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TaxTips Volume 8, Issue 8 For distribution 10/8/18; publication 10/11/18
Is Your Business an SSTB? (And Why Do You Care?)
QBI, 199A, SSTB—these are just a few of the new acronyms being tossed around as part of the recent business tax reform changes (like we don’t already have enough of them to remember!). Out of all the terminology, “SSTB” (Specified Service Trade or Business) seems to be the vaguest and most misunderstood. If you have virtually any type of business entity (except for a C corporation), you need to know what this is and whether or not it applies to you. It could have huge implications come tax time!
The term “SSTB” came about as part of the new Section 199A business deduction (a tax deduction of up to 20% of business profit). SSTBs and non-SSTBs are subject to different limitations/calculations in determining the deduction. Most importantly, if your business is an SSTB and you have taxable income of:
Under $157,500 ($315,000 for joint filers): Your profit FULLY qualifies for the 20% deduction – EASY!
Between $157,500-$207,500 ($315,000-$415,000 for joint filers): Your profit PARTIALLY qualifies for the 20% business deduction (reduced – more complex calculation).
Above $207,500 ($415,000 for joint filers): NONE of your profit qualifies for the 20% business deduction (fully phased out).
So now the big question is: how do you determine if you are an SSTB? The first part is easy: if your business performs services in any of the following areas, you automatically fall into SSTB classification:
After this, the law becomes less clear. The IRS also says that any business “where the principal asset… is the reputation or skill of one or more of its employees or owners” is considered an SSTB. Clearly, this is subject to a lot of varying interpretation – would a widget-maker automatically be an SSTB just because his or her widget-making skills are truly the backbone (“principal asset”) of the business?
Thankfully, IRS has limited the meaning of this “catch-all” clause in subsequent guidance, saying that it applies specifically to those engaged in the trade or business of:
For that widget-maker, the business would likely be a non-SSTB, unless the sale of the widgets is directly associated with use of his or her identity. One way to think about it: if the success of your business depends more on you and not what you are selling, it is most likely an SSTB.
Understanding this classification and how it applies to you is important; it’s the first step in determining how to calculate QBI (Qualified Business Income) for purposes of the 20% deduction, and also a critical stepping stone in tax planning. Be sure to consult with your tax preparer for more information!
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Insert a link to your newsletter, web site or blog before you post these:
Our latest blog: Is Your Business an SSTB? (And Why Do You Care?) Subscribe here: [link]
What qualifies a business as an SSTB for tax purposes? Find out more: [link]
Biz Tip: Determining whether you are a SSTB could have huge implications come tax time. [link]
If your business performs services under certain categories (e.g. health or law), you automatically qualify as an SSTB. Find out more [link]
If your business is an SSTB and you have taxable income of less than $157,000, your profit qualifies for the full 20% business deduction. [link]
You may qualify as an SSTB if you use your identity to earn income. Find out more here: [link]
Is your business an SSTB and do you meet the requirements for the 20% business deduction? [link]
Is Your Business an SSTB? (And Why Do You Care?) Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 7 For distribution 9/23/18; publication 9/26/18
High Income Wages: How & Why the Amount Will Affect Your Tax Return
More and more taxpayers are having deductions and credits either limited or completely disallowed, or additional taxes assessed, because of the level of their adjusted gross income (AGI). AGI is your income minus qualified deductions, i.e. alimony, student loan interest. Check the list below to see if you might fall into any of these limitations/additional tax situations.
Child Tax Credit: Starting in 2018, this credit can be up to $2,000 per child 16 and younger. However, the amount of the credit decreases as your income rises. For single and head of household taxpayers, the credit begins to decrease at $200,000 AGI. It decreases at $400,000 AGI for married filers.
AMT: To prevent higher-income taxpayers from claiming too many deductions, Congress created the Alternative Minimum Tax (AMT) in 1969.
You may have to pay the AMT if your taxable income, plus any adjustments and special items that may apply to you, are more than the AMT exemption amount. Starting with the 2018 tax year, taxpayers get the following amounts as exemptions from AMT:
This AMT exemption will be indexed for inflation in the future.
