Corporations and Pass-Through Entities:  Entity Selection: Fifth in a Series

Corporations and Pass-Through Entities: Entity Selection: Fifth in a Series

The current tax reform has made business entity selection for new and existing businesses quite complicated for C corporations, and other pass-through businesses (think K1’s and Schedule C)  There are tremendous factors based on your industry, size and structure of your organization.

C Corps which have been out of vogue in recent years to most businesses (and CPA entity choice) have gotten some new light,   the new tax law reduces the maximum tax rate from 35% to now 21% flat.    Remember that “distributions” in these entities are dividends, with a maximum tax of 23.8%, so hovering around 40% with the double tax.

Pass-Through Entities (S Corps and Partnerships) which now include Schedule C sole proprietors receive a new 20% deduction off qualified activity income, substantially reducing tax marginal levels near 31-32%.

Under prior law, most businesses benefited from the pass-through entity as it resulted in a lower tax rate.  However, under the new code, special analysis must be conducted as major deductions have been eliminated or capped under the new individual code for 2018 going forward

The deduction for “qualified business income” appears to be straight forward at 20% of the income earned, however there are phase-outs, and how this is calculated based on your income and industry.

We often quote that simplicity can be expensive.    It might be time to change your entity structure or break your business into new entities.

 

2018 Tax Cuts-   Personal Exemptions and Child Credits-   4th In a Series

2018 Tax Cuts- Personal Exemptions and Child Credits- 4th In a Series

One of the big changes under the new code and candidly not spoken about in the press as much as the change in the “standard deduction” is the elimination of all personal exemptions under the new code.    This has a potential substantial impact on larger, middle class families.    These are worth $4,050 in 2017 per exemption and might offset the doubling of the standard deduction.

The child credit will now be $2,000 per qualifying child and up to $1,400 will be refundable – there are substantially higher thresholds for eligibility- good news for the middle and upper class.   These amounts are now $400,000 ($200,000 single) up from $110,000 ($75,000) under 2017 law.      This impacts children under age 17

The Act also provides a $500 nonrefundable credit for qualifying dependents other than children, and  the dependent care credit, adoption credit and the ability to exclude up to $5,000 of gross income annually for employer-provided dependent care remains on the tax code books for 2018

We move to business matters in our next blog.   We will start with an overview on business tax rates and important changes

2018 Tax Cuts- Third in a Series: You Itemize and File Schedule A

The substantial increase in the standard deduction for 2018, as previously posted, means that a larger number of taxpayers will now take the standard deduction in lieu of itemizing.    Factoring in the limit on state and local property taxes and new reduced mortgage interest limits, lets see what else could cause an increase in standard deduction usage for 2018 and beyond.

Casualty and Theft Losses 

No longer deductible unless they are related to a loss in a federally declared disaster area.  (such as major storms such as hurricanes, wildfires and floods)

Medical Expenses

One of the few items that affects 2017 returns and for 2018 only,  the threshold is reduced to 7.5% of AGI – for taxpayers planning surgery and can bunch these expenses its time to consider this before this reverts to 10% of AGI effective 2019 tax year

State and Local Taxes

These taxes are now capped at $10,000.   Same regardless if you are single or married.  (substantial reduction to many taxpayers)

Miscellaneous Deductions

Completely eliminated under the code.   This includes all reimbursed business expenses (meals, mileage etc), tax prep, fees, investment management fees.   Sales people with substantial business miles need to factor this change immediately in their compensation packages

Employees and business owners heed:   The ability to deduct business meals and entertainment has now been eliminated starting this year as this was previously 50% deductible.

Child Tax Credits/Personal Exemptions will be our next blog topic.

