18 Jan

Tax filing season for 2017

IRS has announced tax filing season for 2017 tax returns

The IRS announced that this year’s filing season will begin January 29.

The announcement of the start date for tax season comes much later than last season (January 4 versus early December). As of November 2017, the IRS was still updating its systems to prepare for the 2018 filing season.

The IRS also explained that individual tax returns are due April 17 this year because April 15 is a Sunday and April 16 is a holiday in the District of Columbia.  This same tax filing deadline occurred just a couple of years ago.

27 Dec

Deduction for Qualified Business Income

Deduction for Qualified Business Income of an Individual (Passthrough Break)

The recent Tax Cuts and Jobs Act of 2017 (TCJA) passed by congress an signed by President Trump has a very interesting deduction for owners of partnerships and S corporations, provided the business’ principal asset is not the reputation or skill of one or more of its employees or owners (sorry – no accountants, consultants, lawyers, etc).

Under TCJA, sole proprietors, partners in partnerships, members in LLCs taxed as partnerships (hereafter, “partners”), and shareholders in S corporations may qualify for a new deduction for qualified business income for tax years beginning after December 31, 2017, and before January 1, 2026. Trusts and estates are also eligible for this deduction.

The amount of the deduction is generally 20 percent of the taxpayer’s qualifying business income.

Example: In 2018, Joe receives a salary of $100,000 from his job at XYZ Corporation and $50,000 of qualified business income from a side business that he runs as a sole proprietorship. Joe’s deduction for qualified business income in 2018 is $10,000 (20 percent of $50,000).

Observation: The effective marginal tax rate on qualified business income for individuals in the top 37-percent tax bracket who are able to fully apply the new deduction will be 29.6 percent – fully 10 points lower than the top rate under current law.

The deduction for qualified business income is claimed by individual taxpayers on their personal tax returns. The deduction reduces taxable income. The deduction is not used in computing adjusted gross income. Thus, it does not affect limitations based on adjusted gross income.

Observation: The deduction is available to both nonitemizers and itemizers.

The deduction for qualified business income is subject to several restrictions and limitations, discussed below.

Qualified Trade or Business

TCJA provides that qualified business income is determined for each qualified trade or business of the taxpayer. The term “qualified trade or business” means any trade or business other than: (1) a specified service trade or business (defined below); and (2) the trade or business of performing services as an employee.

Specified Service Trade or Business. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities (Code Sec. 475(c)(2) and Code Sec. 475(e)(2), respectively).

Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.

Special Rule Where Taxpayer’s Income Is Below a Specified Threshold. The rule disqualifying specified service trades or businesses from being considered a qualified trade or business does not apply to individuals with taxable income of less than $157,500 ($315,000 for joint filers). After an individual reaches the threshold amount, the restriction is phased in over a range of $50,000 in taxable income ($100,000 for joint filers).

The threshold amount is indexed for inflation. The exclusion from the definition of a qualified business for specified service trades or businesses is fully phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a joint return). For a taxpayer with taxable income within the phase-in range, the exclusion applies as follows.

Phase-in of Specified Service Business Limitation. In computing the qualified business income with respect to a specified service trade or business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 wages. The applicable percentage with respect to any tax year is 100 percent reduced by the percentage equal to the ratio of the excess of the taxable income of the taxpayer over the threshold amount bears to $50,000 ($100,000 in the case of a joint return).

Example: Tom, and unmarried taxpayer, has taxable income of $187,500, of which $150,000 is attributable to an accounting sole proprietorship. Assume that the sole proprietorship’s W-2 wages are high enough that the W-2 wage limitation (see below) will not affect Tom’s deduction. Tom has an applicable percentage of 40 percent [$187,500 – $157,500 (Tom’s threshold amount) = $30,000 / $50,000 (phaseout range) = 60 percent; 100 percent – 60 percent = 40 percent]. In determining includible qualified business income, Tom takes into account 40 percent of $150,000, or $60,000. Because we’re assuming that the W-2 wage limitation doesn’t apply, Tom’s deduction for qualified business income is 20 percent of $60,000, or $12,000.

“Domestic” Business Income Requirement

Items are treated as qualified items of income, gain, deduction, and loss only to the extent they are effectively connected with the conduct of a trade or business within the United States. In the case of a taxpayer who is an individual with otherwise qualified business income from sources within the commonwealth of Puerto Rico, if all the income is taxable under Code Sec. 1 (income tax rates for individuals) for the tax year, the “United States” is considered to include Puerto Rico for purposes of determining the individual’s qualified business income.

