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.
The Tax Cuts and Jobs Act (TCJA) has done a stellar job of removing all or part of the “deduction” from the Meals and Entertainment Deduction.
Business related entertainment deductions turned out to be a big loser when the dust settled after the passage of the TCJA in late December 2017. Entertainment expenses were hit particularly hard as the TCJA completely eliminates the deduction for entertainment expenses (including food purchases), for activities such as taking clients or prospective clients to concerts, movies, the theater, sporting events or amusement parks. The Act also eliminates deductions for amounts paid for memberships in any club organized for business, pleasure, recreation or social purposes.
One entertainment expense that did survive the new law is expenses employers incur for recreational, social, or similar activities primarily for the benefit of employees, such as expenses incurred for an annual holiday party or summer outing or picnic.
Businesses are allowed a 50% deduction for amounts paid for meals in conjunction with the active conduct of the taxpayer’s trade or business. However, we must take note of two changes made by the new tax act relating to meals.
First, a definition for “business meal” has been removed, and meals provided to employees traveling on business are still deductible at 50%. However, beginning in 2018 through the end of 2025, the cost of meals provided for the convenience of the employer, such as meals provided to employees who need to be available throughout the mealtime, are only deductible at 50%. Prior to TCJA these types of meals were deductible at 100%. Also, the new tax law expands the definition of meals for the convenience of the employer subject to the 50% limitation to include meals provided in the employer’s on-site dining facility. Further, beginning in 2026, no deduction will be allowed for meals for the convenience of the employer and for the cost, including meals, of operating an on-site dining facility.
While the new law ratchets down on the meals and entertainment deduction that we have become used to over the years, the deduction does survive in some forms. While customers and clients will likely enjoy fewer trips to the ball field or concert venue, employees should continue to look forward to a nice summer picnic and festive holiday party with their coworkers.
One of the changes to itemized deductions because of the Tax Cuts and Jobs Act of 2017 was the suspension of the deduction on interest on up to $100,000 of home equity indebtedness. The Internal Revenue Service announced that in many cases taxpayers will be able to continue deducting interest paid on home equity loans.
Prior to the Tax Cuts and Jobs Act, taxpayers were able to deduct interest on up to $1 million in mortgage debt and also up to $100,000 of home equity debt. Under the new law, taxpayers are now limited to $750,000 of home acquisition debt with no separate carve out for home equity debt. However, tax filers with mortgage debt taken out prior to December 14, 2017, are still allowed to deduct interest on up to $1 million in mortgage debt (not inclusive of home equity debt).
So, how do you determine if interest on home equity debt is deductible for tax years beginning after 2017? Here are a couple of guidelines:
It is good to see that interest on home equity debt is still available for deduction. Check the IRS’ announcement for some examples to illustrate the new limits.
Between Hurricane Harvey, the fast-approaching Hurricane Irma and the various wildfires ravaging the west, unfortunately natural disasters have been all too common this summer.
The last thing on anyone’s mind living in those areas is taxes, but nonetheless, there are various tax aspects of a disaster that people should be aware of. Fortunately, this is one area that the IRS makes rapid decisions to help those in need. Below is a sampling of the latest relief for victims of Hurricane Harvey from the IRS. Those impacted by disasters should check the IRS’s page frequently as other disasters may get similar relief from the IRS in the near future.
Finally, for those who want to help and support those victims of any natural disaster, be cautious of who you make donations to. In order for donations to be tax deductible, they must be made to recognized charitable organizations under the IRS. For instance, Go Fund Me donations are typically not deductible as they go to a person and not a charitable organization. If you are donating online, make sure you are on the legitimate website for the charity. Unfortunately, it is all too common for charity scams to pop up during disasters with fake websites that are very similar to legitimate ones. You should ensure that the organization clearly has their Employee Identification Number (EIN) posted and you can use that and their name to check their exempt status on the IRS website. If you are donating a significant sum, that little bit of homework on your part is well worth it.
Selling your home sale could impact your income taxes. You may or may not have to pay income taxes on the gain from the sale of your home.
The gain from the sale of your home may be excluded, either all or in part, from your income tax if you meet the eligibility test. The eligibility test consists of ownership and the use of the home rules. You must have owned and used it as your main home for at least two out of the five years before the date of the sale. Property acquired through a like-kind exchange (1031 exchange) during the 5-year period is not eligible for the exclusion.
The 24 months used as your main home can fall anywhere within the 5-year period and does not need to be consecutive 24 months. Short absences count as time lived at home. Only 12 months of residence will meet the requirement if you are physically or mentally unable to care for yourself. Time spent living in a licensed care facility also counts toward the residency requirement.
Partial exclusion is available if you moved because of work, health or an unforeseeable event. Work-related exception qualifies if your new job is at least 50 miles farther from home than your old work location. Health-related exception qualifies if you moved to obtain, provide, or facilitate diagnosis, cure, mitigation or treatment of disease, illness, or injury for yourself or a family member. Health-related exceptions also include a doctor’s recommendation of a change in residence due to health problems. Giving birth to two or more children from the same pregnancy is one of the situations qualifying as an unforeseeable related exception.
The maximum gain exclusion is $250,000 or ($500,000 if married filing jointly). The eligibility test must be met to qualify for the full or partial exclusion. Check for additional rules and any exceptions that may apply to you. One last note: You must report the sale to claim the exclusion and if you receive a form 1099-S, Proceeds from Real Estate Transactions, even if you have no gain from the sale.