IRA Contributions: The contribution limit to your traditional or Roth IRA has increased to the smaller of $5,500 or your taxable compensation for the year. If you were age 50 or older, the most that can be contributed to your traditional or Roth IRA is the smaller of $6,500 or your taxable compensation for the year.
Roth IRA contributions are reduced/phased out if your modified AGI is between $120,000 to $134,999 for singles and $189,000 to $198,999 for couples.
You may make your full traditional IRA contribution if you (and spouse) are not covered by an employer retirement plan. If you are covered by a retirement plan at work, your deduction to a traditional IRA is phased out if you modified AGI is between $63,000 to $73,000 for singles and $101,000 to $121,000 for couples. If only one spouse is covered by a plan at work, the phaseout zone for deducting a contribution for the uncovered spouse begins at $189,000 of AGI and finishes at $199,000. When your AGI goes above the upper limit of the phaseout range, your Roth IRA deduction is not allowed, and your traditional IRA deduction is not allowed.
Mortgage Interest: For any mortgages taken out after December 14, 2017, only interest on the first $750,000 of debt to purchase a house is deductible (note that mortgages taken out prior to that date are grandfathered in under the old rules/still subject to the $1.1 million threshold). Furthermore, interest on home equity loans where the proceeds are used for expenses other than home improvement/related will no longer be deductible after 2017. Note that interest on home equity loans where proceeds ARE used for home improvement are still deductible, subject to the aggregate $750,000 limitation referred to above.
Rental Losses: Owning a rental property is a great investment, but it might not have all the advantages you are hoping for if your AGI is more than $100,000. If your rental has a loss, the deduction is reduced as your AGI rises above $100,000. If your AGI is more than $150,000, your loss is totally suspended and you get no tax benefits that year. However, unused losses will be carried forward to future years and used when a profit or sale of property occurs.
Medical Deductions: For 2018, taxpayers cannot begin to deduct medical expenses until they exceed 7.5% of AGI. Prior to the Tax Cuts and Jobs Act, medical expenses needed to exceed 10% of AGI (7.5% if either you or your spouse is age 65 or older) to start being deducted, and after 2018 the floor will return to 10%. That means the higher your income, the less likely you will be to qualify to deduct any of these expenses unless you have very high medical costs. For example, for 2018, if you make $100,000 a year and paid $7,501 in medical expenses, you would be able to deduct only $1.
Education Credits: Education credits include the American Opportunity Credit, which covers up to $2,500 of undergraduate costs, and the Lifetime Learning Credit, which covers up to $2,000 of undergraduate and graduate school costs. Note, even if you qualify for both credits, you will only be allowed to claim one in the same taxable year.
For the American Opportunity Credit, the credit begins to phase out at $80,000 to $90,000 for single filers or $160,000 to $180,000 for married couples filing jointly.
For the Lifetime Learning Credit, the range at which the credit begins to decrease is $56,000 to $66,000 for single filers and $112,000 to $132,000 for married couples filing jointly. Taxpayers are not eligible for either credit if married filing separately. When parents have a high AGI, it’s sometimes better for children to claim themselves. Consult your tax preparer to crunch the numbers.
AMERICAN OPPORTUNITY CREDIT
LIFETIME LEARNING CREDIT
SINGLE
$80,000 - $90,000
$56,000 - $66,000
MARRIED FILING JOINTLY
$160,000 - $180,000
$112,000 - $132,000
Net Investment Income Tax: Taxpayers who also have investment income (interest, dividends, certain annuities, royalties, and rents) and have modified AGI over certain thresholds are also subject to a 3.8% tax on that investment income. Single and head of household taxpayers with modified AGI over $200,000 ($250,000 for couples filing jointly) will owe this tax. The tax is 3.8% on the lesser of total net investment income and the excess of modified AGI over the above thresholds.
There’s never been a better year to do some tax planning. Feel free to reach out if you want some help.
