DETHLOFF & ASOOCIATES BLOG - MOSTLY (BUT NOT ALL) TAX
Here's a link to the lastest scam. It involves erroneous refunds.
While many provisions of the Tax Cuts and Jobs Act (TCJA) will save businesses tax, the new naw also reduces or eliminates some tax breaks for businesses. One break it eliminates is the Section 199 deduction, commonly referred to as the “manufacturers’ deduction.” When it’s available, this potentially valuable tax break can be claimed by many types of businesses beyond just manufacturing companies. Under the TCJA, 2017 is the last tax year noncorporate taxpayers can take the deduction (2018 for C corporation taxpayers).
The basics: The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts (DPGR).
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible. The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
Calculating DPGR: To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of DPGR exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as tangible personal property (for example, machinery and office equipment), computer software, and master copies of sound recordings.
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Give us a call to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2017 return. We can also help address any questions you may have about other business tax breaks that have been reduced or eliminated by the TCJA.
Based on questions we’ve received from clients there is some confusion about the new rules for deducting home equity interest under the Tax Cuts and Jobs Act. Starting in 2018 you can only deduct purchase mortgage interest. As of 1-1-18 you can no longer deduct interest paid on home equity debt. Home equity debt is a debt on your residence that was not used to purchase or improve your residence. For example, using a home equity credit line to purchase a car. Purchase mortgage interest is interest on debt that was used to purchase or improve your residence.
What can be confusing is that home equity debt is determined by what the money was used for, not the type of loan. A home equity credit line used 100% to remodel your home will continue to be deductible in 2018. And if you’ve refinanced your primary mortgage in the past and taken out cash that was not used to improve your residence then some of the interest on your primary mortgage will not be deductible starting in 2018.
There are also new limits on the total amount of purchase mortgage interest you can deduct. For debt incurred before 12-14-17 you can deduct the interest on purchase mortgage debt up to $1,000,000 in loan balance. For debt incurred after 12-14-17 you can only deduct interest on purchase mortgage debt up to $750,000.
This is a very brief overview of the rules. Contact us if you’d like to discuss in more detail.
If you haven't yet filed your 2017 Tax Return the US government shut down should have little or no impact on you.
If you have filed your tax return the major impact will be a suspension of processing refunds.
Processing of amended income tax returns and related refunds will also be suspended during the shut down period.
Most taxpayer support services will be suspended during the shut down. So telephone inquiries about tax law and collections will not be answered during the shut down period.
Let's hope our elected officials can come to some sort of agreement quickly to resolve this situation.
This recent article in the Wall Street Journal highlights the importance of keeping accurate records regarding your employees' legal status to work in the United States. An I-9 form must be kept on file for all current employees and for 3 years after an employee leaves. We recommend keeping a copy of the supporting documents provided by employees to support the I-9 form.
An extra step you might consider to ensure an employee's legal status is to use the E-Verify system administered by US Citizenship and Immigration Services. E-Verify is an Internet-based system that compares information from an employee's Form I-9, Employment Eligibility Verification, to data from U.S. Department of Homeland Security and Social Security Administration records to confirm employment eligibility.
Immigration Officials Swarm 7-Elevens, Issue Warning to U.S. Businesses http://on.wsj.com/2mk7ijd
This post covers the changes that will affect business tax returns with suggestions of a few things you can do before year end related to the new tax law.
While most of the provisions won’t go into effect until 2018, you can take a couple of steps now to minimize your total tax bill for 2017.
1) Consider purchasing assets that may qualify for 100% bonus depreciation or the Section 179 expensing election.
2) Deferring income into 2018 is especially relevant this year since many businesses and individuals are expected to have lower marginal tax rates next year under the new bill.
3) Accelerating deductions into 2017 is especially relevant this year since many businesses and individuals are expected to have lower marginal tax rates next year under the new bill.
4) If you think your business will have a net operating loss (NOL) for 2017 try and push as many deductions as possible into the 2017 tax year as starting in 2018, the carryback for NOLs is eliminated and the deduction for NOL carryforwards is limited to 80% of taxable income.
Below are the items in the new tax bill that will affect your business tax return. We’ve not included any of the tax law changes that would only affect larger business taxpayers.
The corporate tax rate changes to a flat 21%. If your corporate taxable income was mostly in the 15% federal tax bracket (under $50,000) this will increase your corporate income tax. If your corporate taxable income was higher than $95,000, you should have a decrease in your federal corporate tax. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The corporate Alternative Minimum Tax (AMT) has been repealed. The individual AMT was not repealed. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The 80% Dividends Received Deduction (DRD) has been reduced to 65% and the 70% DRD has been reduced to 50%. If your business isn’t taxed as a C Corporation, this doesn’t apply to you.
