The following links will take you to the corresponding articles:
Material Participation Key to Deducting LLC and LLP Losses
The PAL Rules
The 7 Tests
Make Sure Your Company Is Prepared For Any Disaster
Tax Planning Critical When Buying a Business
2 Ways Spouse-owned Businesses Can Reduce Their Self-employment Tax Bill
Timing Strategies Could Become More Powerful in 2017, Depending on What Happens With Tax Reform
Thorough Due Diligence Can Protect Your Acquisition From Fraud
How To Maximize Deductions For Business Real Estate
Reduce Your 2017 Tax Bill By Buying Business Assets
Getting Around The $25 Deduction Limit For Business Gifts
Accrual-Basis Taxpayers: These Year-End Tips Could Save You Tax
Tax Cuts and Jobs Act: Key Provisions Affecting Businesses
The TCJA Temporarily Expands Bonus Depreciation
New Tax Law Gives Pass-Through Businesses A Valuable Deduction
Choosing The Best Business Entity Structure Post-TCJA
Does Your Business Have To Begin Collecting Sales Tax On All Out-Of-State Online Sales?
How To Avoid Getting Hit With Payroll Tax Penalties
Close-Up On The New QBI Deduction’s Wage Limit
2 Tax Law Changes That May Affect Your Business’s 401(k) Plan
Material participation key to deducting LLC and LLP losses
If your business is a limited liability company (LLC) or a limited liability partnership (LLP), you know that these structures offer liability protection and flexibility as well as tax advantages. But they once also had a significant tax disadvantage: The IRS used to treat all LLC and LLP owners as limited partners for purposes of the passive activity loss (PAL) rules, which can result in negative tax consequences. Fortunately, these days LLC and LLP owners can be treated as general partners, which means they can meet any one of seven “material participation” tests to avoid passive treatment.
The PAL rules
The PAL rules prohibit taxpayers from offsetting losses from passive business activities (such as limited partnerships or rental properties) against nonpassive income (such as wages, interest, dividends and capital gains). Disallowed losses may be carried forward to future years and deducted from passive income or recovered when the passive business interest is sold.
There are two types of passive activities: 1) trade or business activities in which you don’t materially participate during the year, and 2) rental activities, even if you do materially participate (unless you qualify as a “real estate professional” for federal tax purposes).
The 7 tests
Material participation in this context means participation on a “regular, continuous and substantial” basis. Unless you’re a limited partner, you’re deemed to materially participate in a business activity if you meet just one of seven tests:
1. You participate in the activity at least 500 hours during the year.
2. Your participation constitutes substantially all of the participation for the year by anyone, including nonowners.
3.You participate more than 100 hours and as much or more than any other person.
4. The activity is a “significant participation activity” — that is, you participate more than 100 hours — but you participate less than one or more other people yet your.participation in all of your significant participation activities for the year totals more than 500 hours.
5. You materially participated in the activity for any five of the preceding 10 tax years.
6.The activity is a personal service activity in which you materially participated in any three previous tax years.
7. Regardless of the number of hours, based on all the facts and circumstances, you participate in the activity on a regular, continuous and substantial basis.
The rules are more restrictive for limited partners, who can establish material participation only by satisfying tests 1, 5 or 6.
In many cases, meeting one of the material participation tests will require diligently tracking every hour spent on your activities associated with that business. Questions about the material participation tests? Contact us.
Make Sure Your Company Is Prepared For Any Disaster
What could stop your company from operating for a day, a month or a year? A flood or fire? Perhaps a key supplier shuts down temporarily or permanently. Or maybe a hacker or technical problem crashes your website or you suddenly lose power. Whatever the potential cause might be, every business needs a disaster recovery plan.
Get started by brainstorming as many scenarios as possible that could devastate your business. The operative word there is "your." Every company faces distinctive threats related to its size, location(s), and products or services.
There are some constants to consider, however. Seek out alternative suppliers who could fill in for your current ones if necessary. Moreover, identify a strong IT consulting firm with disaster recovery capabilities and have them a phone call away.
The Right Voice
Another critical factor during and after a crisis is communication, both internal and external. You and most of your management team will need to concentrate on restoring operations, so appoint one manager or other employee with necessary skills to keep stakeholders abreast of your recovery progress. These parties include:
- Staff members and their families,
- Banks and other financial stakeholders, and
- Local authorities and community leaders (as appropriate).
