The Coronavirus Aid, Relief, and Economic Security Act,
“The CARES Act” provides tax relief to individuals and businesses
After days of furious negotiations, Congress has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The $2.2 trillion price tag for tax relief and incentives for individuals and businesses makes it the most expensive piece of legislation ever passed. It includes the greatly anticipated provision for recovery rebate credits to individuals. Here are some of the major aspects of The CARES Act.
You may have many questions about how this will affect you and your taxes.
If you have any questions, please give us a call.
We are here to help.
Anderson, Spector and Co PC
Depreciation of Qualified Improvement Property
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides tax relief to individuals and businesses in an effort to support the economy. In addition to numerous other provisions that provide cashflow to businesses, the CARES Act includes a modification to the recovery period for qualified improvement property.
Under the CARES Act, a 15-year recovery period is retroactively assigned to qualified improvement property placed in service after December 31, 2017. Therefore, qualified improvement property may be depreciated over 15 years or, alternatively, qualifies for 100 percent bonus depreciation if all bonus requirements are met.
Qualified improvement property is broadly defined as an internal improvement to nonresidential real property but does not include improvements related to elevators and escalators, the internal structural framework, or an enlargement of the building. The improvement must be placed in service after the date the improved building is first placed in service. The improvement must be made by the taxpayer. Therefore, the 15-year recovery period and bonus depreciation does not apply to a taxpayer that purchases a building that includes qualified improvement property depreciated by the seller over 15 years.
Opportunity to Amend: As a result of the retroactive application of the reduced recovery period, if a taxpayer filed two or more returns using a 39-year recovery period for qualified improvement property placed in service after 2017 an incorrect accounting method was adopted and automatic consent to change to the correct method must be filed on Form 3115. Taxpayers who only filed one return using a 39-year recovery period (e.g., a calendar year taxpayer who has not filed a 2019 return) may file an amended return to correct the recovery period or may file Form 3115 with their current year return.
Generally, a taxpayer must elect out of bonus depreciation by the extended due date of the return for the tax year in which the property eligible for the bonus was placed in service. Some taxpayers may not want to claim 100 percent bonus depreciation on qualified improvement property that retroactively qualifies for the additional allowance. The IRS will presumably issue guidance allowing these taxpayers to make a late election out of bonus depreciation and to file an amended return or Form 3115, as applicable, based on a 15-year recovery period.
The reduced recovery period not only allows businesses to improve their cashflow by filing an amended return, but also encourages investment in further improvements to stimulate the economy.
Please call our office with any questions on qualified improvement property or other provisions of the CARES Act. We are here to help you.
Special Rules for Use of Retirement Funds
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief designed to increase liquidity in the economy including modifications to the rules on the use and distribution of retirement funds.
Withdrawals: The CARES Act waives the 10-percent penalty on early withdrawals up to $100,000 from qualified retirement plans for coronavirus-related distributions. For purposes of the penalty waiver, a coronavirus-related distribution is one made during the 2020 calendar year, to an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus.
Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years. This relief is commonly granted by Congress in the wake of major disaster declarations, such as those made after a major hurricane.
Loans: The maximum loan amount is increased from the lesser of $50,000 or 50% of vested balance to the lesser of $100,000 or 100% of vested balance. This increase applies to loans made between March 27, 2020 (the date of enactment of the CARES Act) and December 31, 2020.
In addition, if a qualified individual has a loan repayment due date after March 27, 2020 and before December 31, 2020, on an outstanding loan, the payment due date is delayed one year (or, if later, until the date which is 180 days after March 27, 2020). Any subsequent repayments with respect to the loan will be adjusted accordingly and the five-year period for repayment is disregarded.
Similar to the rules on withdrawals, a qualified individual is an individual (or the spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus.
Required Minimum Distributions: The CARES Act also waives required minimum distributions, regardless of whether the taxpayer has been impacted by the pandemic. The waiver applies for calendar year 2020 to defined contribution plans, certain annuity plans, and traditional or Roth IRAs. The waiver allows seniors to hold on to their plan assets when they might otherwise have to sell at market lows.