2018 Tax Cuts and Jobs Act- Individual and Business Tax Forum Series- “You’re Buying (or Selling) a Home

For taxpayers with existing mortgages you can currently deduct mortgage interest of up to 1,000,000 (500,000 married separate) of incurred debt.    Under the new Code, mortgages taken out between December 15,2017 and December 31, 2025  are now only eligible for an interest deduction on their mortgage of up to $750,000 ($375,000 married separate).   Note:  If you have a binding contract signed before December 15, 2017 and close on the home no later than April 1, 2018 the old rules apply to you.

Prior to the new Code,  interest on Home Equity loans of up to $100,000 has been fully deductible.     The new rules have eliminated this deduction on all HELOC loans,  including existing loans already in place.

The impact on home sales is unclear at this point,  we anticipate that the potential decline in pricing in urban areas could be offset by the reduction of sellers who keep their homes to avoid the new rules

The tax free sale of primary homes is a great benefit in the current code, married couples can exclude up to $500,000 ($250,000 single) from their income taxes as long as the home is their residence for at least two of the last five years.    There was much debate about changing this to five of the last eight years but this was not passed.   This benefit remains in place.

Next blog will talk about the impact on itemized deductions overall on your form Schedule A

2018 Tax Cuts and Jobs Act-   Individual and Business Tax Forum Series-  “You Own a Home”

2018 Tax Cuts and Jobs Act- Individual and Business Tax Forum Series- “You Own a Home”

The new tax law that President Donald Trump signed into law late December 2017 will have massive, sweeping impacts on both the individual and business taxpayer.     We are beginning to digest the new code.    The changes involve so many parts of the code that the tax affect for each taxpayer has the potential to be profoundly different based on children, types of income, local taxes and more.       We will highlight highly impact areas over a series of blog posts to help explain specifics to our clients and readers.

You Own a Home

If you live in a high-tax area you will be especially affected by a new $10,000 limit on local and state taxes you can deduct on your Schedule A.

For our clients in FL, unless you are in a very expensive area you potentially will not feel any pain in this area, but our Atlanta clients in high-taxed areas of Decatur, along with large homes in Fulton County plus 6% GA state income taxes will feel the pinch.

This blog is about currently owning a home, so your current primary mortgage interest deductions won’t be affected, but if you are considering a move, that will be changes that you need to consider (another blog).    Note that fewer people will itemize, though since the new standard deduction has been increased substantially.

Taxpayers that are single (and married separately) will see this rise from $6,350 to $12,000,  head of household jumps from 9,350 to 18,000, and married filing jointly folks go from $12,700 to now $24,000.

Homeowners, starting with tax year 2018, will also lose their ability to deduct the interest on home-equity loans .

Our next blog will talk about the changes in buying and selling a home and the impact on new mortgages and holding periods on sales of your primary residence

Trump Child Care/Elder Care Expenses

Trump Child Care/Elder Care Expenses

We have been fielding many questions from clients and the community about what we expect under the new Trump Administration.     Although it will be early 2017 before we get any specifics on the future pending legislation, Trump has made various announcements about the scope of his overall tax plan- which will be of similiar magnitude of the Tax Reform Act of 1986.     In the first of a few posts-  child care expenses are of a great concern to many of our clients.  Key highlights include:

  • New Above-the-Line deduction and a new tax-preferred savings account to encourage families to set aside funds for caregiving expenses
  • New Above-the-Line Deduction will now cover up to four (4) children per family from birth to age 13 with the deduction capped at “the average cost of child care” based on he child’s age and state of residence.   The deduction would be available to itemizers and non-itemizers and would apply to families that use paid child care providers as well as families that rely of a stay-at-home parent or unpaid relative to meet their child care needs
  • The deduction would be limited to couples earning up to $500,000 a year and individuals earning up to $250,000.
  • Familys will no income tax liability will potentially receive assistance though a “spending rebate” through the earned income tax credit capped at “half the payroll taxes paid by the taxpayer” (lower earning parent) and subject to a limitation of $31,200 for an individual or $62,400 for joint filers.
  • A similar above-the-line deduction would be available for home care or adult day care for elderly dependent relatives – current proposed would be a cap of $5,000 a year, indexed for inflation.