He or she should be prepared to spread the word through channels such as your company's voice mail, email, website, and even traditional and social media.
Whatever you do, don't expect to create a disaster recovery plan and then toss it on a shelf. Revisit the plan at least annually, looking for shortcomings.
You'll also want to keep your plan fresh in the minds of your employees. Be sure that everyone - including new hires - knows exactly what to do by holding regular meetings on the subject or even conducting an occasional surprise drill. And be prepared to coordinate with fire, police and government officials who might be able to offer assistance during a catastrophe.
Thoughts and Concepts
These are just a few thoughts and concepts to consider when designing, implementing and updating your company's disaster recovery plan. Our firm can help you identify both risks and cost-effective ways to safeguard your employees and assets.
Tax planning critical when buying a business
If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.
Complacency can be costly
During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.
Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.
You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Merging accounting functions
One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.
To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.
The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.
2 ways spouse-owned businesses can reduce their self-employment tax bill
If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.
1. Establish that you don’t have a spouse-owned partnership
While the IRS creates the impression that involvement by both spouses in an unincorporated businessautomatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:
- The spouses have no discernible partnership agreement, and
- The business hasn’t been represented as a partnership to third parties, such as banks and customers.
If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax.
Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).
2. Establish that you don’t have a 50/50 spouse-owned partnership
Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.
Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650).
More-complicated strategies are also available. Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.
© 2017Timing Strategies Could Become More Powerful in 2017, Depending on What Happens With Tax Reform
Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.Timing strategies for businesses
Here are two timing strategies that can help businesses defer taxes:
1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.Potential impact of tax reform
These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.
Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.
But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.Be prepared
Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.
© 2017Thorough Due Diligence Can Protect Your Acquisition From Fraud
In today’s rough-and-tumble world of mergers and acquisitions (M&As), buyers need to get to know business sellers and their executives, test their representations about asset condition and financial performance, and screen for common fraud schemes. Here’s why.Whose side are they on?
Without adequate M&A due diligence, unwary buyers could fall victim to false representations by sellers that never pan out after the deal closes. Or they may inherit a hornet’s nest of white collar crime and embezzlement by employees.
Even if a company has internal controls in place, owners and executives can override them. These individuals have access to financial statements, and may have incentives — such as to receive bonuses for exceeding certain growth targets — to falsify them.
So it’s essential to perform background checks on your acquisition target’s owners and C-suite executives. A thorough check can uncover past involvement in criminal embezzlement, theft, forgery and other types of fraud, as well as involvement in civil litigation. It could also reveal falsified items on their resumés and other pertinent personal claims.How “creative” is the business?
Financial statements should also be scoured for misstatements. Some owners may use “creative” accounting techniques to artificially inflate a company’s value. They might, for example:
- Prebook revenues,
- Leave stale receivables on the books,
- Record phantom inventory,
- Defer expense recognition, or
- Lend money to major customers so they can make large purchases that will inflate sales numbers.
Owners might also hide liabilities, falsify transactions with related parties, overvalue receivables and securities, and overstate inventories to boost the selling price.Tip of the iceberg
Unfortunately, this is just the tip of the iceberg when it comes to fraud schemes that could diminish the value of your acquisition. In addition to performing financial and legal due diligence, be sure to tour your target’s facilities and interview management for insight into the company’s culture. For help conducting due diligence, please contact us.
© 2017How To Maximize Deductions For Business Real Estate
Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.Segregate personal property from buildings
Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).
If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.Carve out improvements from land
As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.Convert land into a deductible asset
Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.
Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.More limits and considerations
There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.
© 2017Reduce Your 2017 Tax Bill by Buying Business Assets
Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.Section 179 expensing
Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.
The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.
Under the initial version of the House bill, the limit on Sec. 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.
The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.
The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.Year-end planning
If you’ve been thinking about buying business assets, consider doing it before year end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum Sec.179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform. It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.
Getting Around The $25 Deduction Limit For Business Gifts
At this time of year, it’s common for businesses to make thank-you gifts to customers, clients, employees and other business entities and associates. Unfortunately, the tax rules limit the deduction for business gifts to $25 per person per year, a limitation that has remained the same since it was added into law back in 1962. Fifty-five years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions.The exceptions
Here’s a quick rundown of the major exceptions to the $25 limit:Gifts to a business entity
. The $25 limit applies only to gifts directly or indirectly given to an individual. Gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.Gifts to a married couple
. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.