- IRA Contribution Deadline. The deadline to make an IRA contribution is extended to July 15, the extended due date for tax returns.
- Mandatory 20% Withholding. The mandatory 20% income tax withholding on rollovers is also suspended for 2020.
If you would like more information on modifications to the rules on the use and distribution of retirement funds, please call our office. We are here to help you.
Does my business qualify to receive the Employee Retention Credit?
The Treasury Department and the Internal Revenue Service have launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
The credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.
Qualifying employers must fall into one of two categories:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
How is the credit calculated? The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.
How do I know which wages qualify? Qualifying wages are based on the average number of a business’s employees in 2019. Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
Employers with more than 100 employees: If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
I am an eligible employer. How do I receive my credit? Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not enough to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Please call our office if you have any questions related to the employee retention credit and how you may qualify.
Excess Business Losses of Noncorporate Taxpayers
Under the CARES Act, the limitation on the deduction of excess business losses for noncorporate taxpayers will not apply for tax years beginning in 2018, 2019, and 2020.
An “excess business loss” is the excess of a taxpayer’s aggregate deductions for the tax year from its trades or businesses over the aggregate gross income or gain for the tax year from those trades or businesses plus $250,000 ($500,000 for joint return filers). Under the Tax Cuts and Jobs Act, a noncorporate taxpayer is not allowed to claim a deduction for excess business losses for tax years beginning after December 31, 2017, and before January 1, 2026. However, the CARES Act now modifies the deduction limitation to apply for tax years beginning after December 31, 2020 and before January 1, 2026.
Because the limitation on excess business losses no longer applies to the 2018 tax year, taxpayers who were subject to the limitation for 2018 have an opportunity to file an amended return and claim a potential refund.
The modification to the loss limitation for shareholders and partners of pass-through businesses and sole proprietors, will help noncorporate taxpayers utilize business losses and improve their cashflow. Please call our office to determine if you will benefit by filing an amended return. We are here to assist you.
Delayed Payment of Employer Payroll Taxes
In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act defers the payment of the employer share of payroll taxes.
In general, under the Federal Insurance Contributions Act (FICA), taxes are imposed on both employers and employees on wages paid to the employee for Social Security (old-age, survivors, and disability insurance (OASDI)), and Medicare hospital insurance (HI). The FICA taxes are imposed on both the employer and the employee at a rate of 6.2 percent for OASDI and 1.45 percent for HI for a total of 7.65 percent for the employee and 7.65 for the employer (15.3 percent total).
Payroll taxes due from the period beginning on the date the CARES Act is signed into law and ending on December 31, 2020, can be deferred. The total payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
In addition to the payroll tax deferment, the CARES Act also provides for an employee retention credit and advance payment of payroll credits for employee paid sick and family leave. Please call our office to discuss your available options.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides tax relief to individuals and businesses in an effort to support the economy. Included in the numerous provisions is modification to the rules on the tax treatment of net operating losses.
Normally, NOLs arising in tax years beginning after 2017 may only reduce 80 percent of a taxpayer’s taxable income in carryback and carryforward years. The two-year carryback period and twenty-year carryforward period, as well as the longer carryback periods for special types of losses, were eliminated under the Tax Cuts and Jobs Act, effective for NOLs arising in tax years ending after 2017. NOLs arising in tax years ending after 2017 are carried forward indefinitely.
However, under the CARES Act, net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period. The general rule limiting an NOL deduction to 80 percent of taxable income does not apply to NOLs arising in these years.
Extension of time to waive five-year carryback for 2018 and 2019 NOLs. The five-year carryback period may be waived by making an election. For NOLs that arose in tax years beginning in 2018 or 2019, the time for making the waiver election is extended to the due date (including extensions) for filing the taxpayer’s return for the first tax year ending after March 27, 2020 (the date of enactment of the new law). Normally, the election is required by the due date (including extensions) of the return for the tax year in which the NOL arose. The regular election deadline continues to apply to NOLs arising in a tax year that begins in 2020.
