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A New Deduction for Qualified Business Income

The Tax Cut and Jobs Act – How does it affect non-corporate taxpayers with business income?

The Tax Cut and Jobs Act decreased the tax rate for corporations from graduated rates of up to 35% to a flat rate of 21% beginning after December 31, 2017. The Act also added a 20% deduction for non-corporate taxpayer with domestic qualified business income from sole proprietorship, partnership, limited liability company (LLC) and S corporations, effective for tax years after December 31, 2017 and before January 1, 2026.

The 20% deduction is allowed as a deduction reducing taxable income and not allowed in computing adjusted gross income. The deduction is limited to the greater of:

  1. 50% of the W-2 wages paid by the business, or
  2. The sum of 25% of the W-2 wages paid by the business plus 2.5%% of the cost basis of the tangible depreciable property of the business at the close of the tax year.

The 20% deduction is also limited to qualified non-personal service businesses income. Qualified non-personal service income is defined as the net amount of domestic qualified items of income, deduction and loss from trade or business other than health, law, consulting, athletics, financial services, brokerage services or any business where the main asset of the business is the reputation or skill of one or more of its employees or owners.

The above limitations do not apply for taxpayers with taxable income below the “threshold amount” ($315,000 for couples filing jointly, $157,000 for other individuals). The 20% deduction is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly, $50,000 for other individuals.

Basically, non-corporate taxpayers with taxable income below the $157,000 or $315,000 threshold may generally claim the full 20% deduction. Non-corporate taxpayers with taxable income above the threshold with non-personal service business income may claim the deduction, but may be limited by the wage and capital limit exception or may be completely phased out.


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
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%
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.




It’s only November but there’s still time to make the filing of your 2017 tax return less taxing in 2018.

Withholding and Estimated Taxes. Make sure enough taxes are withheld to avoid surprises at tax time. Generally taxes are withheld from wages and other income such as pensions, bonuses, commissions and gambling winnings. Taxpayers with interest, dividends, capital gains, rents and royalties will usually make additional tax payments by making estimated tax payments. Self-employed individuals who do not pay tax through withholding will also pay estimated taxes.

  1. Employees starting a new job must fill out a Form W-4, Employee’s Withholding Allowance Certificate. Use the IRS Withholding Calculator to figure out how much tax to withhold.
  2. Taxpayers expecting to owe $1,000, or more than taxes that are withheld, will need to make estimated tax payments to avoid penalties.
  3. Martial status changes, birth of a child or the purchase of a home may change the amount of taxes a taxpayer owes. Employees should submit a new Form W-4 to their employer when necessary.

Name changes. Taxpayers with name changes due to a marital status change should notify the Social Security Administration. SSA should also be notified if there’s a name change for a dependent. Notifying the SSA with name changes will ensure that the new name on the tax return matches the SSA records to avoid any delay in the processing.

Individual Taxpayer Identification Numbers. Taxpayers who use Individual Taxpayer Identification Numbers which have expired or are due to expire should apply to renew their ITIN to avoid processing delays next year. A Form W-7 must be completed as well as submission of original or certified copies of identity documents to renew an ITIN.

With the passing of another tax deadline, I thought it would be helpful to go over the consequences of not filing your tax return on time. If you have not filed your 2016 tax return, file it as soon as possible to minimize the penalties that you may owe.

There are three types of payments that could be assessed if you do not pay the tax owed on time. These are late filing penalties, late payment penalties, and interest.

If you owe taxes and don’t file your tax return or extension by the original due date, or if you filed an extension but fail to file your return by the extension due date you will be subject to late filing penalties.

The late filing penalty is 5% of the tax owed for every month your return is late, up to a maximum of 25%. If you fail to file your return for over 60 days after the due date or extended due date, the minimum penalty is the lesser of $205 (for 2016) or 100% of the unpaid tax due.

Late payment penalties could be assessed if you do not pay all of the taxes you owe. These apply if you do not pay all of the taxes owed by the original due date, regardless of whether or not you filed an extension. The late filing penalty is 0.5% of the tax owed for each month the tax remains unpaid, up to a maximum of 25%.

If both penalties apply to you the monthly penalty would be 5%, up to maximum penalty of 25%.

You will also be charged interest on any unpaid taxes starting the day after the return’s due date.

If you correctly expect to get a refund there is no penalty. You have three years to file from the due date or you will no longer be eligible for your refund.



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.


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.


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!


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.


On December 9th, 2016, the IRS announced that the 2017 tax filing season will begin on January 23rd, 2017, when it will start accepting electronic tax returns. Per its website, the IRS is expecting more than 153 million individual tax returns to be filed during 2017, some of which will be affected by recent changes in tax law. Specifically, the IRS is now required to hold refunds claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15th, 2017. This rule applies to the entire refund, not just the portion of the refund relating to these credits. Furthermore, due to delays in refund processing through financial institutions, weekends, and the Presidents’ Day holiday on Monday, February 20th, 2016, the IRS is warning taxpayers who claim either credit that they most likely will not be receiving their refunds before February 27th, 2017.

How can you check the status of your refund?

There are two easy ways:

– Where’s My Refund on the IRS website – This website will be updated with estimated deposit dates for early EITC and ACTC refund filers after February 15th, 2017. All you need is your social security number or ITIN, filing status, and your exact refund amount.

IRS2Go – This is the official mobile app of the IRS. It can be downloaded from the IRS website. EITC and ACTC refund filers can start checking the status of their refunds after February 15th, 2017.




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Reno, NV 89501

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