The maximum Section 179 deduction has increased to $1,000,000.
For the next five years businesses can deduct 100% of all fixed asset acquisitions (other than certain motor vehicles and most real estate). This provision applies to all assets acquired after September 27, 2017.
The threshold for businesses being allowed to use the cash basis of accounting has increased to $25,000,000.
The exception for businesses having to use the completed contract method of accounting for long term contracts has also been increased to $25,000,000.
I’m sure the last thing you want to be doing this Christmas weekend is reading about tax reform. However, Congress has just passed, and the President will soon sign the largest tax reform package since 1986 and there are number of things that you may want to do before December 31, 2017 to deal with the changes that will take affect in 2018.
We’ve listed below a detailed analysis of the individual tax changes, but wanted to give you a few items we feel are time sensitive. Starting with 2018 tax returns the new tax bill limits the deduction for state and local income and property taxes (SALT) to $10,000. This $10,000 SALT limit is the same whether you are single or married. Miscellaneous itemized deductions (investment fees, unions dues, employee business expenses, tax prep fees, etc.) are eliminated. It also increases the standard deduction to $12,000 for a single taxpayer and $24,000 for a married couple. This means that many people who previously itemized will no longer be able to do so.
Here are things you can do in preparation for the new tax situation:
1) If the total of your state income taxes and property taxes are normally more than $10,000 and you will have significant 2017 state income tax due on April 17, 2018 you should pay it before December 31, 2017.
2) If you have an outstanding property tax bill you should pay it before December 31, 2017.
3) If you normally give large amounts to charity you may want to consider paying your 2018 contributions before December 31, 2017 to ensure you get the benefit of the deduction.
4) If possible, you should prepay any 2018 miscellaneous itemized deductions in 2017.
5) Pay your January 1, 2018 mortgage payment early so the payments posts to your account before 12-31-17.
6) Pay business and rental expenses before 12-31-17.
7) If possible, defer income to 2018.
Here is an overview of the items in the new tax bill that will affect your individual tax return. The recently enacted Tax Cuts and Jobs Act (TCJA) is a sweeping tax package. Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.
· Tax rates. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child's tax is unaffected by the parent's tax situation or the unearned income of any siblings.
· Standard deduction. The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.
· Exemptions. The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.
· New deduction for “qualified business income.” Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
· Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer's dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
· State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.
· Mortgage interest. Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
· Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
· Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
· Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
· Overall limitation on itemized deductions. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
· Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion from income for moving expense reimbursements has also been suspended.
· Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
· Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
· Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
· Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law, but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your situation, please give us a call. Our office will be closed Friday December 22, 2017 for the Christmas holiday.
At this time of year, it’s common for businesses to make thank-you gifts to customers, employees and other business entities. Unfortunately, tax rules limit the deduction for business gifts to only $25 per person per year. But there are exceptions. Here are three: 1) gifts to a company for use in the business, 2) incidental costs of making a gift, such as engraving or shipping, and 3) gifts to employees (though other limits apply and they may be treated as taxable compensation). Be sure to properly track and document qualifying expenses.
To ensure that your pet is cared for after your death, consider creating a pet trust. It allows you to set aside funds for the animal’s care. After the pet dies, any remaining funds are distributed among your heirs as directed by the trust’s terms.
Here’s how it works: You create the trust to take effect either during your lifetime or at death. Typically, a trustee will hold property for the benefit of your pet, and payments to a designated caregiver are made on a regular basis. The trust can also mandate periodic visits to the vet.
Tomorrow is Giving Tuesday the non-profit worlds equivalent to Black Friday and Cyber Monday. In preparation for Giving Tuesday and other year end charitable contributions we'll review the IRS documentation requirements for charitable donations.
For cash donations of less than $250 you must have either a bank record or a written receipt from the charity acknowledging the donation.
For cash donations of $250 or more you must have a written receipt from the charity with the following wording or a close equivalent: "No goods or services were received in exchange for this receipt."
If goods or services were received, the charity must give the donor a good faith estimate of the value received. In this case you can only deduct the amount you gave in excess of the fair market value of goods or services received.
For non-cash (Goodwill, Habitat Restore, Salvation Army, etc.) donations the same rules apply. If your total non-cash donations exceed $500 you must also file an additional IRS form.
If you think your total non-cash donations will exceed $5,000 some special rules apply and you should check with us before making the donation.
Scammers are targeting employers by asking that copies of employee's I-9 forms be emailed to a phony U.S. Citizenship and Immigration Service (USCIS) email address.
Employers must have an I-9 form on file for every employee. The I-9 form contains information that would be very valuable to identity theft criminals. There is no requirement to send these forms to USCIS. Any email requests for the forms can safely be ignored. Do not click on any links in these emails.
