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Three Expired Tax Provisions That May Impact Your 2018 Taxes

The Tax Cuts and Jobs Act brought to mainstream attention the use of temporary tax provisions by Congress. As temporary provisions near their expiration dates several options exist for Congress to choose from. Congress may decide to keep the provision temporary by extending the expiration date, make a temporary provision permanent, or simply allow the provision to expire. When a temporary provision has expired, Congress can also extend the provision retroactively; as was the case in 2018 when Congress retroactively extended the majority of 2016 expired provisions with the passing of the Bipartisan Budget Act of 2018.

As in years past, 2017 saw the expiration of many of these temporary provisions. Twenty eight provisions expired at the end of 2017. Of these, twelve were related to business entities, thirteen to energy credits, and three to individuals.

The three individual provisions that expired will impact a large number of taxpayers.

The first of three expired individual provisions was the tuition and fees deduction. We first saw this provision in the Economic Growth and Tax Relief Reconciliation Act of 2001. This provision allowed a qualified individual to take an above the line deduction on up to $4,000 of qualified education expenses. This temporary provision has been extended in the past several times and if you were a qualified individual in 2017 and still a student in 2018 this change will impact your tax return.
The second expired individual provision was the mortgage insurance premium deduction. This provision allowed individuals to deduct the entire premium for mortgage insurance on a qualified residence as an itemized deduction on Schedule A. We first saw this provision in 2006 with the Tax Relief and Health Care Act. Like the tuition and fees deduction, this provision has been extended several times in the past. If you had a qualified mortgage in 2017 and 2018 and paid mortgage insurance, this expiration will impact your tax return in 2018.

The final individual temporary tax provision that expired in 2017 was the exclusion in income of the cancellation of mortgage debt on your primary residence. Typically, when a debtor receives debt forgiveness the IRS requires this to be included as income. This temporary provision allowed for qualified mortgage debt forgiveness to be excluded. We first saw this deduction with the passing of The Mortgage Forgiveness Debt Relief Act of 2007. If you received mortgage forgiveness on a qualified residence in 2018, you will now likely be required to include this in your taxable income in 2018.

The three expired individual tax provisions described in this post have been used in tax planning and filing for at least a decade. Many of us have used them in the past, and may have been planning on using them in 2018. It is impossible to determine the impact this may have when combined with the increase of the standard deduction in 2018 without being familiar with your individual tax situation. If you are concerned with the impact these changes may have on your 2018 tax return, consult with your trusted tax professional. For more detailed reading on the subject of this post see Congressional Research Service Report R45347.

By Jarad Clark, CPA     jclark@bvcocpas.com

 

It is no secret that the majority of our friends and family are on social media. But small business is taking on an expanded roll into the usually social environment. “Friend me”, “Follow me” or “Find me on LinkedIn” are the new aged business card exchange. Gone are the days of stacks of business cards on young professional’s desk, now we share LinkedIn profiles for contact information. Here are a few statistics about the power of social media in 2018:

In 2018, there are 3.196 billion global social media users. A 42% penetration of the worlds population.

There are few other platforms that you can reach such a wide array of potential clients with relatively cheap advertising.

These stats show the power that social media has become in the marketing and business development world. Social media is the most likely place that your potential clients, employees, and business partners are going to hear about you. Now is the time to utilize the platforms at hand to gain an edge on your competition.

On December 20, the House approved H.R. 1, the Tax Cuts and Jobs Act, a sweeping tax reform measure. While much still needs to be determined for tax planning opportunities, we can look at the new income tax rates and how they compare to the pre-Act law.