These proposals are a major change from the current code which offers a small tax credit of based on spending of up to $3,000 per child, max of $6,000 subject to declining percentages.

Source:  Deloitte-  2017 essential tax and wealth planning guide

Donald Trump Taxes:   What the Future could Look Like

Donald Trump Taxes: What the Future could Look Like

With Donald Trump as the president elect and Republicans holding a majority in the U.S. House and Senate, GOP tax reform appears likely in 2017. While campaigning, Mr. Trump promised big tax changes. Here’s a digest of his proposals, according to his website.

Individual Tax Rates and Capital Gains Taxes

For individuals, President-elect Trump proposes fewer tax brackets and lower top rates: 12%, 25% and 33% — versus the current rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%.

Proposed Rate Brackets for Married-Joint Filing Couples

Taxable Income Rate Bracket
Less than $75,000 12%
More than $75,000 but less than $225,000 25%
More than $225,000 33%


Proposed Rate Brackets for Unmarried Individuals

  Taxable Income
Rate Bracket
$0 to $37,500 12%
More than $37,500 but less than $112,500 25%
More than $112,500 33%

The proposed plan would eliminate the head of household filing status, which could prove to be a controversial idea.

President-elect Trump would abolish the alternative minimum tax (AMT) on individual taxpayers.  Itemized/ Standard Deductions and Personal/ Dependent Exemptions

The president-elect’s plan would cap itemized deductions at $200,000 for married joint-filing couples and $100,000 for unmarried individuals.

The standard deduction for joint filers would be increased to $30,000 (up from $12,700 for 2017 under current law). For unmarried individuals, the standard deduction would be increased to $15,000 (up from $6,350).

The personal and dependent exemption deductions would be eliminated.

Child and Dependent Care

Proposed new deduction: The Trump plan would create a new “above-the-line” deduction (meaning you don’t have to itemize to benefit) for expenses on up to four children under age 13. In addition, it would cover eldercare expenses for dependents. The deduction wouldn’t be allowed to a married couple with total income above $500,000 or a single taxpayer with income above $250,000. The childcare deduction would be available to paid caregivers and families who use stay-at-home parents or grandparents to provide care. The deduction for eldercare would be capped at $5,000 annually, with inflation adjustments.

Rebates for child care expenses: The proposed Trump Plan would offer new rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit. The rebate would equal 7.65% of eligible childcare expenses, subject to a cap equal to half of the federal employment taxes withheld from a taxpayer’s paychecks. The rebate would be available to married joint filers earning $62,400 or less and singles earning $31,200 or less. These ceilings would be adjusted for inflation annually.

Dependent care savings accounts: Under the proposed plan, taxpayers could establish new Dependent Care Savings Accounts for the benefit of specific individuals, including unborn children. Annual contributions to one of these accounts would be limited to $2,000. When established for a child, funds remaining in the account when the child reaches age 18 could be used for education expenses, but additional contributions couldn’t be made. To encourage lower-income families to establish these accounts for their children, the government would provide a 50% match for parental contributions of up to $1,000 per year. Dependent Care Savings Account earnings would be exempt from federal income tax.

Affordable Care Act Taxes

President-elect Trump wants to repeal the Affordable Care Act and the tax increases and employer penalties that it imposes — including the 3.8% Medicare surtax on net investment income and the 0.9% Medicare surtax on wages and self-employment income.

Estate Tax

His plan would also abolish the federal estate tax. But it would hit accrued capital gains that are outstanding at death with a capital gains tax, subject to a $10 million exemption.

Business Tax Changes

The president-elect proposes major changes to the taxes paid by businesses. Trump would cut the corporate tax rate from the current 35% to 15%, but eliminate tax deferral on overseas profits.

Under the proposed plan, a one-time 10% tax rate would be allowed for repatriated corporate cash that has been held overseas where it’s not subject to U.S. income tax under current rules.