You can find more information about how long you need to retain I-9 forms and other questions at the USCIS web site.
It’s not completely clear, but a provision on pages 49-52 of the House bill appears to require active owners of “S” corporations to allocate 70% of their flow-through income to ordinary tax rates, and subjects that amount to self-employment tax. In addition, “S” corporations that are personal service type businesses in the fields of healthcare, engineering, architecture, law, accounting, consulting, performing arts or actuaries would have to pay SE tax on 100% of flow-through income. The House bill also removes the limited partner exemption from self-employment tax.
As a service to our clients we offer our Thirteenth annual shredding week. It will be the second full week in December (December 11-15) this year.
If you have old tax returns or other financial documents that you need to shred please bring them by our office between 9:00AM and 5:00PM on Monday December 11th thru Friday December 15th and we will have it shredded for you at no charge. Bring as much as you want, but if you are bringing large quantities please call and let us know so we can make sure our shredders bring a big enough truck.
The largest changes to income tax law since 1986 as proposed are listed below. The stated goal is to have the bill passed by Thanksgiving, so it is important to give feedback to your representatives as soon as possible.
The proposed business tax law changes are not as dramatic as those impacting individual tax returns. The drop in corporate income tax rates and pass-through entity income rates is the most significant. The elimination of the domestic production activity deduction would also affect a significant number of our clients.
1. Maximum corporate tax rates would be reduced to 20% from 35%. For a personal service corporation, the maximum rate would be 25%.
2. Dividends received by a domestic corporation from a specified 10%-owned foreign corporation would be allowed as a deduction in an amount equal to the foreign-source portion of such dividend.
3. A portion of net income distributed by a pass-through entity to an owner or shareholder would be treated as “business income” subject to a maximum rate of 25%. Provisions are included to guard against reclassifying wages as business income to utilize the lower rate.
4. The 100% bonus depreciation (§168(k)) would be extended through Dec. 31, 2022.
5. Section 179 expensing would be increased to $5,000,000 for taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2023. A phase-out would apply if the business places in service more than $20,000,000 of §179 property during the taxable year.
6. The gross receipts test on the use of the cash method of accounting by a corporation or partnership with a corporate partner would be increased to $25,000,000.
7. Interest deduction would be limited for large corporations and partnerships. Businesses with gross receipts of less than $25,000,000 would be exempt.
8. The NOL carryback would be eliminated except for a one-year carryback for eligible disaster losses. The NOL carryforward would be indefinite (currently 20 years) but limited to 90% of taxable income (like AMT limitation now.).
9. Section 199 deduction for income attributable to domestic production activities would be repealed.
10. Self-created property (patent, invention, design, formula, or process) would not be treated as a capital asset.
11. Incentive stock options would be treated like non-qualified stock options (taxed at exercise unless subject to forfeiture or §83(b) election).
12. Section 1031 would apply to real property exchanges only.
13. Rehabilitation credit, work opportunity credit, and disabled access credit would be repealed.
14. No tax-exempt bonds could be issued for professional stadiums.
Please contact us if you would like to discuss the proposals in more detail.
The largest changes to income tax law since 1986 as proposed are listed below. The stated goal is to have the bill passed by Thanksgiving, so it is important to give feedback to your representatives as soon as possible
While the changes in tax rates listed below and elimination of the Alternative Minimum Tax may reduce your taxes the elimination of deductions and credits could also increase your taxes.
Since most of our clients live in either Oregon or California we think the biggest impact will come from the elimination of the state income tax deduction. The limit on the property tax deduction to $10,000 will also impact many of our clients. The elimination of the gain exclusion on the sale of your residence if your AGI is over $250,000 ($500,000 if married filing seperately) could impact some of our clients.
Summary of proposed changes that would affect individual taxpayers:
1. Individual rates would be compressed from the current 7 brackets to 4 brackets: 12%, 25%, 35%, and 39.6%.
2. Personal exemptions would be eliminated.
3. The child tax credit would be increased from $1,000 to $1,600 for a qualifying child. The refundable portion would remain $1,000. A $300 credit would be added for the taxpayer and spouse and other dependents to 2023. The phase-out for the credits would be increased to $115,000 for single and $230,000 for MFJ (currently $75,000 and $110,000, respectively.)
4. The standard deduction would be increased to $12,2002 single, $18,300 HOH and
$24,400 MFJ. The additional standard deduction for the elderly and the blind would be repealed.
5. The phaseout of itemized deductions would be repealed.
6. AMT would be repealed. AMT credit carryovers would reduce regular tax in 2018, and then become 50% refundable 2019–2021. Any unused AMT credit carryover would be 100% refundable in 2022.
