowed a taxpayer to waive the underpayment penalty on those who have paid at least 85% of their tax liability by January 15, 2019.

This waiver is not automatically applied to your 2018 return. To request the waiver taxpayers must file Form 2210 – Underpayment of Estimated Tax by Individuals, Estates, and Trusts. Individuals will need to determine their eligibility for the waiver and if the waiver applies, check the waiver box and include the statement “85% Waiver” with the return.

While this waiver is good news for individuals, the AICPA has recommended that the IRS and Department of the Treasury do more to assist tax payers. On January 28, 2019 the AICPA made recommendations to lower the threshold of underpayment penalty relief to 80%, make the relief process automatic, establish a process to grant taxpayers penalty relief for reasonable cause, and extend the penalty relief to businesses and other entities.

The AICPA letter addressed concerns with taxpayers’ inability to accurately determine their tax liability due to the substantial uncertainties and lack of guidance. The AICPA explained that it could be unreasonably burdensome for taxpayers to rely on prior year tax liability in situations where there was a significant increase in prior year income. The AICPA also addressed the need to apply for penalty relief, and felt it more appropriate to have the relief granted automatically. The AICPA also recommended that a process for penalty relief be established for those who do not meet the requirements but have reasonable cause, and to extend the relief to all tax paying entities.

 

by Keelie Bishop     kbishop@bvcocpas.com

 

As the Federal Government has now officially been shut down for the longest length of time in U.S. history and the Tax Cuts and Job Acts is one of the largest tax reforms in 30-years, many challenges are expected for the upcoming tax filing season. Accountants are still waiting on the final word from the IRS for certain regulations of the Tax Cuts and Jobs Act that would affect clients’ 2018 returns, including the 20 percent qualified business income deduction. Yet, due to the government shutdown, answers aren’t likely to come in time for at least the beginning of the 2019 filing season.

About 70,000 IRS employees – roughly 88% of the workforce — have been furloughed. In preparation for the upcoming filing season, the Trump Administration has announced that it is planning to recall a significant portion of the IRS workforce without pay. With this recall, the IRS is expecting to only be able to answer 60 to 70 percent of phone calls. This has also created a lack of training for the IRS employees regarding the Tax Cuts and Jobs Act as employees have been furloughed during crucial times for the IRS. It is unsure whether the IRS will be able to actually provide answers to those searching for tax assistance.

To top it off, the National Treasury Employees Union has filed a lawsuit alleging the administration is violating the Fair Labor Standards Act (FLSA) by requiring federal employees to work without pay during the partial government shutdown. This includes the IRS employees that are being recalled to assist with the upcoming tax filing season.

Regardless, the IRS will be open the individual filing season on January 28, 2019 and, as of the date of this post, have announced that all deadlines will remain the same, and refunds will be processed.

 

A few weeks ago, the Internal Revenue Service issued a notice stating they would be preparing regulations and guidance to clarify the treatment of income re-characterized for purposes of working around the new $10,000 cap on the state and local tax (SALT) deduction. So far, several states including New York, New Jersey, and Connecticut have passed legislation designed to enable high-income taxpayers to bypass the cap, with legislation pending elsewhere. In the notice, the IRS emphasized the “substance over form” doctrine, meaning they care about the actual substance of a payment, and not the name or form it may be given.

While the direct guidance remains to be seen, this is clearly bad news for the charitable contributions in lieu of taxes approach that California was looking into to, and will greatly reduce the itemized deductions of CA residents for 2018. The IRS has made clear in this notice that it is concerned with whether a payment is made in satisfaction of a tax liability, and not whether it is re-characterized in some other way. The impact on other workarounds, such as New York’s optional payroll tax swap or Connecticut’s entity-level tax swap, is not immediately clear, though both approaches could be at risk as well.
We should continue to practice skepticism of any SALT deduction cap avoidance schemes until we receive the IRS guidance. Most agree that existing statutes, case law, and regulations are fairly clear on this matter and states have just muddied the waters. Formal IRS guidance will help protect taxpayers, so hopefully they do not rely on state-endorsed strategies, which could result in penalties and increased liability.