Qualified Business Income

Qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer.

Qualified business income does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include any guaranteed payment for services rendered with respect to the trade or business, and to the extent provided in regulations, does not include any amount paid or incurred by a partnership to a partner who is acting other than in his or her capacity as a partner for services.

Example: Charlotte is a partner in, and sales manager for, the XYZ partnership, a domestic business that is not a specified service trade or business. During the tax year, she receives guaranteed payments of $250,000 from XYZ for her services to the partnership as its sales manager. In addition, her distributive share of XYZ’s ordinary income (it’s only item of income or loss) was $175,000. Charlotte’s qualified business income from XYZ is $175,000.

The determination of qualified items of income, gain, deduction, and loss takes into account these items only to the extent included or allowed in the determination of taxable income for the year.

Example: During the tax year, a qualified business has $100,000 of ordinary income from inventory sales, and makes an expenditure of $25,000 that is required to be capitalized and amortized over five years under applicable tax rules. Qualified business income is $100,000 minus $5,000 (current-year ordinary amortization deduction), or $95,000. The qualified business income is not reduced by the entire amount of the capital expenditure, only by the amount deductible in determining tax income for the year.

Calculating the Deduction

The deductible amount for each qualified trade or business is the lesser of –

(1) 20 percent of the taxpayer’s qualified business income with respect to the trade or business; or

(2) the greater of 50 percent of the W-2 wages (defined below) with respect to the trade or business or the sum of 25 percent of the W-2 wages with respect to the trade or business and 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property.

The amount in “(2)” is referred to hereafter as “the W-2 wage limitation.”

W-2 Wage Limitation on the Deduction

The W-2 wage limitation on the deduction for qualified business income is based on either W-2 wages paid, or W-2 wages paid plus a capital element. This limitation is phased in above a threshold amount of taxable income (see below). Specifically, the limitation is the greater of: (1) 50 percent of the W-2 wages paid with respect to the qualified trade or business; or (2) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property.

Example: Susan owns and operates a sole proprietorship that sells cupcakes. The business is not a specified service business and Susan’s filing status for Form 1040 is single. The cupcake business pays $100,000 in W-2 wages and has $350,000 in qualified business income. For the sake of simplicity, assume the business had no qualified property, and that Susan has no other items of income or loss (putting her taxable income at a level where she’s fully subject to the W-2 wage limitation). Susan’s deduction for qualified business income is $50,000, which is the lesser of (a) 20 percent of $350,000 in qualified business income ($70,000), or (b) the greater of (i) 50 percent of W-2 wages ($50,000) or (ii) 25 percent of W-2 wages plus 2.5 percent of qualified property ($25,000) ($25,000 ($100,000 x 25 percent) + $0 (2.5 percent x $0)).

Observation: The first of the two ways of calculating the W-2 wage limitation (50 percent of W-2 wages) is the one that will apply to most business that have employees. The second way (25 percent of W-2 wages plus 2.5 percent of qualified property) will mainly apply to real estate activities and other activities that have an unusually high ratio of qualifying property to employees.

W-2 Wages Defined

W-2 wages are the total wages subject to wage withholding, elective deferrals, and deferred compensation paid by the qualified trade or business with respect to employment of its employees during the calendar year ending during the tax year of the taxpayer. W-2 wages do not include any amount which is not properly allocable to the qualified business income as a qualified item of deduction. In addition, W-2 wages do not include any amount which was not properly included in a return filed with the Social Security Administration (SSA) on or before the 60th day after the due date (including extensions) for such return.

Gray Area: The language of new Code Sec. 199A (which provides the rules for the deduction for qualified business income), appears to treat S corporation shareholders and partners in partnerships differently for the narrow purpose of calculating the W-2 wage limitation. Reasonable compensation paid to an S corporation shareholder as wages appear to fall within the definition of W-2 wages for purposes of applying the limitation. By contrast, guaranteed payments to a partner appear not to fall within the definition.

Caution: The text of Code Sec. 199A is convoluted, and other commentators and (and the IRS) may have a different interpretation of how the definition of W-2 wages applies to S corporation shareholders vs. partners and LLC members. Even if our interpretation holds up, there is no indication that Congress intended to treat these types of owners differently with respect to how W-2 wages are calculated. So, for now, practitioners may want to note this as a gray area, and one that will be ripe to be addressed in a future technical corrections bill.