High Income Wages: How & Why the Amount Will Affect Your Tax Return. Subscribe here: [link]
What is adjusted gross income? Find out here: [link]
Biz Tip: For 2018, taxpayers cannot begin to deduct medical expenses until they exceed 7.5% of their adjusted gross income. [link]
Check our list to see if you might fall into any of these limitations/additional tax situations. [link]
More and more taxpayers are having deductions and credits either limited or completely disallowed. Find out more [link]
Adjusted gross income is your income minus qualified deductions, i.e. alimony, student loan interest. Find out more [link]
How will a high-income wage affect your tax return? Find Out [link]
High Income Wages: How & Why the Amount Will Affect Your Tax Return. Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 6 For distribution 9/9/18; publication 9/13/18
The New 20% Small Business Deduction
There is a brand new 20% small business deduction that everyone is talking about. In the tax and legal professions, it’s fondly know at Section 199A. Here are some facts about this deduction:
The Basics
All pass-thru entities, such as Sole Proprietors, S-corporations and Partnerships that qualify may be able to take the 20% small business deduction. The deduction can be taken against qualified business income from sales/services, rental real estate (not W-2 income) and can help to reduce taxes. IRS has not published a final 2018 form, but the deduction will come after the itemized deduction amount and before the taxable income amount.
But it’s not easy or simple. The rules are complex as well as fuzzy, and some accountants are waiting on IRS guidance to clarify the fuzzy parts.
First, the deduction is calculated differently for certain “specified service businesses.” We’ll talk about what that means in a minute. If the business is NOT a specified service business, the deduction is limited and must go through this calculation:
If the personal return of the owner of the specified service business has taxable income of LESS than $315k (married filing joint) or $157,500 (single), they CAN deduct 20%.
For taxpayers who have taxable income of MORE than $415k (married filing joint) or $207,500 (single), the amount of the deduction is limited to the LESSER of the qualified business deduction of 20% OR the GREATER of:
A. 50% of the W-2 wages paid by the business OR
B. 25% of the W-2 wages paid by the business PLUS 2.5% of unadjusted basis on qualified property!
If the taxpayer has taxable income BETWEEN $315k and $415k (married filing joint) or between $157,500 and $207,500 (single), they will get a PARTIAL DEDUCTION.
Specified Service Business
In order to qualify for the small business deduction, one of the questions that needs to be determined is if the business is a “specified service business.” What is a specified service business? This is any trade or business involving:
…where the principal asset of the business is the reputation or skill of one or more of its owners or employees. This does NOT include architects nor engineers because they were specifically mentioned as excluded from this exclusion (confused yet?).
A specified service business small business deduction is calculated differently than all other businesses.
Entity Change Considerations
Now you can see why consulting your tax professional will be key so there will be NO surprises come tax filing time! Taxpayers will need to be PROACTIVE to seek counsel for their specific situation because the type of entity they file as will impact their eligibility for this deduction. In some cases, it may make sense to change entities, but there are far more than tax considerations for such a decision.
Do contact us if you’d like to discuss the 20% business deduction and how it applies to your business.
2018 Tax Law Changes for Businesses: Understanding the Small Business Deduction. Subscribe here: [link]
What is a specified service business? Find out here: [link]
Biz Tip: If a business is NOT a specified service business, the 20% small business deduction is limited and must go through a deeper calculation. [link]
Taxpayers will need to be PROACTIVE to seek counsel on the new 20% business deduction because what works for one S-corporation will not work for another S-corporation. [link]
In order to qualify for the small business deduction (199A), what that needs to be determined is if the business is a “specified service business”. [link]
A specified service business small business deduction per 199A is calculated differently than all other businesses. [link]
Do you have trouble understanding the small business deduction? Find Out More [link]
2018 Tax Law Changes for Businesses: Understanding the Small Business Deduction. Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 5 For distribution 8/27/18; publication 8/30/18
Tax Changes Affecting Small Businesses
In 2018, the Tax Cuts and Jobs Act entered into effect. Though this act was primarily billed as helping large corporations, it also made changes relevant to small and mid-sized businesses. For small business owners, these tax law changes are best countered by planning ahead for the year to come -- and, in general, it's good news. Here are some basics that you need to know.
Corporations now have a flat tax rate of 21%.
By far, the most significant change in the TCJA was creating a flat tax rate of 21% for corporations. Before TCJA, corporations had graduated tax rates, with the top bracket at 35%. This is going to apply to corporations of all sizes, not just large enterprises. Most small business owners are going to find themselves paying less in taxes due to this, even if they no longer can expense some of the items they are used to expensing.
The bonus depreciation amount has been increased to 100%.