7. For sales and exchanges after Dec. 31, 2017, §121 exclusion of gain on the sale of a personal residence would be modified to require that the home be owned and used for five of the last eight years. Section 121 would be modified to phase-out the exclusion based on AGI above $250,000 ($500,000 MFJ).
8. The credits for adoption and plug-in electric vehicles would be repealed.
9. The exclusions for employee achievement awards, dependent care assistance programs, moving expense reimbursement, and adoption assistance programs would be repealed.
10. Education credits would be consolidated into an enhanced American Opportunity Tax Credit (AOTC). The AOTC would remain the same at 100% of the first $2,000 and 25% of the next $2,000. The AOTC would be available for five years (the fifth year at ½ the rate of the first four years.)
11. The deduction for interest on student loans would be repealed. The exclusion for interest on US savings bonds used for higher education expenses would be repealed. The exclusion for employer provided education assistance programs would be repealed.
12. The special rule permitting a recharacterization of Roth IRA contributions as traditional IRA contributions would be repealed.
13. The moving expense deduction would be repealed.
14. The alimony paid deduction would be repealed for agreements executed after Dec. 31, 2017. There would be a corresponding repeal of the provisions providing inclusion of alimony in gross income.
15. The medical expense deduction and the deduction for state and local taxes would be repealed.
16. The mortgage interest deduction would be reduced from acquisition debt amounts of $1,000,000 to $500,000 for new home purchases on or after Nov. 2, 2017. Interest on home equity borrowing after the effective date of the law would be repealed.
17. Mortgage interest deduction would be limited to one qualified residence.
18. The 50% AGI limitation on cash contributions to public charities and certain private foundations would be increased to 60%.
19. Charity mileage would be indexed for inflation (finally.)
20. Miscellaneous itemized deductions for employee business expenses, personal casualty losses, and tax preparation fees would be repealed.
21. The exclusion for housing provided for the convenience of an employer and for employees of educational institutions would be limited to $50,000 and would phase-out beginning at AGI of $120,000. The exclusion would be limited to one residence.
22. The estate, gift, and generation skipping transfer tax exemption amount would be increased to $10,000,000 for decedents dying after Dec. 31, 2017. Estate taxes would be repealed after Dec. 31, 2023.
Please contact us if you would like to discuss the proposal in more detail.
It was announced this morning that the release of the GOP tax reform proposal will be delayed until tomorrow. The announced goal is still to pass the bill in both house and senate by Thanksgiving. So now taxpayers and their advisors will have 21 days to evaluate the most massive revision to the income tax code since 1986. For perspective the 1986 revision took 13 months to negotiate.
The GOP is proposing the most significant changes to the Federal tax code in a generation. They have said they will release their proposal on November 1st with a goal of passing it in both houses and sending it to the president by Thanksgiving. This is not a lot of time for tax professionals and taxpayers to review the proposed changes and evaluate the impact on individual and business returns. We will try and get information to our clients as soon as possible after the proposal is presented, but I would ask the GOP to consider giving interested parties more than 22 days to evaluate this massive overhaul to our tax system.
If you own life insurance policies at your death, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds.
The way around this problem is to not own the policies when you die. However, don’t automatically rule out your ownership either. And it’s important to keep in mind the current uncertain future of the estate tax. If the estate tax is repealed (or if someone doesn’t have a large enough estate that estate taxes are a concern), then the inclusion of your policy in your estate is a nonissue. However, there may be nontax reasons for not owning the policy yourself.
Plus and minuses of different owners: To choose the best owner, consider why you want the insurance. Do you want to replace income? Provide liquidity? Or transfer wealth to your heirs? And how important are tax implications, flexibility, control, and cost and ease of administration?
Let’s take a closer look at four types of owners:
1. You or your spouse. There are several nontax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback is estate tax risk. Ownership by you or your spouse generally works best when your combined assets, including insurance, won’t place either of your estates into a taxable situation.
2. Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds aren’t subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax-free. On the minus side, policy proceeds are paid to your children outright. This may not be in accordance with your estate plan objectives and may be especially problematic if a child has creditor problems.
3. Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the business under a split-dollar arrangement. But if you’re the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the business, the proceeds could be included in your estate for estate tax purposes.
4. An ILIT. A properly structured irrevocable life insurance trust (ILIT) could save you estate taxes on any insurance proceeds. The trust owns the policy and pays the premiums. When you die, the proceeds pass into the trust and aren’t included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.
Please contact us if you'd like to discuss your particular situation in more detail
From Larry's Tax Blog by Larry Brant: http://www.gsblaw.com/larry-s-tax-law/US-Tax-Court-Rule-Jacobs-v-Commissioner