In the case of a taxpayer who is an individual with otherwise qualified business income from sources within the commonwealth of Puerto Rico, if all the income is taxable under Code Sec. 1 (income tax rates for individuals) for the tax year, the determination of W-2 wages with respect to the taxpayer’s trade or business conducted in Puerto Rico is made without regard to any exclusion under the wage withholding rules for remuneration paid for services in Puerto Rico.

Qualified Property Defined

For purposes of this provision, qualified property means tangible property of a character subject to depreciation that is held by, and available for use in, the qualified trade or business at the close of the tax year, and which is used in the production of qualified business income, and for which the depreciable period has not ended before the close of the tax year. The depreciable period with respect to qualified property of a taxpayer means the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of (1) the date 10 years after that date, or (2) the last day of the last full year in the applicable recovery period that would apply to the property under Code Sec. 168 (without regard to Code Sec. 168(g)).

Example: Walter (who is subject to the limitation on the deduction for qualified business income) does business as a sole proprietorship conducting a widget-making business. The business buys a widget-making machine for $100,000 and places it in service in 2020. The business has no employees in 2020. The W-2 limitation in 2020 is the greater of (a) 50 percent of W-2 wages, or $0, or (b) the sum of 25 percent of W-2 wages ($0) plus 2.5 percent of the unadjusted basis of the machine immediately after its acquisition: $100,000 x .025 = $2,500. The amount of the limitation on Walter’s deduction is $2,500.

In the case of property that is sold, for example, the property is no longer available for use in the trade or business and is not taken into account in determining the limitation. TCJA provides that the IRS must provide rules for applying the limitation in cases of a short tax year in which the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the year. The IRS is required to provide guidance applying rules similar to the rules of Code Sec. 179(d)(2) to address acquisitions of property from a related party, as well as in a sale-leaseback or other transaction as needed to carry out the purposes of the provision and to provide anti-abuse rules, including under the limitation based on W-2 wages and capital. Similarly, the IRS must provide guidance prescribing rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions as needed to carry out the purposes of the provision and to provide anti-abuse rules, including under the limitation based on W-2 wages and capital.

Phase-in of W-2 Wage Limitation

The application of the W-2 wage limitation phases in for a taxpayer with taxable income in excess of the following threshold amounts: $315,000 for joint filers and $157,500 for all other taxpayers, indexed for inflation. For purposes of phasing in the wage limit, taxable income is computed without regard to the 20 percent deduction.

The W-2 wage limitation applies fully for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a joint return). For a taxpayer with taxable income within the phase-in range, the wage limit applies as follows. With respect to any qualified trade or business, the taxpayer compares –

(1) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business; with

(2) the W-2 wage limitation (see above) with respect to the qualified trade or business.

If the amount determined under (2) is less than the amount determined (1), (that is, if the wage limit is binding), the taxpayer’s deductible amount is the amount determined under (1) reduced by the same proportion of the difference between the two amounts as the excess of the taxable income of the taxpayer over the threshold amount bears to $50,000 ($100,000 in the case of a joint return).

Carryover Losses

If the net amount of qualified business income from all qualified trades or businesses during the tax year is a loss, it is carried forward as a loss from a qualified trade or business in the next tax year. Similar to a qualified trade or business that has a qualified business loss for the current tax year, any deduction allowed in a subsequent year is reduced (but not below zero) by 20 percent of any carryover qualified business loss.

Example: Sean has qualified business income of $20,000 from qualified business A and a qualified business loss of $50,000 from qualified business B in Year 1. Sean is not permitted a deduction for Year 1 and has a carryover qualified business loss of $30,000 to Year 2. In Year 2, Sean has qualified business income of $20,000 from qualified business A and qualified business income of $50,000 from qualified business B. To determine the deduction for Year 2, Sean reduces the 20 percent deductible amount determined for the qualified business income of $70,000 from qualified businesses A and B by 20 percent of the $30,000 carryover qualified business loss.

Treatment of Investment Income

Qualified items of income, gain, deduction, and loss do not include specified investment-related income, deductions, or loss. Specifically, qualified items of income, gain, deduction and loss do not include (1) any item taken into account in determining net long-term capital gain or net long-term capital loss, (2) dividends, income equivalent to a dividend, or payments in lieu of dividends, (3) interest income other than that which is properly allocable to a trade or business, (4) the excess of gain over loss from commodities transactions, other than those entered into in the normal course of the trade or business or with respect to stock in trade or property held primarily for sale to customers in the ordinary course of the trade or business, property used in the trade or business, or supplies regularly used or consumed in the trade or business, (5) the excess of foreign currency gains over foreign currency losses from Code Sec. 988 transactions, other than transactions directly related to the business needs of the business activity, (6) net income from notional principal contracts, other than clearly identified hedging transactions that are treated as ordinary (i.e., not treated as capital assets), and (7) any amount received from an annuity that is not used in the trade or business of the business activity. Qualified items under this provision do not include any item of deduction or loss properly allocable to such income.