The extended due date is necessary because the statutory deadline for making the waiver election has expired for some taxpayers. The CARE Act contains no specific relief that allows taxpayers with a 2018 or 2019 NOL to file a late tentative refund application. Since the due date for filing a tentative refund application is statutorily required to be filed within one year after the close of the NOL year the IRS is not able grant administrative relief. Consequently, taxpayers for whom the deadline has passed will need to file amended returns in order to claim refunds.
If you have any questions related to the NOL rules, please call our office. We can help you determine the best timing for claiming a net operating loss.
Waiver of Required Minimum Distribution Rules
The Coronavirus Aid, Relief, and Economic Security (CARES) Act waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.
The required minimum distribution (RMD) rules prevent taxpayers from extending the tax benefit for retirement savings indefinitely. In general, a minimum required distribution must be made for the later of the year in which the participant turns 70 1/2 (or 72, if they have not reached 70 1/2 before 2020) or retires, and for every year thereafter. The required beginning date cannot be delayed until retirement if the participant is a five-percent owner of the employer, or if the account is an IRA. The distribution for the first year can be made as late as April 1 of the following year. For other years, the required distribution must be made during the calendar year.
The waiver under the CARES ACT applies for calendar year 2020 to defined contribution plans, certain annuity plans, and traditional or Roth IRAs. The waiver allows seniors to hold on to their plan assets when they might otherwise have to sell at market lows.
Comment: There may be an additional benefit of the waiver for taxpayers who turned 70 ½ in 2019 and did not take their first required distribution in 2019. For those individuals who chose to wait until April 1, 2020 and had not yet taken the distribution at the time legislation was passed, they can waive both the 2019 and 2020 RMDs.
Conversely, for all taxpayers who have already taken their distribution, it is uncertain if they can still benefit from the waiver. In general, distributions received each year, up to the amount of the individual's RMD, are not eligible rollover distributions. We must wait for guidance from the IRS to see if the generally applicable rule continues to apply for 2019 and 2020 RMDs that were taken prior to the CARES Act. For now, the distribution is included in income. However, if redepositing the RMD into another tax qualified account would otherwise qualify as a rollover, then taxpayers may be able to treat it as they would any other rollover (i.e. redeposit it somewhere within 60 days, convert to a Roth, etc.).
If you would like more information on the waiver of RMDs for 2020, please call our office. We are here to help you.
Recovery Rebates for Individuals
Under the CARES Act, individual taxpayers will receive advance refunds of credits against 2020 taxes equal to $1,200 for individuals, or $2,400 for joint filers, plus $500 for each qualifying child. Generally, income tax credits reduce a taxpayer’s income tax liability and are claimed on the tax return for the year they arise. However, the government will make advance payments of the credit as soon as possible, with eligibility and credit amounts based on information from 2019 or 2018 tax returns.
The amount of each recovery rebate credit is phased out by $5 for every $100 in excess of a threshold amount. This threshold amount is based upon 2018 adjusted gross income (unless a 2019 return has already been filed). The phaseout begins at $75,000 for single filers, $112,500 for heads of households, and $150,000 for joint filers. Thus, the rebates are completely phased out for single filers with 2018 (or 2019, if applicable) adjusted gross income over $99,000, heads of household with $136,500, and joint filers with $198,000. Once the credit for an eligible individual phases out, the credit for each qualifying child phases out with each additional $10,000 in AGI over the threshold.
Pat and Terry are eligible individuals who file a joint return that claims two qualifying children. If Pat and Terry’s AGI is $198,000 or less, they are entitled to a $3,400 advance payment ($1,200 each for Pat and Terry, plus $500 for each child). If Pat and Terry’s AGI is at least $218,000, their advance payment is completely phased out. If Pat and Terry’s AGI is more than $198,000 but less than $218,000, their $3,400 advance payment is partially phased out. For example, if their AGI is $205,000, their $3,400 credit is reduced by $350 (five percent of their $7,000 AGI that exceeds the phase-out threshold).