 

2017 2018
Single
Up to 9,325.00 10.0% Up to 9,525.00 10.0%
Up to 37,950.00 15.0% Up to 38,700.00 12.0%
Up to 91,900.00 25.0% Up to 82,500.00 22.0%
Up to 191,650.00 28.0% Up to 157,500.00 24.0%
Up to 416,700.00 33.0% Up to 200,000.00 32.0%
Up to 418,400.00 35.0% Up to 500,000.00 35.0%
Over 418,400.00 39.6% Over 500,000.00 37.0%
MFJ
Up to 18,650.00 10.0% Up to 19,050.00 10.0%
Up to 75,900.00 15.0% Up to 77,400.00 12.0%
Up to 153,100.00 25.0% Up to 165,000.00 22.0%
Up to 233,350.00 28.0% Up to 315,000.00 24.0%
Up to 416,700.00 33.0% Up to 400,000.00 32.0%
Up to 470,700.00 35.0% Up to 600,000.00 35.0%
Over 470,700.00 39.6% Over 600,000.00 37.0%
As you can see, the majority of the tax rates are lower, where we start to see some discrepancies is when we get to Single filers making over $200,000. With the pre-tax law, an individual making in the range of $200,000 – $420,000, will be taxed at a 33% marginal rate. Under the “Tax Cuts and Jobs Act”, a single person making between $200,000-$420,000 will be taxed at a 35% marginal rate. It appears on its face that these individuals will be paying more in taxes. So let’s look at the real world numbers.

It isn’t until we get to $387,000 where we see the 2018 tax surpass that of the 2017 tax rates. From this point on there is a window of taxpayers (Single filers) who make between $387,000 and $417,000 who, with no other changes, will see their taxes go up for 2018. For the remaining filers, it appears that for the next 8 years you should see a tax rate decrease.

 

 

 

Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.

As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.

Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.

Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.

On May 11, 2017, the Tax Court issued a Memorandum Decision (TC Memo 2017-79) that addressed, among other things, the Taxpayer arguing that the software “lured” him into claiming too many deductions on his tax return.

There were a number of issues on this return that caught the eye of the IRS: alimony paid deduction, interest deduction, and deduction for other expenses. When examined by the IRS, the Taxpayer did not have much in the way of paperwork to support his positon for the deductions reported.

In addition to disallowing the majority of the deductions taken, the Taxpayer was assessed an accuracy related penalty for substantial understatement of income tax. For this penalty, the burden shifts to the Taxpayer to show that his mistakes were reasonable and in good faith. “He admitted during trial that he deducted items he shouldn’t have, and that he overstated certain losses. He tried to blame TurboTax for his mistakes, but tax preparation software is only as good as the information one inputs into it,” the Court concluded.

Tax preparation software must be used correctly to be useful for purposes of showing reasonable cause and good faith as a defense to accuracy related penalties. The majority of court cases have rejected this defense.

It is the taxpayer’s responsibility to review the output as well as the input when using tax software. Remember the old adage: Garbage In Garbage Out.

When preparing your return, ensure you are reviewing the return before filing it. I just received a phone call this week from someone that was asking if his tax software was properly calculating the tax on rental property he had sold. A first for him. I commend him for wanting to understand what he was filing.

Remember: You can’t blame the software!

 

Reno, Nevada CPAs in the office of Barnard Vogler & Co. can assist individuals in many ways. We offer the traditional CPA services of 1040 preparation and tax planning. More specifically, our Reno CPAs have tax experience with California residency issues, cancellation of debts of recourse and nonrecourse, Chapter 11 bankruptcy tax matters and various trusts issues beyond just the preparation of the tax return.

Our CPAs in Reno, Nevada are also versed in a wide array of business matters. Some areas of expertise are the customary services that Certified Public Accountants typically provide such as financial statement preparations, compilations, reviews and audits. Additionally, we have assisted businesses with a congressional tax audit returning to the taxpayer a multimillion dollar tax refund, entity selections to provide the most beneficial business types, or controller/CFO services of remote bookkeeping, budget assistance and development of accounting policies and procedures. At our downtown Reno, Nevada location CPAs have also helped unravel and report on multimillion dollar frauds, been Chapter 7 bankruptcy examiners, and performed business valuation and expert witness testimony.

