Your New Life as a Pass-Through Entity Owner

Pass-Through Entity Owner

An initial look at the new business deduction

If you are a small business owner, your planning could get a lot trickier after the passage of the Tax Cuts and Jobs Act (TCJA). That’s because most small businesses have legal structures that are treated as pass-through entities for tax purposes, meaning they “pass through” their income to be taxed on owners’ Form 1040 individual tax returns. These entities include S corporations, partnerships and sole proprietorships.

On one hand, these kinds of businesses will benefit from the TCJA’s 20 percent reduction to the taxation of business income. On the other, the rules used to determine how much of that reduction each business gets are complex. Here are some tips to help find out where your business falls in the new structure:

Check Know your businesses’ QBI
QBI stands for qualified business income, which is generally your business net income other than income in the way of wage compensation. QBI is the basic figure you need to determine how much of the 20 percent reduction you get. It excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is determined separately for each business activity, not per taxpayer.The first simple threshold rule is:If your taxable income is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly, you can take the 20 percent deduction from your QBI.If your taxable income is higher than those levels, several other factors come into play. Buckle up and hold on, here is where it gets complex:
Check Know whether your profession matters

Several “specified service professions” are treated differently under the new rules. The list includes health, law, consulting, athletics, financial services, brokerage services, accounting firms or “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

If your business is in one of these professions, the 20 percent deduction starts to phase out to zero once your taxable income passes $157,500 as an individual filer or $315,000 as a married joint filer. The phaseout range before the reduction reaches zero is $50,000 for individual filers and $100,000 for married filers.

The phaseout range also determines how much of the next factor matters:

Check Know whether wage and capital limits matter

Once you go above the threshold, special wage and capital limits start to reduce your deduction.

The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business over the year.

These wage and capital limits are phased in over the threshold and apply in full after passing the $50,000 range for individual filers or $100,000 for married filers.

Bottom line: Get help

As you can see, the 20 percent deduction can be a great benefit, but taking it can get complex very quickly. If you are a small business owner, don’t try to do it yourself. The new rules apply for the 2018 tax year, so after you’ve wrapped up 2017 taxes under the old rules, reach out for a consultation to determine how to position your business under the new laws.

In the meantime, please be patient. The IRS has yet to publish guidance on the new rules.

Tax Reform in 2018

2018Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most important items in the new bill that impact individual taxpayers.

 

 

 

Point Reduces income tax rates. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
Point Doubles standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions are suspended, as well as most additional standard deductions (except for the blind and elderly).
Point Limits itemized deductions. Many itemized deductions are no longer available, or are now limited. Here are some of the major examples:
  • Caps state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
  • Caps mortgage interest deductions. Mortgage acquisition indebtedness interest will be deductible for no more than $750,000. Existing homeowners are unaffected by the new cap. The bill also suspends the deductibility of interest on home equity debt.
  • Limits theft and casualty losses. These deductions are now only available for federally declared disaster areas.
  • Removes 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone.
Point Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
Point Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phaseout threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
Point Bumps up child tax credit, adds family tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it refundable even if no tax is owed. The phaseout threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers. Also, dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
Point Expands use of 529 education savings plans. Qualified distributions from 529 education savings plans now include amounts to pay tuition for students in K-12 private schools.
Point Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
Point Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.

Because major tax reform like this happens so seldom, it’s worth scheduling a tax planning consultation to ensure you reap the most tax savings possible during 2018.

Credit Card Transactions Could Pose Audit Risk

Credit Card Transactions

What small businesses need to know

Small business owners beware: the IRS may more closely scrutinize reporting of credit card transactions after it was criticized for lax enforcement.

The IRS’ overseer, the Treasury Inspector General for Tax Administration (TIGTA), recently said the IRS had been missing opportunities to audit tax returns that had large discrepancies between income and the card payments reported on Forms 1099-K.

This means small businesses that accept credit, debit or gift card payments can expect to draw the attention of IRS auditors if there are material differences between what is reported on their tax returns and what is on their 1099-Ks.

Tax gap concern driving the scrutiny

TIGTA has estimated an underpayment of more than $450 billion in income taxes every year. In an effort to close this “tax gap,” it recommended the IRS focus on some of the larger or more obvious sources of underpayment.

One area TIGTA identified was on Forms 1099-K, where more than 20,000 taxpayers who received them had discrepancies of more than $10,000 on their returns. Calculating from this small sample size, there was at least a $200 million underpayment.