In order to be eligible for a recovery rebate, the individual must not be:
- a nonresident alien,
- able to be claimed as a dependent on another taxpayer’s return,
- an estate or trust, and
- must have included a Social Security number for both the taxpayer, the taxpayer’s spouse, and eligible children (or an adoption taxpayer identification number, where appropriate).
The advance credit is based on the AGI reported and the qualifying children claimed on the eligible individual’s 2019 return. If the individual requested payment of any refund via electronic funds transfer, the IRS may pay the advance credit to that same bank account. However, if an individual has not filed a 2019 return by the time the advance credits are determined, the advance credit is based on the individual's 2018 tax return. If the individual has not filed a 2018 return by the time the advance payments are determined, the advance payment is based on information provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board, for calendar year 2019.
Although the advance credit is based on earlier tax returns, the rebate actually applies to the 2020 tax year. The advance credit reduces the amount of the taxpayer’s credit for the 2020 tax year, but not below zero. One-half of any advance payment or refund made on a joint return is treated on having been made or allowed to each spouse. Thus, it appears that a taxpayer whose advance credit is reduced or eliminated because of the AGI limits (based on their 2019 or 2018 return) may still be able to claim the credit on a 2020 return if 2020 AGI drops below the phase-out limits.
We will share more information on the recovery rebate credit and other provisions of the CARES Act as it becomes available. We are here to help you in these turbulent times. Please call our office if you have any questions.
COVID-19 Tax Deadline Extension
March 20, 2020
New Tax Deadlines
The Treasury Department earlier today announced that many tax returns and payments coming due next month have been extended. Instead of April 15th, these returns are now due July 15th, 2020. Payments due with any of these returns was extended to July 15th earlier this week. Affected returns and related payments are:
- 2019 U.S. Individual Income Tax Returns (Form 1040)
- 2020 U.S Estimated Payment Voucher Quarter 1 (1040-ES due 4/15/20)
- 2020 U.S. Estimated Payment Voucher 2 (1040-ES due 6/15/20)
- 2019 U.S. Income Tax Return for Estates and Trusts (Form 1041)
- 2020 Trust & Estate Payment Voucher 1 (Form 1041-ES due 4/15/20)
- 2020 Trust & Estate Payment Voucher 2 (Form 1041-ES due 6/15/20)
- 2019 U.S. Corporation Income Tax Return (Form 1120)
New ASC Office Procedures
Starting at 5pm today, March 20, 2020 we will be working remotely. Other than changing how we receive and deliver data, we will remain fully operational. We are asking our clients to send us their data by mail, email or fax unless other arrangements are made. Our front door will be locked except for scheduled drop offs and deliveries. We are asking our clients to use emails for communication with us because voicemails will be harder for us to monitor and retrieve. We will be delivering tax returns and financial statements by secure email, mail and delivery services whenever possible. We will schedule appointments as needed. You can email us at firstname.lastname@example.org or any of our individual email addresses. You can get individual email addresses at www.andersonspector.com. Hopefully we will able to return to normal operations later this spring. Stay safe!
Anderson, Spector & Co., PC
Roy P. Anderson, CPA
David M. Spector, CPA
And all of us here at ASC.
March 17, 2020
We now know that COVID‐19 has been reported in Denton as well as much of the adjacent Metroplex. We have decided to take some common‐sense steps to minimize the risk of infection by changing our procedures a bit. Our primary goal is to continue to provide timely services in the midst of this crisis. We are lucky that much of our work is prepared and stored
digitally, so these changes will be easy to implement. At this point, “social distancing” is our community’s front line of defense against the spread of this virus.
To that end, we are asking you to mail or drop off your data in lieu of a face to face meeting. You can also upload your data with our secure website link, just call for instructions. We will proceed with your project and call or email with questions. Once complete, we will deliver your
project either by mail or secure email, or you can pick them up at our office. In some circumstances, meeting in person will be necessary. We will make every effort to be certain those meetings are safe and convenient.