Incidental costs of making a gift. Such costs aren’t subject to the limit. For example, the costs of custom engraving on jewelry or of packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.Gifts to employees
. Although employee gifts have their own limitations and may be treated as taxable compensation, an employer is generally allowed to deduct the full cost of gifts made to employees.Gifts vs. entertainment expenses
In some situations related to gifts of tickets to sporting or other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. Under current law, entertainment expenses are normally 50% deductible, so the gift deduction is a better deal for lower-priced tickets. But once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.
Be aware, however, that the elimination of the entertainment expense deduction has been included in proposed tax reform legislation. If legislation with such a provision is signed into law, it likely won’t go into effect until 2018.Track and document
To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.
In addition, you must retain documentation of the following:
- A description of the gift,
- The gift’s cost,
- The date the gift was made,
- The business purpose of the gift, and
- The business relationship to the taxpayer of the person receiving the gift.
If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact us.
© 2017Accrual-Basis Taxpayers: These Year-End Tips Could Save You Tax
With the possibility that tax law changes could go into effect next year that would significantly reduce income tax rates for many businesses, 2017 may be an especially good year to accelerate deductible expenses. Why? Deductions save more tax when rates are higher.
Timing income and expenses can be a little more challenging for accrual-basis taxpayers than for cash-basis ones. But being an accrual-basis taxpayer also offers valuable year-end tax planning opportunities when it comes to deductions.Tracking incurred expenses
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2018. This will enable you to deduct those expenses on your 2017 federal tax return. Common examples of such expenses include:
- Commissions, salaries and wages,
- Payroll taxes,
- Insurance, and
- Property taxes.
You can also accelerate deductions into 2017 without actually paying for the expenses in 2017 by charging them on a credit card. (This works for cash-basis taxpayers, too.)
As noted, accelerating deductible expenses into 2017 may be especially beneficial if tax rates go down for 2018.Prepaid expenses
Also review all prepaid expense accounts. Then write off any items that have been used up before the end of the year.
If you prepay insurance for a period of time beginning in 2017, you can expense the entire amount this year rather than spreading it between 2017 and 2018, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.And there’s more …
Here are a few more year-end tax tips to consider:
- Review your outstanding receivables and write off any receivables you can establish as uncollectible.
- Pay interest on all shareholder loans to or from the company.
- Update your corporate record book to record decisions and be better prepared for an audit.
To learn more about how these and other year-end tax strategies may help your business reduce its 2017 tax bill, contact us.
© 2017Tax Cuts and Jobs Act: Key Provisions Affecting Businesses
The recently passed tax reform bill, commonly referred to as the “Tax Cuts and Jobs Act” (TCJA), is the most expansive federal tax legislation since 1986. It includes a multitude of provisions that will have a major impact on businesses.
Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted.
- Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
- Repeal of the 20% corporate alternative minimum tax (AMT)
- New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
- Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
- Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
- Other enhancements to depreciation-related deductions
- New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
- New limits on net operating loss (NOL) deductions
- Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning afterDecember 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
- New rule limiting like-kind exchanges to real property that is not held primarily for sale
- New tax credit for employer-paid family and medical leave — through 2019
- New limitations on excessive employee compensation
- New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
Keep in mind that additional rules and limits apply to what we’ve covered here, and there are other TCJA provisions that may affect your business. Contact us for more details and to discuss what your business needs to do in light of these changes.
© 2017The TCJA Temporarily Expands Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.Pre-TCJA Bonus Depreciation
Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.
In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.TCJA Expansion
The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.
For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.
Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.
© 2018New Tax Law Gives Pass-Through Businesses A Valuable Deduction
Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law. Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI).A 20% Deduction
For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.The Limitations
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of:
- 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income.
Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture).
The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.Careful Planning Required
Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details.
© 2018Choosing The Best Business Entity Structure Post-TCJA
For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%.
On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved.Conventional wisdom
Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations: A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital gains when they sell the stock. For pass-through entities, there’s no federal income tax at the entity level.
Although C corporations are still potentially subject to double taxation under the TCJA, their new 21% tax rate helps make up for it. This issue is further complicated, however, by another provision of the TCJA that allows noncorporate owners of pass-through entities to take a deduction equal to as much as 20% of qualified business income (QBI), subject to various limits. But, unless Congress extends it, the break is available only for tax years beginning in 2018 through 2025.
