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.

• If Single Taxpayer A makes $250,000 of taxable income, the taxpayer will pay $65,899.25 in tax in 2017, and $63,189.50 in 2018.
• If Single Taxpayer A makes $300,000 of taxable income, the taxpayer will pay $82,399.25 in tax in 2017, and $80,689.50 in 2018.
• If Single Taxpayer A makes $350,000 of taxable income, the taxpayer will pay $98,899.25 in tax in 2017, and $98,189.50 in 2018, still a small tax reduction.

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.

Having just lost my mother this year, there were many lessons I learned.

My mother did not have much in assets when she passed away but she did get a will prepared several years ago. I would strongly encourage that you make sure your parents have a will or trust in place and that you are informed as to their intentions. This can sometimes be a difficult conversation. My mother was 95 years old when she passed away and I was still struggling to get her to even bring up the subject of the eventuality of her death. Not until she was under the care of Hospice did she start informing me of what she wanted done with some of her personal effects.

My mother was a hoarder and had lived in her home for 46 years. One of the things she told me a few weeks before her death was that she felt bad for my husband who would have to deal with all of her things. As it turns out I am the one dealing with all of her things. Note to self – Do not do this to your kids. After this experience I am determined not to leave a mess for my children. My sister shared a Facebook post with me – ‘Death Cleaning’ is the newest way to declutter. Many are decluttering to save their loved ones stress down the road. Highly recommended.

In connection with my going through her things, I have found there is much that I wished we had talked about. Photos found that look precious and old that I don’t know anything about. I always wanted to make time to go through memories with her but never did. This is one of my deepest regrets. Find the time to spend with your parents to document these memories.

And finally, make sure you don’t make any tough decisions until you have had time to get through the grieving process. I was surprised at how hard her death hit me, even though as I said she was 95, and I knew it was eventually going to happen. Make sure you have a support team to help you through any immediate decisions you have to make. I was fortunate to have my daughter and husband with me that first week when I was making arrangements. It was difficult to make even what you would think are easy decisions.

When you lose a loved one, reach out to your Trusted Advisor when you are looking to make any financial decisions. This could be your attorney, financial advisor, or your CPA. I am now a firm believer that you should also have a family or friend support member of your team. Decisions are hard when you are grieving. Take the time to heal. And reach for support.

It may not be the first thing on everyone’s mind as we head in to the holiday season but for your local CPA, taxes are certainly on the mind. Year end tax planning is always a good idea for a proactive business owner or individual but this year it may be even more important than ever with tax reform coming down the pipeline.

You can’t open a newspaper lately without seeing talks about tax reform. The back and forth and uncertainties surrounding tax legislation is making for an entertaining situation for your local tax nerd. Both the House and Senate have their own plans that are changing by the second; odds are the analysis you read one day will completely change a week later and many details we are hearing about now may be totally different by the time legislation comes across the President’s desk (if that even happens). As your average everyday business owner and taxpayer, you care about the financial well being of you and your company, but chances are you don’t have the time or patience to keep up on the constant changes happening on Capitol Hill. While you may not think any legislation will affect you in the short term, you may be wrong and there may be moves you need to make by the end of 2017.

With uncertainty in the air and the year quickly coming to an end, right now is a great time to get in touch with your accountant. We can educate you about tax reform and its specific effects on you, and help you make sure you make the right moves by year end. Having a good CPA as part of your advisory team is an invaluable resource during times like this.

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.

•  The IRS has provided special relief to encourage leave-based donation programs. Under these programs, employees may forgo their vacation, sick or personal leave in exchange for cash payments the employer makes, before Jan. 1, 2019, to charitable organizations providing relief for the victims of this disaster. The donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the cash payments as business expenses.
•  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 who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA). For a complete list of eligible counties, visit The FEMA Disaster website page. To qualify for this relief, hardship withdrawals must be made by Jan. 31, 2018. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
•  Hurricane Harvey victims in parts of Texas and any area designated by FEMA as qualifying for individual assistance (currently 18 counties are eligible) have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16, and businesses with extensions that run out on Sept. 15. This also includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area.

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.

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 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.

The 12 days of tax planning countdown- for web

With the year coming to an end, it is important to start getting your books in order to have them ready to close, and get a head start on filing your tax return. It is important to know that for the upcoming year, many due dates have changed for 2016 returns, and will be changed going forward.

Here are a few of those dates that have changed for the upcoming filing season. Additional guidance can be found on the American Institute of Certified Public Accountants (AICPA) website:

• Partnerships with a calendar year end will have a new due date of March 15th, and the extension date remains as September 15th. Fiscal year partnership returns are due on the 15th day of the 3rd month after year end, and a six month extension is allowed from that date.

• Trusts and Estates Form 1041 will have the same filing date of April 15th, but the new extension date is now September 30th.

• Exempt organizations will have the same filing date of May 15th, but with a single automatic 6-month extension of November 15th.

• FinCEN Report 114 will have a new due date of April 15th, with a new extension date of October 15th.

• Information returns including W-2 and most 1099 MISC forms will be due to the IRS/SSA on January 31st. This is the same date that they are due to the taxpayer. All other 1099 forms are due February 28th or March 31st if filed electronically.

• C Corporations have different rules for the upcoming years depending on when the year end is:

C Corporations with a calendar year end will have a new due date of April 15th with an extension date of September 15th.

C Corporations with a fiscal year end return other than December 31st and June 30th will be due on the 15th of the 4th month after the year end with an extension on the 15th of the 10th month after year end.

C Corporations with a June 30th fiscal year end will have a due date of September 15th with a new extension due date of April 15th.

It is important to be aware of these new filing dates since this will effect many entity returns in the upcoming filing season.