Special Rules for Partnerships and S Corporations

TCJA provides that, in the case of a partnership or S corporation, the business income deduction applies at the partner or shareholder level. Each partner takes into account the partner’s allocable share of each qualified item of income, gain, deduction, and loss, and is treated as having W-2 wages for the tax year equal to the partner’s allocable share of W-2 wages of the partnership. The partner’s allocable share of W-2 wages is required to be determined in the same manner as the partner’s share of wage expenses. For example, if a partner is allocated a deductible amount of 10 percent of wages paid by the partnership to employees for the tax year, the partner is required to be allocated 10 percent of the W-2 wages of the partnership for purposes of calculating the wage limit under this deduction. Similarly, each shareholder of an S corporation takes into account the shareholder’s pro rata share of each qualified item of income, gain, deduction, and loss, and is treated as having W-2 wages for the tax year equal to the shareholder’s pro rata share of W-2 wages of the S corporation.

Qualified REIT Dividends, Cooperative Dividends, and Publicly Traded Partnership Income

A deduction is allowed under the provision for 20 percent of the taxpayer’s aggregate amount of qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income for the tax year. Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend. A qualified cooperative dividend means a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount, provided it is includible in gross income and is received from either (1) a tax-exempt benevolent life insurance association, mutual ditch or irrigation company, cooperative telephone company, like cooperative organization, or a taxable or tax-exempt cooperative that is described in Code Sec. 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter T of the Code in 1962. Qualified publicly traded partnership income means (with respect to any qualified trade or business of the taxpayer), the sum of the (1) the net amount of the taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (that are effectively connected with a U.S. trade or business and are included or allowed in determining taxable income for the tax year and do not constitute excepted enumerated investment-type income, and not including the taxpayer’s reasonable compensation, guaranteed payments for services, or (to the extent provided in regulations) Code Sec. 707(a) payments for services) from a publicly traded partnership not treated as a corporation, and (2) gain recognized by the taxpayer on disposition of its interest in the partnership that is treated as ordinary income (for example, by reason of Code Sec. 751).

Determining the Final Amount of the Deduction for Qualified Business Income

An individual taxpayer generally may deduct an amount equal to the sum of –

(1) the lesser of (a) the combined qualified business income amount for the tax year; or (b) an amount equal to 20 percent of the excess (if any) of taxpayer’s taxable income for the tax year over the sum of any net capital gain and qualified cooperative dividends, plus

(2) the lesser of 20 percent of qualified cooperative dividends for the tax year or taxable income (reduced by net capital gain).

This sum may not exceed the taxpayer’s taxable income for the tax year (reduced by net capital gain).

Treatment of Trusts and Estates

TCJA provides that trusts and estates are eligible for the 20-percent deduction. Rules similar to the rules under present-law Code Sec. 199 (as in effect on December 1, 2017) apply for apportioning between fiduciaries and beneficiaries any W-2 wages and unadjusted basis of qualified property under the limitation based on W-2 wages and capital.

Treatment of Agricultural and Horticultural Cooperatives

For tax years beginning after December 31, 2017, but not after December 31, 2025, a deduction is allowed to any specified agricultural or horticultural cooperative equal to the lesser of (1) 20 percent of the cooperative’s taxable income for the tax year or (2) the greater of 50 percent of the W-2 wages paid by the cooperative with respect to its trade or business or the sum of 25 percent of the W-2 wages of the cooperative with respect to its trade or business plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property of the cooperative. A specified agricultural or horticultural cooperative is an organization to which subchapter T applies that is engaged in (1) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, (2) the marketing of agricultural or horticultural products that its patrons have so manufactured, produced, grown, or extracted, or (3) the provision of supplies, equipment, or services to farmers or organizations described in the foregoing.

Effective Date

The provision is effective for tax years beginning after December 31, 2017, and does not apply to tax years beginning after December 31, 2025.

26 Dec

Tax Bill Changes for Corporations

Tax Bill Changes for Corporations

The 2017 GOP tax bill just passed by congress and signed into law by the president, has many significant changes for corporations.  The changes are effective January 1, 2018.  Here are some of the aspects of the new law that will affect many corporate taxpayers.