In prior years, a depreciation amount of up to 50% could be expensed at once when dealing with a long-term asset's costs. After 09-27-17, 100% of the cost of the asset can be depreciated at once. This covers assets that are used for over 50% business-related work (though computers that are used less than 50% of the time may still qualify). Bonus depreciation qualifies for both used and new equipment and is a valuable incentive for many businesses.
Automobile depreciation limits have increased.
Many references have been made to "small business owners in luxury cars," due to the new automobile depreciation limits. Automobile depreciation limits have increased overall, increasing the amount of money you can deduct related to vehicle expenses.
For the first year the vehicle is placed in service, the automobile depreciation limits are $10,000. It is $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and fifth years. Bonus depreciation is set at $8,000. Essentially, it has become more affordable to acquire a more expensive, more reliable vehicle.
Section 179 deductions have increased from $500,000 to $1 million.
Before 2018, businesses could deduct up to $500,000 of the cost of a qualified business property. This amount has been adjusted to compensate for inflation. The cap is now at $1 million, which should be considered by businesses looking to invest directly in business property.
Fewer corporations need to file tax returns on accrual basis.
Corporations with above $25 million in gross receipts over the next three years will need to file using accrual basis accounting, but now businesses can file a simpler, cash-based accounting system if they are under this $25 million amount. Previously the cutoff limit was $5 million.
In simple terms, cash-based accounting systems log expenses and income when money changes hands, whereas accrual-based accounting systems log expenses and income when they actually occur. Accrual systems are often more complex because they need to track vendor bills and client invoices.
Net operating losses can no longer be carried back two years.
Net operating losses can be carried forward indefinitely, with a limit of 80% of taxable income. Prior to this, net operating losses could only be carried forward for 20 years and carried back 2 years.
Pass-through entities have acquired a number of benefits.
Some business-related expenses have been eliminated.
Some business tax deductions have been eliminated. Deductions for business entertainment expenses -- except for meals -- are no longer going to be allowed. Further, the deduction of meals that are provided to employees for the convenience of the employer will also not be allowed to be deducted from the tax return after 2025.
Deduction for the payment of employee transportation -- including rental vehicles, parking, and mass transit -- will no longer be allowed on the corporate side. However, employees are not going to be taxed on the value of these benefits; the benefits remain the same to the employees. Local lobbying expenses and domestic production activities will also be eliminated.
Overall corporate taxes have been streamlined, adjusted for rates, and decreased. Though there are some deductions that have been removed, most corporations are going to benefit quite a lot from the overall decrease in corporate tax rates. Small business owners are going to find that they can expense at higher limits though they may not be able to expense as many individual line items, and they will find themselves paying less in overall taxes.
Of course, any small business owner concerned about how their taxes are going to look in the coming year should consult with a tax professional. There are many adjustments being made to corporate taxes, and small business owners will want to plan ahead about the financial choices they're going to be making in the coming year.
Our latest blog Tax Changes Affecting Small Businesses. Subscribe here: [link]
How does the Tax Cuts and Jobs Act affect your small business? Find out here: [link]
Biz Tip: Due to The Tax Cuts and Jobs Act the bonus depreciation amount has been increased to 100%. [link]
For small business owners, the new tax law changes are best countered by planning ahead. [link]
In 2018, the Tax Cuts and Jobs Act entered into effect. Find out more [link]
Here are some business highlights that you need to know about the Tax Cuts and Jobs Act. [link]
Which business-related expenses have been eliminated due to Tax Cuts and Jobs Act? Find Out [link]
Tax Changes Affecting Small Businesses. Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 4 For distribution 8/13/18; publication 8/16/18
2018 Tax Law Changes for Businesses: Understanding the Tax Cuts and Jobs Act
With the largest tax law update in over 30 years, navigating the course with the new laws can be confusing. Businesses need to be aware of these changes and consult with their tax professional to get advice so they can be knowledgeable of their options and plan ahead!
For All Businesses
Here are some highlights of changes that affect all business entities:
Meals & Entertainment
It was a surprise to many businesses that the new law does not allow entertainment expenses. This would include golf outings, ball games, movies, theatre, etc. The good news is that meals with clients are still 50% deductible, including meals while you travel. Be aware though, if you go to the ball game and have a meal, there is no deduction for the meal while participating in entertainment.