Anderson, Spector and Co., PC will remain open during this crisis until and if a quarantine event occurs. We are preparing to work from our homes remotely in the event of an office closure.
Our commitment to you is to deliver timely professional services to the best of our abilities. We will update you if circumstances change.
We want to thank you for your patience as we all work through this public health crisis together. If you need anything at all, please do not hesitate to reach out to one of us directly. This is our contact information.
Roy P. Anderson, CPA
David M. Spector, CPA
and the entire staff of Anderson Spector & Co., PC
Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) may be just what you need, and now may be a great time to establish one. A SEP has high contribution limits and is simple to set up. Best of all, there’s still time to establish a SEP for 2017 and make contributions to it that you can deduct on your 2017 income tax return.
2018 deadlines for 2017
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2017 in 2018 as long as you do it before your 2017 return filing deadline. You have until the same deadline to make 2017 contributions and still claim a potentially hefty deduction on your 2017 return.
Generally, other types of retirement plans would have to have been established by December 31, 2017, in order for 2017 contributions to be made (though many of these plans do allow 2017 contributions to be made in 2018).
High contribution limits
Contributions to SEPs are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than yourself: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. The contributions go into SEP-IRAs established for each eligible employee.
For 2017, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $270,000, subject to a contribution cap of $54,000. (The 2018 limits are $275,000 and $55,000, respectively.)
Simple to set up
A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. Contact us to learn more about SEPs and how they might reduce your tax bill for 2017 and beyond.
Claiming bonus depreciation on your 2017 tax return may be particularly beneficial
With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation. Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.
Pre- and post-TCJA
Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property. 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.But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.
A good tax strategy • or not?
Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.
On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate. What to do on your 2017 return
The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years
beginning in 2018 through 2025.
If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation. If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us. Anderson Spector and Co PC 940-566-0512.
Dear Clients and Friends:
As you know, Congress and President Trump enacted the Tax Cuts and Jobs Act of 2017 just before Christmas. The new law has raised questions about last minute planning opportunities, especially relating to the deduction of state and local taxes in 2017. I am referring specifically to real estate taxes on your home or non-rental investment real estate. Business taxes are unaffected by the new law. Beginning in tax year 2018, deductions for these nonbusiness taxes will be limited to $ 10,000 on a joint return.
The question we all have is, “Should I pay my property taxes before 12/31/17?”
These taxes fall into two categories:
Taxes already assessed and due 1/31/18. If you normally itemize and your Schedule A taxes are normally more than $ 10,000, yes, you should pay these taxes. The alternative minimum tax in effect for 2017 may limit the effectiveness of the deduction, so we cannot predict your individual savings without doing a tax projection. Whether by design or intent, Congress just did not leave taxpayers enough time to evaluate their options.
Taxes not assessed and due 1/31/19. The most recent information we have from the IRS indicates 2017 payments for these will be treated as deposits and may not be deductible. While some counties have made arrangements to accept these payments, we will not know if they are deductible for a few more weeks. Again, the lateness of the new law limits our ability to plan effectively. I do not recommend current payment of these taxes.
We will post additional information on our website as we learn more!
Roy P. Anderson, CPA
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 after December 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.
It can be difficult in the current job market for students and recent graduates to find summer or full-time jobs. If you are a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.
By shifting some of your business earnings to a child as wages for services performed by him or her,you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child's wage must be reasonable.
Here is an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings. The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.
Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.
Saving employment taxes
If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.
If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us at 940-566-0512.
It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.
But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.
Do you have “nexus”?
Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations. Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:
Employing workers in the state,
Owning (or, in some cases even leasing) property there,
Marketing your products or services in the state,
Maintaining a substantial amount of inventory there, and
Using a local telephone number.
Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.
Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.
The complexity of state tax laws offers both risk and opportunity. Contact us for help ensuring your business comes out on the winning end of a move across state lines.