The plan would also allow the same 15% tax rate for business income from sole proprietorships and business income passed through to individuals from S corporations, LLCs, and partnerships, which could cause a significant decrease in tax revenues.

Without getting very specific, the proposed plan proposes the elimination of “most” corporate tax breaks other than the Research and Development (R&D) credit. At-risk tax breaks could include unlimited deductions for interest expense and a bevy of other write-offs and credits.

On the other hand, the proposed Trump plan would allow manufacturing firms to immediately write off their capital investments in lieu of deducting interest expense.

What about Congress?

In addition to President-elect Trump’s proposed plan, House Republicans released the “Better Way Tax Reform Blueprint” earlier this year and Republicans in the Senate proposed their own tax plans. These proposals — which in some cases, differ from Trump’s — would make numerous changes to cut taxes and simplify filing. Despite some differences, members of Congress have expressed support for Trump’s plans and have vowed to act quickly.

When Might Changes Happen?

Democrats in Washington are likely to oppose any meaningful tax cuts, and they can attempt to stall things in the Senate where the Republicans won’t have a filibuster-proof majority. However, the Republicans can use the same procedural tactics that the Democrats used in 2010 to enact the Affordable Care Act. It’s possible that Trump’s tax plan (or parts of it) may pass in the first 100 days of his new presidency. If that happens, we could see major tax changes taking effect as early as next year.

Stay tuned as the tax code legislation unfolds

Source:  checkpointmarketing.net/Vision HR

 

Court Temporarily Blocks Overtime Rule- Happy Holidays!

Court Temporarily Blocks Overtime Rule- Happy Holidays!

On Tuesday November 22,2016 a federal court issued a preliminary injunction to temporarily block the U.S. Department of Labor (DOL) from implementing and enforcing its Final Overtime Rule nationally, pending further review by the court.  What does this mean currently?

  • As a result of this ruling, employers do not need to comply by the original December 1 effective date
  • The injunction is temporary pending further review by the court
  • We have no additional information if or when the status of the regulations will change.
  • Balog+Tamburri CPAs will continue to monitor this situation and will keep everyone updated accordingly

Source :  Paychex.com/accounting-professionals

IRS De Minimis Safe Harbor Expensing Threshold

IRS De Minimis Safe Harbor Expensing Threshold

The IRS has increased the maximum threshold for expensing certain capital items under the De Minimis Safe Harbor from $500 to $2500.     The increase is in reponse to CPA comments that the $500 limitation was too low to effectively reduce the adminitrative burden of capitalizing the cost of many commonly purchased items such as furniture, computers, phones, and small equipment.   This rule goes into effect tax years on or after January 1, 2016.    Furthermore, if taxpayers are using a threshold higher than $500 but less than $2500 for tax years beginning after December 31, 2011 and ending before January 1, 2016 the IRS will not focus on this issue in an examination.    Please contact us if you have questions or want specifics to your situation.   This post is designed to provide a basic overview.

Free Money from the IRS?  Part I

Free Money from the IRS? Part I

As we review current tax law for late year changes we will be doing a series of blog posts to remind taxpayers that there are a few income sources which might impact your personal tax situation which remain completely tax-free to you (although some are reportable but not taxable)

How many people have heard about an urban legend in the tax code called “The Masters Exemption”? (think Augusta, GA)  The good news is this legend is true!   Situations where your property (primary or vacation home) is rented for 14 or fewer days is completely tax-free to the taxpayer (without any depreciation or maintainance deductions though) regardless of the amount!     Between the hot film industry in Georgia, combined with major sporting and music events these opportunities provide a major possible windfall to the homeowner.

Please note that the title of the blog post only mentions the IRS unfortunately.   Generally any short-term rental has state and local tax obligations and state governements continue to use better techonology to track these types of rentals.

Just a reminder these are rentals of your primary home or second/vacation home not considered an investment property

Next blog post we will talk about when selling your primary residence will result in a zero federal tax bill.