The old law allowed a 100% deduction for meals provided to all employees when there was a company meeting during a meal break. This has changed to be 50% deductible.
Holiday parties, company picnics, and employee appreciation remain at 100% deductible.
C-corporations
The old law taxed corporations between 15% to 35%. In fact, personal service corporations, like accountants, attorneys, architects, were taxed at a flat rate of 35%. The new law says that all corporations will be taxed at a 21% rate. This is fantastic for those personal service corporations, but businesses that were taxed at 15% may want to look at the options of switching their entity to pay less in tax. Corporations that have less than $87,100 of income will end up paying more in taxes.
The good news is that the alternative minimum tax (AMT) for corporations is eliminated!
Partnerships
Prior to the new law, the rule was that if a partnership sold more than 50% of the ownership, the partnership was automatically terminated. The new rule eliminates this rule.
Consult your attorney because partnerships will want to make sure that it is documented on who the partnership representative is. If there is no written representative, the IRS may assign someone and you could lose rights and control.
That’s just a quick look at some of the changes affecting businesses. If there ever was a year to do some business tax planning, this year is it. Contact us to find out more.
Our latest blog: 2018 Tax Law Changes for Businesses: Understanding the Tax Cuts and Jobs Act. Subscribe here: [link]
Are you confused navigating through the new tax laws? Find out more here: [link]
Biz Tip: It was a surprise to many businesses that the new law does not allow entertainment expenses. [link]
With the largest tax law update in over 30 years, here are some changes that affect all business entities: [link]
Businesses need to be aware of the new tax law changes and consult with their tax professional. [link]
Get advice from a tax professional so you can plan ahead for the 2018 tax law changes. Find out more [link]
Do you need help understanding the Tax Cuts and Jobs Act? [link]
2018 Tax Law Changes for Businesses: Understanding the Tax Cuts and Jobs Act. Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 3 For distribution 7/30/18; publication 8/2/18
Earned Income Credit - IRS Gives Free Money to Certain Taxpayers
I want free money!! How do I get it? Back in 1975, Congress approved this Earned Income Credit (EIC) to provide an incentive to working taxpayers. To qualify, you must meet certain requirements.
To receive earned income credit you must have earned income from employment (W-2), self-employment or another source of income. You don’t need to have children to qualify, but the more kids you have, the higher the credit. You can be single, head of household or married filing joint with your spouse to qualify.
EIC is an area that is highly audited with the IRS because it is abused often. There are fraudulent returns created every year and the IRS estimates between 21 to 26 percent of EIC credits are paid in error. It is such a big deal that that the IRS delayed refunds in 2017 in order to minimize the fraudulent returns filed. Thus, a good understanding of the rules is important because if a return is generated with EIC errors, the taxpayer would need to pay back the EIC with not only interest, but fraud penalties that could ban the person from EIC for the next 10 years. So what are the rules?
If you are married and have at least one child, there are 4 tests that you must meet to qualify:
If you are married and have no children, you must meet 3 tests:
In order to qualify in 2018, your adjusted gross income (AGI) must be less than:
Tax Year 2018 maximum credit:
Note that you also must have investment income (interest, dividends, capital gains) of $3,500 or less for the year in order to qualify for the credit.
60% of the errors in filing this credit are due to 3 things:
For more information, you can check out the IRS publication 596 here: http://www.irs.gov/pub/irs-pdf/p596.pdf
Our latest blog: Earned Income Credit - IRS Gives Free Money to Certain Taxpayers. Subscribe here: [link]
Do you quality for Earned Income Credit? Find out here: [link]
Biz Tip: Earned Income Credit is an area that is highly audited with the IRS because it is abused often. [link]
To receive earned income credit, you must meet certain requirements. [link]
A good understanding of the rules is important when it comes to Earned Income Credit. [link]
Back in 1975, Congress approved this Earned Income Credit (EIC) to provide an incentive to working taxpayers. Find out more [link]
What requirements must you meet for Earned Income Credit (EIC)? [link]
Earned Income Credit - IRS Gives Free Money to Certain Taxpayers. Sign up for our newsletter: [link]
Tax Tips Volume 8, Issue 2 For distribution 7/16/18; publication 7/19/18
2018 Tax Law Changes: Understanding the Tax Cuts and Jobs Act
In this article, we’ll share some of the highlights of the tax changes for 2018 as they relate to individuals. Use this as a type of checklist, and feel free to contact us on any point so we can provide additional details as to how it might impact your situation.