Now that the bill to repeal and replace the Affordable Care Act (ACA) has been withdrawn and it’s uncertain whether there will be any other health care reform legislation this year, it’s a good time to review some of the tax-related ACA provisions affecting businesses:
Small employer tax credit. Qualifying small employers can claim a credit to cover a portion of the cost of premiums paid to provide health insurance to employees. The maximum credit is 50% of premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.
Penalties for not offering complying coverage. Applicable large employers (ALEs) — those with at least 50 full-time employees (or the equivalent) — are required to offer full-time employees affordable health coverage that meets certain minimum standards. If they don’t, they can be charged a penalty if just one full-time employee receives a tax credit for purchasing his or her own coverage through a health care marketplace. This is sometimes called the “employer mandate.”
Reporting of health care costs to employees. The ACA generally requires employers who filed 250 or more W-2 forms in the preceding year to annually report to employees the value of health insurance coverage they provide. The reporting requirement is informational only; it doesn’t cause health care benefits to become taxable.
Additional 0.9% Medicare tax. This applies to:
• Wages and/or self-employment (SE) income above $200,000 for single and head of household filers, or
• Combined wages and/or SE income above $250,000 for married couples filing jointly ($125,000 for married couples filing separately).
While there is no employer portion of this tax, employers are responsible for withholding the tax once an employee’s compensation for the calendar year exceeds $200,000, regardless of the employee’s filing status or income from other sources.
Cap on health care FSA contributions. The Flexible Spending Account (FSA) cap is indexed for inflation. For 2017, the maximum annual FSA contribution by an employee is $2,600.
There’s also one significant change that hasn’t kicked in yet: Beginning in 2020, the ACA calls for health insurance companies that service the group market and administrators of employer-sponsored health plans to pay a 40% excise tax on premiums that exceed the applicable threshold, generally $10,200 for self-only coverage and $27,500 for family coverage. This is commonly referred to as the “Cadillac tax.”
The ACA remains the law, at least for now. Contact us if you have questions about how it affects your business’s tax situation.
Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.
Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)
Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.
If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.
If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby.
The hobby loss rules
Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.
If you haven’t earned a profit from your business in three out of five consecutive years, including the current year, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. But if this profit test can be met, the burden falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:
Do you carry on the activity in a business-like manner?
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Dangers of reclassification
If your enterprise is reclassified as a hobby, you can’t use a loss from the activity to offset other income. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.
The Section 1031 exchange:
Why it’s such a great tax planning tool
Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely.
How it works
Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property. Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.
Executing the deal
Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance. When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.
An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.
The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.
The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this deadline is nothing new for S corporation returns, it’s earlier than previous years for partnership returns.
In addition to providing continued funding for federal transportation projects, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the due dates for several types of tax and information returns, including partnership income tax returns. The revised due dates are generally effective for tax years beginning after December 31, 2015. In other words, they apply to the tax returns for 2016 that are due in 2017.
The new deadlines
The new due date for partnerships with tax years ending on December 31 to file federal income tax returns is March 15. For partnerships with fiscal year ends, tax returns are due the 15th day of the third month after the close of the tax year.
Under prior law, returns for calendar-year partnerships were due April 15. And returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.
One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April 15 deadline (April 18 in 2017 because of a weekend and a Washington, D.C., holiday). After all, partnership (and S corporation) income flows through to the owners. The new date should allow owners to use the information contained in the partnership forms to file their personal returns.
If you haven’t filed your partnership or S corporation return yet, you may be thinking about an extension. Under the new law, the maximum extension for calendar-year partnerships is six months (until September 15). This is up from five months under prior law. So the extension deadline doesn’t change — only the length of the extension. The extension deadline for calendar-year S corporations also remains at September 15. But you must file for the extension by March 15.
Keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. But if filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 18 deadline.
Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. Please contact us if you need help or have questions about the filing deadlines that apply to you or avoiding interest and penalties.
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