Tax Rate

Prior to January 1, 2018, the corporate tax rate is a graduated rate.  The lowest rate is 15% for taxable income up to $50,000.  The top corporate tax rate is 38% for income over $15 million.

Beginning January 1, 2018, the corporate tax rate is going to be a fixed rate of 21% for all income levels.  This obviously presents large savings in federal income tax for corporations earning at the level of the prior highest brackets.

AMT

Corporate alternative minimum tax (AMT) is repealed.

Bonus Depreciation

In prior years, there has been a provision for bonus depreciation up to 50%.  This was to be phased out.  With the new tax bill, the allowable bonus depreciation will be 100% starting in 2018 and up to 2022.  In 2023, it will be 80%, 2024 will have 60%, 2025, will have 40%, 2026 will have 20%.

Most importantly, bonus depreciation was available for only new property.  Now, it will be available for used property also.

Section 179

Section 179 maximum is increased to $1 million, up from $500,000.  The phaseout threshold is increased to $2.5 million from

The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Cash method of accounting

More corporate taxpayers are eligible to use the cash method of accounting now.

Farming C corporations (or farming partnerships with a C corporation partner) will be allowed to use the cash method if they meet the $25 million gross-receipts test.

The current-law exceptions from the use of the accrual method otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of that method clearly reflects income.

Inventories

Corporations that meet the cash-method $25 million gross-receipts test will not be required to account for inventories under Section 471 of the Internal Revenue Code (General rule for inventories).  Instead, they will be allowed to use an accounting method that either treats inventories as non-incidental materials and supplies, or conforms to their financial accounting treatment of inventories.

Interest deduction limitation

The deduction for business interest is limited to the sum of business interest income (if any) plus 30% of the adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year.  Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).

Any taxpayer that meets the $25 million gross-receipts test is exempt from the interest deduction limitation.  The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Farming businesses are allowed to elect out of the limitation.

For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer’s gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).

Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.

Net operating losses:

The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)

Taxpayers are allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback.

Like-kind exchanges:

Under the act, like-kind exchanges under Sec. 1031 will be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange was disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange was received on or before that date.

Domestic production activities

The act repealed the Sec. 199 domestic production activities deduction.

Entertainment expenses

The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.

Qualified transportation fringe benefits

The act disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer and, except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Meals

Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, will not be deductible.

 

Amortization of research and experimental expenditures

Under the act, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.

Year of inclusion: The act requires accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The act provides an exception for taxpayers without an applicable or other specified financial statement.

Modifications of Treatment of Certain Farm Property

The act shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer and is placed in service after December 31, 2017.

The act also repeals the required use of the 150-percent declining balance method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-percent declining balance method will continue to apply to any 15-year or 20-year property used in the farming business to which the straight line method does not apply, or to property for which the taxpayer elects the use of the 150-percent declining balance method.

The provision is effective for property placed in service after December 31, 2017.

There are many other provisions for businesses in the 500 pages of the act just signed into law.  If you have questions about how the tax law will affect your business, please contact us and we will be happy to answer your questions.

 

19 Dec

2017 GOP Tax Bill

The 2017 GOP tax bill rolling out of committee has many interesting provisions that will affect many U.S. taxpayers either positively or negatively.

All personal income tax provisions would be effective from 2018 to 2025.  Here are some aspects of the bill that will affect most taxpayers in one way or another.

Obamacare Individual Mandate Penalty

Under the new GOP bill, the penalty is 0.

Tax Brackets

First and foremost, people want to know how the tax brackets in the compromise bill compare to the 2017 tax brackets in effect.

For married filing jointly, here is a comparisons:

New  Old (2017)
Taxable income over But not over Is taxed at Taxable income over But not over Is taxed at
$0 $19,050 10%  $                             –  $                         18,650 10%
$19,050 $77,400 12%  $                 18,650  $                         75,900 15%
$77,400 $165,000 22%  $                 75,900  $                       153,100 25%
$165,000 $315,000 24%  $               153,100  $                       233,350 28%
$315,000 $400,000 32%  $               233,350  $                       416,700 33%
$400,000 $600,000 35%  $               416,700  $                       470,700 35%
$600,000 37%  $               470,700 39.60%

As you can see, the brackets under the new bill are slightly lower, and the bracket amounts are slightly higher.  Thus, the average taxpayer will find themselves possibly in a lower marginal tax bracket.