There’s no one-size-fits-all answer when deciding how to structure a business. The best choice depends on your business’s unique situation and your situation as an owner.3 common scenarios
Here are three common scenarios and the entity-choice implications:
1. Business generates tax losses. For a business that consistently generates losses, there’s no tax advantage to operating as a C corporation. Losses from C corporations can’t be deducted by their owners. A pass-through entity will generally make more sense because losses pass through to the owners’ personal tax returns.
2. Business distributes all profits to owners. For a profitable business that pays out all income to the owners, operating as a pass-through entity generally will be better if significant QBI deductions are available. If not, it’s probably a toss-up in terms of tax liability.
3. Business retains all profits to finance growth. For a business that’s profitable but holds on to its profits to fund future growth strategies, operating as a C corporation generally will be advantageous if the corporation is a qualified small business (QSB). Why? A 100% gain exclusion may be available for QSB stock sale gains. If QSB status is unavailable, operating as a C corporation is still probably preferred — unless significant QBI deductions would be available at the owner level.Many considerations
These are only some of the issues to consider when making the C corporation vs. pass-through entity choice. We can help you evaluate your options.
© 2018Does Your Business Have To Begin Collecting Sales Tax On All Out-Of-State Online Sales?
You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in South Dakota v. Wayfair, Inc. is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax.
But for businesses with out-of-state online sales that haven’t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns.What the requirements used to be
Even before Wayfair, a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of the U.S. Constitution.
Previous Supreme Court rulings had found that a physical presence in a state (such as retail outlets, employees or property) was necessary to establish substantial nexus. As a result, some online retailers have already been collecting tax from out-of-state customers, while others have not had to.What has changed
In Wayfair, South Dakota had enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit sales tax. The Supreme Court found that the physical presence rule is “unsound and incorrect,” and that the South Dakota tax satisfies the substantial nexus requirement.
The Court said that the physical presence rule puts businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes.
In addition, the Court found that the physical presence rule treats sellers differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to sales tax on all of its sales in the state, while a business with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.What the decision means
Wayfair doesn’t necessarily mean that you must immediately begin collecting sales tax on online sales to all of your out-of-state customers. You’ll be required to collect such taxes only if the particular state requires it. Some states already have laws on the books similar to South Dakota’s, but many states will need to revise or enact legislation.
Also keep in mind that the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The others weren’t argued in Wayfair, but the Court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.
Please contact us with any questions you have about sales tax collection requirements.
© 2018How To Avoid Getting Hit With Payroll Tax Penalties
For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government.
If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company.The 100% penalty
Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule.
If a business makes payments late, there are escalating penalties. And if it fails to make them, the Trust Fund Recovery Penalty could apply. Under this penalty, also known as the 100% penalty, the IRS can assess the entire unpaid amount against a “responsible person.”
The corporate veil won’t shield corporate owners in this instance. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.
When the IRS assesses the 100% penalty, it can file a lien or take levy or seizure action against personal assets of a responsible person.“Responsible person,” defined
The penalty can be assessed against a shareholder, owner, director, officer or employee. In some cases, it can be assessed against a third party. The IRS can also go after more than one person. To be liable, an individual or party must:
Prevention is the best medicine
- Be responsible for collecting, accounting for and remitting withheld federal taxes, and
- Willfully fail to remit those taxes. That means intentionally, deliberately, voluntarily and knowingly disregarding the requirements of the law.
When it comes to the 100% penalty, prevention is the best medicine. So make sure that federal taxes are being properly withheld from employees’ paychecks and are being timely remitted to the federal government. (It’s a good idea to also check state and local requirements and potential penalties.)
If you aren’t already using a payroll service, consider hiring one. A good payroll service provider relieves you of the burden of withholding the proper amounts, taking care of the tax payments and handling recordkeeping. Contact us for more information.
© 2018Close-Up On The New QBI Deduction’s Wage Limit
The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.Full vs. partial phase-in
When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:
- 50% of the amount of W-2 wages paid to employees during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).
When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:
- The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
- The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
- The result is subtracted from the gross deduction to determine the final deduction.
Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.
The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.
What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:
($400,000 taxable income - $315,000 threshold)/$100,000 = 85%
To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:
($60,000 - $50,000) × 85% = $8,500
That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.That’s not all
Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.
© 20182 Tax Law Changes That May Affect Your Business’s 401(k) Plan
When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.1. Plan loan repayment extension
The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do.
Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59½).
Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.2. Hardship withdrawal limit increase
Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.
Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.)
Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.Nest egg harm
These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.
So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of
loans and early withdrawals. Please contact us if you have questions.