Who is impacted

If you have a business that accepts payment cards like debit cards or credit cards, you will probably receive a Form 1099-K from your payment processor. The form is also required for anyone who has $20,000 in card payments and 200 transactions or more per year. Examples of those who would receive Forms 1099-K include users of PayPal, sellers on Ebay and Etsy, cab drivers and any small business that accepts card transactions as a form of payment.

Here’s how you can prepare

Receiving a Form 1099-K and reporting it in such a way that the IRS is satisfied can be complicated. You could easily double-report your revenue from 1099-Ks out of an excess of caution. Or, you may not be disclosing your correct reporting of card income in a way that IRS audit programs are able to identify. It’s often best to get professional guidance to ensure your return does not stick out when the IRS tries to comply with the TIGTA request for more oversight.

 

Save More in 2018

Retirement contribution and Social Security limits on the rise

The maximum contribution to 401(k) accounts rises by $500 in 2018, the first increase in three years. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2018.

Retirement Contribution Limits
Retirement Program 2018 2017 Change Age 50 or
over catch up
401(k), 403(b), 457 plans
$18,500
$18,000
+$500 add: $6,000
IRA: Roth
$5,500
$5,500
none add: $1,000
IRA: SIMPLE
$12,500
$12,500
none add: $3,000
IRA: Traditional
$5,500
$5,500
none add: $1,000
Social Security
Item 2018 2017 Change
Wages subject to Social Security
$128,700
$127,200
+$1,500 Annual Social Security employee tax: $7,979.40
Average estimated monthly retirement benefit
$1,404
$1,360
+$44

Don’t forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.

Say Goodbye to the College Tuition Deduction

Mortarboard and money

It’s hard enough to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive.

But it isn’t as bad as it sounds. That’s because Congress left in place two popular education credits that often offer a more valuable tax break:

Bullet Point The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).
Bullet Point Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $132,000 per year (or singles making $66,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.

So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction was generally the only means you had to reduce your tax bill.

But there’s still hope! In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives. Please call if you’d like an overview of the alternatives available to you.

Three Popular Tax Breaks are Gone

Expense paperwork

As you make plans for the 2017 tax year, take note that three popular tax breaks expired last year and won’t be available unless Congress acts to extend them.

1 Tuition and fees deduction. You used to be able to deduct as much as $4,000 in college tuition and fees as an adjustment to taxable income. This provision was popular because it provided an alternative to other credits and did not require you to itemize deductions to receive the tax benefit. While this tax benefit is currently expired, several tax breaks geared toward students still exist:

student loan interest expense deductions
student education savings plans (529 plans)
education credits such as the American opportunity credit and the lifetime learning credit
1 Mortgage insurance premiums. The ability to deduct the cost of mortgage insurance premiums as an itemized deduction expired last year. This expired benefit used to phase out for taxpayers with more than $100,000 in adjusted gross income. Mortgage insurance is typically required of homeowners with a less than 20 percent down payment on their home purchase.
1 Lower senior threshold for medical expense deductions. The threshold for deducting itemized medical expenses raises to 10 percent of adjusted gross income for all taxpayers beginning in 2017. Prior to this, those age 65 or older had a lower 7.5 percent threshold. Only unreimbursed, qualified medical expenses in excess of 10 percent of your adjusted gross income can now be taken as an itemized deduction. For example, if a 70 year old taxpayer has $50,000 in adjusted gross income, he could have deducted his medical expenses that exceeded $3,750 as an itemized deduction. This year that number rises to $5,000 with the same income, putting it that much further out of reach for seniors.

Remember to plan for these changes. But also keep an eye on future action from Congress that could bring these dead tax deductions back to life.

2017 Standard Mileage Rates

The IRS recently announced mileage rates to be used for travel in 2017. The business mileage rate decreases by 0.5 cents while medical and moving mileage rates are lowered by 2 cents. Charitable mileage rates are unchanged.

2017 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 53.5¢
Medical/Moving 17.0¢
Charitable Work 14.0¢
Mileage Rates

Here are the 2016 rates for your reference as well.

2016 Standard Mileage Rates
Mileage Rate/Mile
Business Travel 54.0¢
Medical/Moving 19.0¢
Charitable Work 14.0¢
Mileage Rates

Remember to properly document your mileage to receive full credit for your miles driven.