Tax Bracket Reorganization
There will continue to be seven tax brackets, but the rates and thresholds have changed:
Above the Line Deductions
Moving deductions and reimbursements—suspended through 2025 except for military service members who are changing duty stations. Employer reimbursements (other than military) will be included as taxable wages
Alimony—for agreements or modifications entered into after 12/31/18, alimony will no longer be deductible by the payer, nor will it count as income to the recipient. For a pre-2019 divorce, the old rules apply (payer can deduct payments and the recipient must pay taxes on them. The law does permit ex-spouses to modify an earlier divorce agreement to adopt the new rule after it goes into effect in 2019, but both spouses would need to agree to the change
Educator expenses—there is no change to the law where a teacher is allowed to deduct up to $250 paid out of pocket for classroom supplies and professional development courses
Dependent care—there is no change to the law. An employee can exclude up to $5000 per year from their gross income to provide for dependent care assistance.
Education Provisions
All education provisions remain the same for the following:
The only exception is the 529 plan, which now allows for the tax-free withdraw of funds if used for qualifying expenses for K-12 private and religious schools.
Tax Credits and Exemptions
Exemptions--the $4050 exemption per person (taxpayer, spouse, dependents) has been suspended, but don’t panic because the standard deduction has increased to offset this change
The Child Tax Credit--expanded to $2000 per child under the age of 17. More taxpayers will qualify for this deduction, as the phase out now begins at $200,000 AGI for single filers or $400,000 for MFJ filers
Non-Child Dependent Credit--allows for a $500 credit per non-child dependent. The same income phase out as the Child Tax Credit applies
Electric Vehicle Credit—credit has been retained and continues to be a maximum credit of $7,500
Adoption Credit—credit has been retained and continues to apply to an adopted child under the age of 18, with a maximum credit of $13,570
Alternative Minimum Tax
While AMT was retained, the exemption phase out has increased substantially. Old tax laws were $160,900 for Married Filing Joint, $80,450 Married Filing Separate, $120,700 single or Head of Household filers. NEW laws are $1 Million for Married Filing Joint, and $500,000 for all others
Standard Deduction and Itemized Deductions
Standard deduction has nearly doubled:
Itemized Deductions
Medical deduction has been retained and improved—for 2018, the threshold for deductibility is now 7.5% of Adjusted Gross Income (used to be 10% of AGI)
Itemized deduction phase out—the deduction limitation phase out for higher income taxpayers has been suspended
SALT (State and Local Tax) deduction—the SALT deduction has been capped at $10,000. This is a combined total of your property taxes + state/local taxes + DMV fees. In the past, the deduction was not limited
Mortgage interest deduction—full interest deduction allowed for up to $750,000 of indebtedness on primary/secondary home mortgage. For loans originated prior to 12/15/17, mortgage indebtedness can be as much as $1 million to qualify for full interest deduction. Home equity (includes second mortgages) mortgage interest can still be deducted so long as funds from the equity loan was used to buy, build, or substantially improve the home that secures the loan. The total of all loans must not exceed $750,000 ($1 million for loans originated prior to 12/15/17)
Charitable contributions—the deduction amount has increased, but charitable contributions cannot exceed 60% of a taxpayer’s AGI (up from 50%)
Miscellaneous deductions (subject to 2% of AGI)---miscellaneous deductions have been suspended through 2025. Some examples of these types of deductions are unreimbursed employee business expenses, union dues, tax prep fees, investment expenses, casualty losses
Affordable Care Act
The shared responsibility payment (penalty for not having health insurance) has been repealed and will go into effect in 2019
Do any of these impact you? If so, feel free to reach out so we can do some tax planning to avoid surprises in April 2019.