In September of 2016, the IRS announced that it would start using private debt collectors to recover certain overdue federal tax debts in the spring of 2017. To implement this new program, the IRS contracted with four private collection agencies: CBE Group, Conserve, Performant, and Pioneer. In carrying out their collection efforts, these four companies are required to respect taxpayer rights and obey the consumer protection regulations established in the Fair Debt Collection Practices Act.

How does this new program work?

Considering the continual mail and phone scams that keep emerging, the IRS Commissioner warned taxpayers to be alert for new scams related to this program. When a taxpayer’s account is transferred to a private debt collection agency, the IRS will give the taxpayer written notice of the transfer. In addition, the private collection agency will then send a second, separate letter to the taxpayer verifying this transfer. The private collection agency will not ask for payments to be made on a prepaid debit card or for checks to be made out to the collection agency. All checks should be made payable to the U.S. Treasury. The IRS emphasized that even with private debt collection, taxpayers should not be receiving phone calls from the IRS insisting on immediate payment. The IRS always mails multiple collection notices before making phone calls.

There are several types of accounts that the IRS will not transfer to private collection agencies. Some of these accounts include taxpayers who are deceased, in designated combat zones, victims of identity theft, or in presidentially declared disaster areas and requesting relief from collection. If a taxpayer does not want to work with a private collection agency appointed to his or her account, he or she must notify the private collection agency in writing. Also, the IRS urges taxpayers who are unsure if they have unpaid taxes due from a previous year to check their account balances on www.irs.gov/balancedue.

For more information on private debt collection visit the Private Debt Collection page on the IRS website.

 

Right before this year’s tax deadline, the IRS put out a release reminding people that some of us may not have to ask for an extension. While this advice is coming a bit late from me for the current tax year, it is definitely something to keep in mind. As the IRS notes “Taxpayers in Presidentially-declared disaster areas, members of the military serving in a combat zone and Americans living and working abroad get extra time to both file their returns and pay any taxes due.”

If you are a taxpayer in a disaster area you will often have extended time to file and pay. These extensions of time also apply to other tax-related items like contributing to an IRA. The IRS states that generally any area given a disaster declaration by FEMA is provided this relief, which is extended to relief workers, businesses and anyone who has their tax records located in the disaster area.

If you are a member of the military or eligible support personnel serving in a combat zone you will have at least 180 days after you leave the combat zone to file your tax returns and pay your taxes. As with the disaster relief, this extension also pertains to other tax-related items like contributing to your IRA. The IRS suggest checking Publication 3, Armed Forces’ Tax Guide, for further details.

For U.S. citizens and resident aliens who are living and working outside the United States and Puerto Rico, you have until June 15, 2017 (for the current tax year) to file your return and pay any taxes due. This also applies for military members on duty outside the U.S. who do not qualify for the combat zone extension. The IRS does note two items with this category of extended filing: 1) Attach a statement with your return explaining which situation applies for you; and 2) interest still applies to payments received after the standard filing deadline (generally April 15). See Publication 54 for more information.

For everyone else, just remember to ask for more time by filing Form 4868.

 

We all know how it goes – as soon as the New Year begins the tax forms begin filling up your mailbox. Just another year to throw the 1099s and W-2s in a pile and ship them off to your accountant just in time to throw a return together and be done with it. Many people see tax time as a necessary evil which they grin and bear their way through the steps in order to get it done and over with. If you are one of these people you may benefit from doing things a little different this year and seeing where it gets you.