Personal Exemption and Standard Deduction

The personal exemption would go away under the new bill, and the standard deduction would go way up, almost doubling.  Personal exemptions and the standard deduction combine to make a certain amount of income not taxable.

Based on the change, where a family will start to notice is at the 4 person level – a couple and two dependents.  In the following table, I demonstrate a five person family.  You can see that under the new bill, less of your income will be protected from taxation.

Personal Exemption – per person                                 –                        4,050
Standard deduction – Married filing jointly                      24,000                      12,700
Family of 5                      24,000                      32,950

Child Tax Credit

The child tax credit will increase from $1000 to $2000.  Tax credits are better than deductions, and could make up for the disappearance of the personal exemption for the dependent side of the equation.

State and Local Income or Property Tax

In 2017, if itemizing deductions, state and local property and income tax are deductible for federal income tax purposes.  This will still be true under the new bill, but the cap is $10,000.  This will affect people in high-tax states like California and New York where income tax and property tax can easily exceed $10,000, especially combined.  In states like Idaho, where property tax would not generally be too high for most people, and maybe even not the 7.4% maximum income tax, this may not have much of an impact.

Qualified Business Income Deduction for Pass Through Entity Owners

This is a very interesting topic and would warrant its own blog post, but suffice to say this has the potential to create a significant deduction for some people who are owners in small businesses taxed as S corps or partnerships.

If you have any questions about the tax bill and how it might affect your personal and business situation, I would be happy to help.  Please contact me.

04 Feb

Financial Statement Preparation and Compilation

Paul Herndon, CPA

Paul Herndon, CPA

We are frequently asked if our firm specializes in financial statement preparation, compilation, review, or audit.  We do offer financial statement preparation and compilation.  What is a compilation, and how does it differ from a review or audit?

The main difference between compilations and reviews or audits is the level of service the CPA provides:

What is a compilation?

  • Compiled financial statements represent the most basic level of service CPAs provide with respect to financial statements.
  • In a compilation engagement, the CPA assists management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
  • In a compilation, the CPA must comply with Statements on Standards for Accounting and Review Services (SSARSs).  In this case, those standards require the CPA to have an understanding of the industry in which the client operates, obtain knowledge about the client, and read the financial statements and consider whether such financial statements appear appropriate in form and free from obvious material errors.
  • A compilation does not contemplate performing inquiry, analytical procedures, or other procedures ordinarily performed in a review; or obtaining an understanding of the entity’s internal control; assessing fraud risk; or testing of accounting records; or other procedures ordinarily performed in an audit.
  • The CPA issues a report stating:
    • The compilation was performed in accordance with Statements on Standards for Accounting and Review Services
    • The CPA has not audited or reviewed the financial statements
    • The CPA does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework.

     

To be a good auditor or reviewer, the CPA must have experience in such practice, and CPAs who make the very best auditors do not generally do tax work.  In other words, auditing is a specialization, and tax work is a specialization.  Our firm has chosen to focus on tax work because it is what we are good at, but most importantly, because it is the help most small businesses need.

Of course, small businesses also frequently need financial statements in order to inform potential investors on the performance of the company.  Small businesses also need bookkeeping.  Thus we offer those services and have very good personnel to do that.

We would welcome an opportunity to help your small business in the area of bookkeeping and financial report preparation/compilation.  Give us a call, or email us.  Initial consultations are free as we want to evaluate how we can really help your business succeed.

 

Paul Herndon, CPA

phone 208-597-2086

paul@herndoncpa.com

31 Dec

Herndon CPA PA tax preparation for small business

As we leave 2013, it becomes apparent that the tax code at both the federal and state levels is in a constant state of flux.  For example, if you pay yourself a salary of 100,000, and your state unemployment tax rate is 3% on the first $34,000 of income, you are going to have a tax bill for unemployment of nearly $1000 during the year.  The following year, the rate may go wildly up or down.  What if you are an S corp officer and you don’t think it’s fair that you should even be paying into state unemployment as the sole owner and employee?  Some states recognize this and have opt-out clauses.  However, they aren’t typically well-known.

You could be spending hundreds of dollars more per year for something you don’t need to be doing.

We are here to know these nuances of the laws and regulations so you can go about focusing on your core business.

While employing a CPA will have a cost, it will pay off by saving you more than it typically costs.  Not only do you save money, but also time – and lots of it.

As we enter 2014, we’d like to talk with you about how we can help you save time and money as you minimize your overall tax burden.

HERNDON CPA PA
phone 208-597-2086
paul@herndoncpa.com

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