Fundraising has gone digital. Millions of individuals are now utilizing social media sites such as kickstarter.com and gofundme.com to attract contributors or donations to support their cause. Few, though, are thinking about the income tax ramifications that are created by the crowdfunding environment.
Congress and the IRS have not yet addressed the crowdfunding income specifically, which leaves little guidance for CPAs and tax advisors preparing returns in the coming season. Applying common tax principles, along with some common sense, will help taxpayers and preparers alike to decide the appropriate reporting of funds received.
There are three types of crowd-funding:
Reward and donation-based funding use third party payment processing, such as PayPal. Any campaign creator who collects over $20,000.00 will receive a 1099-K reporting the funds received during the campaign. Pledges for donation-based funding are likely going to qualify as a non-taxable gift, unless an individual gifts more than the annual gift exclusion ($14,000 in 2015 and 2016). Funds received for reward-based funding for creative new ventures are likely to be treated as income to the recipients.
Kickstarter states that it cannot give tax advice, but does indicate that in the US, funds raised through campaigns on kickstarter.com will generally be considered income (see “Kickstarter and Taxes: A Guide for Your Accountant”). They suggest that expenses can offset the income, or that some may be considered gifts, but does not distinguish between the two.
Amounts received for reward-based funding are likely to be treated as income under Section 61 and should be reported by the creator of the campaign in the year of receipt. If it is an active trade or business, business expenses would likely be deductible against the income under Section 62. If this is a hobby, hobby loss rules would apply and limit expenses to the extent of income. Start-up business will also have additional requirements for expensing or capitalizing the organizational costs related to the start-up of the business.
As you can see, there are many different scenarios that will need to be considered when reporting crowd-funding during this period of limbo until the IRS addresses the topic. That makes it even more important as tax preparers and taxpayers alike to ask the right questions, document your position, and substantiate your reporting to the best of your ability.
In December of 2015, I wrote about many tax provisions benefiting taxpayers for 2015 and beyond that had expired. Most CPAs were anticipating these to be retroactively approved by Congress. After much anticipation, Congress ended up extending and in many cases making the provisions permanent. Below is a summary of the main legislation:
Two years ago the Treasury Department implemented new Tangible Property Regulations through the passing of TD 9636. The new regulations contained a “Safe Harbor” election to expense any piece of tangible property purchased under $500. Many felt this was too low and increased the administrative burden on small businesses along with the IRS.
After receiving hundreds of comments from tax payers and professionals suggesting an increase to the “Safe Harbor” threshold amount, and the Treasury Department reviewing the goals of the new regulations, common sense prevailed and the Department agreed to increase the election amount to $2,500 per invoiced piece of tangible property. This election does not require you to expense all items under this threshold. You may choose any amount up to $2,500 that fits your business. Just make sure that your capitalization policy states your dollar threshold.
The effective date of the new safe harbor de minimis is for tax years beginning on or after January 1, 2016. Although, the IRS has allowed for those individuals and businesses that had a capitalization policy in place at the beginning of 2015 to use the $2,500 limit. IRS Notice 2015-82 states:
For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements of 1.263(a) – 1(f)(1)(ii). Moreover, if the taxpayer’s use of the de minimis safe harbor provided in 1.263(a) – 1(f)(1)(ii) is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount (or amounts) that does not exceed $2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise satisfies the requirements of 1.263(a) – 1(f)(1)(ii), then the IRS will not further pursue the issue. “
Taxpayers should review their capitalization policy for 2016 in order to implement the new safe harbor limit. If you have been using the new limit for the 2015 tax year or before, you should review IRS Notice 2015-82 to be sure that your business qualifies for audit protection.
The housing market is beginning to turn around in Nevada over the last couple years. Data provided by Trulia.com indicates that twice as many home sales occurred in 2015 when compared to the bottom of the market in 2009. Many home owners who either lost, or liquidated, their homes over the past several years are finally in a stable financial position to get back into the market.
Many of the homes that are being purchased during this period of growth are those that have either been left vacant for years, require some refurbishing, or need massive upgrades and overhauls to qualify for lending, or to even be livable! Even new homes require additional capital influx in order to complete the front or backyard landscaping.
When we purchase a house, many of us use this required influx of capital to negotiate down the current selling price. But how many of us keep track how much actual additional capital we put back into the house after the sale has been completed? Improvements and substantial repairs such as landscaping, a new roof, fencing, etc., should be accounted for and included in your basis (capital costs) of your home. Keeping track of and having the appropriate record keeping of, these improvements can save you thousands of dollars in capital gains, and possibly net investment income tax, when you decide to sell the home in the future. Even if you decide that renting the home is a better course of action, having an accurate recordkeeping of the basis will allow you to depreciate the maximum allowable amount in order to reduce the rental income created from the business use of the property.
Keeping track of your basis in real property is an important part of homeownership that many of us forget about until it is time to sell. Twenty years from now, will you remember how much you paid the landscaper to put in a sprinkler system? Probably not. So help your future self out of a headache, and probably save a couple bucks, and keep track of those expenditures that you put into your new home. And after you are done, sit down on that new patio with a cold drink and relax, you’ve earned it.
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:
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:
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