There are many benefits to paying attention during your tax filing process if you have never cared or take the time to understand before. It doesn’t matter whether you are a wealthy business owner or just a normal guy or gal working for your paycheck – a good CPA can help you get the most benefit not only tax wise but possibly financially as well. Taking time with your tax preparer to understand the why’s and how’s can open your eyes to things you may be able to do differently to better your tax or financial position in the future. If your accountant does not have your best interest at heart then find a new one because a good accountant takes a personal interest in their clients and wants to see them do as well as absolutely possible. A good accountant will not only be able to prepare your tax return to its fullest potential but they are able to advise you on future moves and desires.
This year, make a resolution to spend some time with your accountant, learn something new, and solidify the relationship. Having a trusted advisor as opposed to a tax preparer on your team will take you a long way and be worth every penny.

 

It’s hard to believe we are two-thirds of the way through 2016 already. Seems like just yesterday you were gathering all of your tax documents and filing your 2015 return (or maybe you still are if it was extended). I know for a lot of individuals and business owners taxes are the last thing on their mind right now, but if you are willing to spend a little time in September it might save you some heartburn come next tax season.

For most business owners and self-employed individuals, September 15th marks the due date for your third round of 2016 estimated tax payments. Most simply rely on the vouchers printed out with their 2015 tax return. There is nothing wrong with this, but these figures are based on your 2015 income. If you have experienced changes in 2016, whether good or bad, the amount you are planning on paying on September 15 may require some tweaking.

We are far enough in to the year to put together a good picture of where you will be at the end of the year. Doing some quick forecasting now could save you from a big cash hit on January’s estimated payment (if you tax plan at year end) or on April 15th. If you take a look at your books and notice some big changes from 2015 now is a good time to adjust your payment.

Keep in mind that as long as you make the payment amounts on your current vouchers you will have met the withholding requirements and will not be subject to estimated tax penalties, but the consequence of withholding too little or too much hits the pocketbook down the line, and we all know the lifeblood of small business is cash.

If you have any questions or would like a qualified professional to take a quick look at your numbers to make sure you aren’t going to be forking out extraordinary amounts of cash come spring, give your CPA a call. It may be well worth it.

 

According to the Network for Good, 30% of all online charitable contributions in 2015 were made during the month of December. This is not surprising as the gift-giving spirit around the holidays inspires many people to donate to causes near to their hearts at that time. Fortunately for us taxpayers, a donation to an IRS qualified charity can provide a tax deduction regardless of when it was made throughout the year. Summers, in particular, are a great time of year to think about donating. First, you can give cash without the stress of holiday spending. Second, you can donate non-cash items and declutter your home at the same time. Here are some tax tips on deducting charitable donations posted by the IRS on its website:

1. Make sure to donate a qualified charity. You cannot deduct donations to individuals or political organizations or candidates. Use the IRS Select Check tool to check the status of the charity to which you would like to give.

2. Be aware that your deduction may be limited. If you receive something in return for your donation, you can only deduct the amount in excess of the value of what you received in return. For example, if you donate $50 to a qualified charity and receive a ticket to a fundraising dinner valued at $30, you may only deduct $20. In addition to this rule, there are AGI limits on charitable donation deductions. Generally, donations may only be deducted up to 50% of AGI. See Publication 526, Charitable Contributions for more information.

3. If you donate non-cash items, there are several things to keep in mind. For donated property to be deductible, it must generally be in good condition. Also, the amount of the deduction for donated property is generally its fair market value. There are special rules for cars, boats, and other types of property. See Publication 526, Charitable Contributions, for more information on these rules. See also Publication 561, Determining the Value of Donated Property.

4. Be diligent with recordkeeping. There are very specific substantiation rules regarding charitable donations. The amount and type of your donation will determine what kind of record you must keep. In general, you must have a written record of any cash you give to claim a deduction. For donations of $250 (cash or property) or more, you must have a written statement from the charity stating the amount and/or a description of the property you gave and whether or not you received anything in return.

The IRS has a section on its website dedicated to information relating to charitable contribution deductions. More guidance can also be found in Publications 526 and 561.

 





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