Give our office a call if you need a Reno CPA for yourself or your business.

 

The Harvard Business Review recently published an article outlining an interesting strategy which should make negotiations more civil, speedy and fair.

The authors have proposed an approach they call the “final-offer arbitration challenge” for reaching fair agreements efficiently.

It works like this. If the other side’s position is unreasonable, one’s initial reaction is often to be just as unreasonable, believing that the issue will be resolved somewhere in the middle, and thus be reasonable. This may ultimately be the result but often only after investing a lot of time and money to get there. It stands to reason that if the parties come to a negotiation with realistic starting positions, the negotiations that follow should be relatively civil, speedy and fair.

But how can a negotiator who wants to be fair at the outset be sure that his or her counterpart will do the same? This is where the “final-offer arbitration challenge” can help to reach fair agreements efficiently. It works like this: To encourage reasonableness, one side should make their offer demonstrably fair from the outset. Then, if the other side is unreasonable, they should be challenged to take the offers to an arbitrator who must not compromise, but must choose one or the other offer. This approach should result in offers that are more aligned from the beginning. Thus it is to everyone’s benefit if the parties come to the negotiations with reasonable offers in hand.

This is not unlike the way thoughtful parents have resolved disputes between two siblings. Have one cut the last piece of cake in half, and have the other choose first.

 

In a recent case, an appeals court upheld the Tax Court’s decision that a bookie’s plea agreement on criminal charges does not bar a civil action for unpaid taxes.

Gary Kaplan operated an illegal sports booking business called BetOnSports. The majority of Kaplan’s booking business was located in the Caribbean islands and Costa Rica for most of the 1990s.

Right before the company went public in July 2004, Kaplan engaged in several transactions and stock transfers that allowed him to set up two trust funds worth $98 million dollars. These trusts were referred to as the “Bird Trusts,” and the money was located somewhere off the coast of France.

Kaplan was the sole grantor of the Bird Trusts. As the grantor of the trusts, Kaplan was responsible for paying income taxes on the earnings of the trusts. Kaplan neglected to pay federal income tax or capital gains tax for the trusts for either 2004 or 2005.

In 2006, Kaplan was indicted by a federal grand jury for operating an illegal bookmaking operation within the United States. Kaplan ended up making a plea deal with the government. In exchange for accepting reduced charges, Kaplan agreed to allow the federal government to take civil action against him regarding the two years at issue.

During a change-of-plea hearing in 2009, Kaplan was questioned about the provision in his original plea agreement that dealt with the right of the government to pursue a civil tax matter against him for the 2004 and 2005 tax years. Kaplan assured the judge that he understood the difference between a civil court matter and a criminal court matter. He insisted that he was aware of the ramifications of the plea deal.

After the change of plea hearing, the court accepted the plea offer and sentenced him to 51 months in jail and ordered him to forfeit $43.65 million to the United States.

Sometime in 2012, the IRS commissioner issued a notice of deficiency for failure to file and pay taxes for 2004 and 2005. Kaplan was also liable for interest and various penalties. The taxes, penalties and interest totaled almost $25.5 million for 2004 and a little over $11 million for 2005.

Kaplan challenged the IRS at the district court level and lost. He brought his appeal to the U.S. Court of Appeals for the 8th Circuit.

Kaplan raised three issues in his appeal:

1. The statute of limitations had run on the commissioner’s ability to assess the unpaid taxes.

2. His 2009 plea agreement barred the claim.

3. Judicial estoppel barred the commissioner’s determination.

The appeals court rejected all three of these issues.

The statute of limitations does not start to run until an income tax return is actually filed by the taxpayer. Because the taxpayer did not file a tax return for 2004 and 2005, the statute of limitations has not run on those tax years. So Gary Kaplan lost on this issue.