Last Year’s Tax Bill Makes This Year’s Opportunity

Hand moving chess piece

For the first time in many years, it looks like a last minute tax law change will not upset your ability to fulfill a well thought out tax plan. In addition to making last minute moves to reduce your tax obligation, consider some opportunities to take advantage of recent legislation.

Educators. The $250, above the line deduction is now permanent. If you are a qualified teacher, please make sure you save receipts for your out-of-pocket classroom expenses.

Action: Add up your receipts now. If less than $250, consider your needs prior to the end of the year to maximize your use of this tax law.

Small Business. There are numerous provisions for small business tax savings opportunities in recent tax legislation. Most of them benefit specific industries, but a couple are worth considering for most businesses.

Action: Consider 1st year bonus depreciation and Section 179 provisions to expense qualified capital equipment purchases. Also review your possible use of the Research Credit recently made a permanent part of the tax code.

Seniors who donate. If a senior age 70½ or older, you can now make direct contributions to charities from qualified retirement accounts. The limit is $100,000. The benefit of these direct contributions is they control your adjusted gross income to help you become more tax efficient.

Action: Consider a direct contribution to a preferred charity, especially if you would make the donation with after-tax funds anyway.

Sales tax or state deduction. The option to deduct general sales tax as an itemized deduction versus using state income taxes is now permanent.

Action: Review your situation. If you anticipate low or no state income taxes, but could itemize, you may wish to use this deduction. Remember to keep receipts of any large purchases to track large sales and use tax payements.

Everyone’s health care reporting. Remember to look for your Form 1095 this year. It should accurately report your family’s health care coverage. Many providers of this form have had a hard time getting this information from insurance carriers.

Action: Look for this form in January. Confirm that the information is correctly reported. Notify the provider immediately if the form contains any errors.

Save

Private Agencies to Start Collecting for IRS

Change Your Password

What you need to know

In late 2015 Congress required the IRS to turn over uncollected taxes it is no longer pursuing to outside collection agencies. The agencies are now selected and in early 2017 they will begin their collection efforts. This will impact all of us. Here is what you need to know.

Alert icon Turn up your scam alert. Rest assured the IRS identity scam epidemic is going to hit a new high as these scam artists now will try to impersonate collection agencies. Never pay a collection agency directly for any tax owed. Always send any payments directly to the IRS. If you do not think you owe money to the IRS, ask for help.
Agencies icon Four agencies have been authorized. Only four collection agencies have been authorized to collect unpaid taxes for the IRS. They are:
Conserve Fairport,
New York
Pioneer Horseheads,
New York
Performant Livemore,
California
CBE Group Cedar Falls,
Iowa
Notice icon You will receive written notice…twice. Before an outside agency calls you, the IRS will send two written notices to you and your representative about the transfer of the bill to an outside collection agency. Without these notices, you must assume any contact with a collection agency saying they represent the IRS is a scam.
Payment icon No payment to the agency. These collection agencies may not receive direct payment. You will be asked to use the IRS online payment system or to send your payment into the IRS. Payment is to be made to the U.S. Treasury and not to the collection agency.

Unfortunately, these agencies are going to begin their collection process right in the middle of this year’s tax filing season. So be prepared now and ask for help if you may be impacted by this change within the IRS.

Preview of Some Key 2017 Tax Figures

2017 compass

While official numbers for 2017 are not yet released by the Internal Revenue Service (IRS), many figures are based on the Consumer Price Index (CPI) published by the Department of Labor. Using the release of recent CPI figures, a number of sources are projecting key figures for 2017.

 

Tax Brackets: While the actual income brackets for tax rates are not set for 2017, the rate of inflation impacting the income levels for each rate is anticipated to raise the income brackets by approximately 0.6 – 0.8%.

Personal Exemption: $4,050 in 2017 (unchanged from 2016)

Standard Deductions:

Deduction Tax Year 2017 Tax Year 2016
Single
$6,350
$6,300
Head of Household
$9,350
$9,300
Married Filing Jointly
$12,700
$12,600
Married Filing Separately
$6,350
$6,300
Dependents (kiddie tax)
$1,050
$1,050
65 or Blind: Married
Add $1,250
Add $1,250
Single
Add $1,550
Add $1,550

Other Key figures:

Estate & Gift Tax Exclusion
$5.49 million
$5.45 million
Annual Gift Tax Exclusion
$14,000
$14,000
Roth and Traditional IRA Contribution Limit
$5,500
$5,500

Caution: Remember, these are early figures using the recently announced Consumer Price Index. Official numbers are released by the IRS later in the year.