The 2009 plea agreement was unambiguous as to the government’s ability to bring a civil action against Gary Kaplan. In addition, during the 2009 change-of-plea hearing, the court referenced answers given by Gary Kaplan that clearly demonstrated that he understood the government had the ability to bring a civil tax proceeding against him.

On the issue of judicial estoppel, Kaplan felt that, because the government did not object to his Presentence Report, it was prevented from bringing a civil tax proceeding against him. In his report, Gary Kaplan did not list any tax liabilities for 2004 and 2005. There were a number of reasons that Kaplan lost this issue, including that the numbers contained in the report were compiled and put together by Kaplan himself, not the IRS. (Gary Kaplan v. Commissioner, U.S. Court of Appeals, Eighth Circuit, 14-2342, July 29, 2015) ■

©2015 CPAmerica International

When starting a new business, a wise first step is to seek the advice of your CPA.

Some things you might want to consider before starting the business:

  1. Business Structure – Determining the business structure should be the first decision that you make. The basic choices are sole proprietorship, corporation, limited liability company or partnership. There are two different types of corporations: C corporation and S corporation. A limited liability company defaults to being taxed as a partnership – or a sole proprietorship in the case of a single member LLC – but may elect to be taxed as either a C or an S Corporation. The type of entity you select determines what forms you will need to file with the IRS and when you will need to file them.
  2. Business Taxes – The four basic types of business taxes are payroll, income, self-employment and excise. The business structure you choose affects which taxes you will be subject to. The income tax could be either corporate income tax or individual income tax – again depending on the business structure.
  3. Employer Identification Number –You are required to have an employer identification  number if you have payroll or if you choose the corporate or partnership form of business structure. Apply for your EIN through the IRS.
  4. Accounting Method – An accounting method is a set of rules that you use to determine when to report income and expenses. The three methods available are cash, accrual and hybrid. Most taxpayers will choose the cash-basis method of accounting unless they are required to select another method. You are required to use the accrual method when your average gross receipts exceed $5 million computed over a three-year period of time.
  5. Employee Health Care – The Small Business Health Care Tax Credit is available to businesses that employ fewer than 25 employees who work full-time, or a combination of full-time and part-time, and purchase insurance through the Exchange. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least 50 full-time equivalent employees.

Learn the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center. ■

©2015 CPAmerica International

 

Most people are probably familiar with the general tax rule about hobbies: You can deduct expenses only to the extent that you have income from the hobby.

This rule applies to individuals, S corporations, partnerships, estates and trusts.

There is a certain pecking order in deducting these expenses:

  1. Deductions a taxpayer can claim whether or not they are incurred with a hobby. Some examples are taxes and interest. These expenses are allowed even if they exceed hobby income.
  2. Deductions not resulting in an adjustment to the property’s basis. These are the hobby’s operating-type expenses. An example is supplies. These expenses are allowed to the extent that the gross income from the hobby exceeds the deductions under No. 1.
  3. Deductions resulting in an adjustment to the basis of property. Depreciation and amortization deductions are allowed but only to the extent that gross income from the hobby exceeds deductions under both No. 1 and No. 2.

The income from the hobby activity is picked up on line 21 on page 1 of the Form 1040 return. This income is not subject to self-employment tax but is subject to federal income tax.

No. 1 deductions are Schedule A-type itemized deductions not subject to the 2-percent-of-adjusted-gross-income limitation. To take advantage of these deductions, you must itemize your deductions.

Nos. 2 and 3 deductions are Schedule A-type itemized deductions, but they are subject to the 2-percent-of-AGI limitation. To take advantage of these deductions, you must itemize your deductions. But even if you itemize your deductions, a portion of the expense deduction is lost because of the 2 percent rule.

Hobbies are considered to be activities engaged in without a profit motive. Whether an activity is engaged in for profit is determined by a facts-and-circumstances test.

Here are a couple of general rules:

© 2015 CPAmerica International





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