Our latest blog: 2018 Tax Law Changes: Understanding the Tax Cuts and Jobs Act. Subscribe here: [link]
What are the tax law changes for 2018? Find out here: [link]
Biz Tip: The charitable contributions deduction amount has increased, but charitable contributions cannot exceed 60% of a taxpayer’s AGI. [link]
There will continue to be seven tax brackets, but the rates and thresholds have changed. Find out more [link]
Learn more about the 2018 tax credits and exemptions. [link]
For 2018 the Alternative Minimum Tax was retained, the exemption phase-out has increased substantially. Find Out More [link]
How have the rates and thresholds changed for the 2018 tax bracket reorganization? [link]
2018 Tax Law Changes: Understanding the Tax Cuts and Jobs Act. Sign up for our newsletter: [link]
Tax Tips Volume 7, Issue 26 For distribution 6/18/18; publication 6/21/18
Is Your Business Considered a Hobby by the IRS?
Very frequently tax preparers are asked to provide clarification on IRS rules that they heard from a friend, neighbor or colleague. Usually some part of the statement is true; however, there is always more to the story or it may not apply to that person’s specific situation. If you’ve heard the statement, “You can’t deduct a loss from business if it occurs more than three out of five years,” this is not the entire truth.
A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. If the expenses exceed the income, the amount can offset other income such as wages, interest, or dividends. However, if your activity is a hobby, you cannot reduce your other income by the losses.
When your losses exceed the three-year rule, the burden of proof now shifts to the taxpayer to prove the activity is a for-profit business. Here are some factors to consider:
Here are some ways to ensure your for-profit business is not considered as a hobby:
Here’s an example: Joe had a business as a personal chef. This was not his primary way of earning income. He had a W-2 job with a local city. He did earn about $200 to 300 in income; however, his expenses were much more than that. Come to find out, he was hosting dinner parties at his home and wanting to write off the food, subscription to cooking magazines, and seeds for his home garden.
If you are in doubt, just imagine yourself in front of an auditor explaining your specific situation. If it “feels” like the story above, it may not fly with the auditor, but that does not mean it is not a true business. What you need to do is plan and strategize. What can you do today to prove that you are a for-profit business?
Know the rules and then step out in confidence. And, don’t get tax advice from a friend because it might not be the whole truth! Consult your tax preparer to confirm your specific situation qualifies.
Our latest blog: Is Your Business Considered a Hobby by the IRS? Subscribe here: [link]
Does the IRS consider your business a hobby? Find out more: [link]
Biz Tip: A person that conducts an activity for profit is allowed to deduct the expenses that are ordinary and necessary in that industry. [link]
When your business losses exceed the 3-year rule, it’s up to the taxpayer to prove the activity is a for-profit business. [link]
Here are some ways to ensure your for-profit business is not considered a hobby. [link]
Make sure your business is not considered a hobby by keeping thorough and professional books. Find out more [link]
What can you do today to prove to the IRS that you are a for-profit business? [link]
Is Your Business Considered a Hobby by the IRS? Sign up for our newsletter: [link]
Tax Tips Volume 7, Issue 22 For distribution 4/23/18; publication 4/26/18
New Tax Brackets in 2018
The 2017 Tax Cuts and Jobs Act revised some foundational deductions, exemptions, and tax brackets for the 2018 tax year. Here’s a rundown of what’s changed in that area for individuals:
Exemption
On your 2017 1040 tax return, you likely received an exemption of $4,050 per person. Check line 42 of your own return. In 2018, this exemption is discontinued, but you won’t really lose out because the standard deduction has increased to compensate for this elimination.
Standard Deduction
In 2017, your standard deduction was $6,350 per person in general and $9,350 for head of household. In 2018, the standard deduction will increase to $12,000 per person and $18,000 for head of household filers.
Quite a few itemized deductions have been eliminated or capped for 2018, so more taxpayers will be using the standard deduction going forward.
Tax Brackets
There are seven tax rates or brackets, just like there were before, but the threshholds and rates have changed. The rates now range from 10 percent to 37 percent:
Here are the details depending on your filing status:
Rate or Bracket
Single
Married Filing Joint Returns
Head of Household
10 %
$0 to $9,525
$0 to $19,050
$0 to $13,600
12
$9,526 to $38,700
$19,051 to $77,400
$13,601 to $51,800
22
$38,701 to $82,500
$77,401 to $165,000
$51,801 to $82,500
24
$82,501 to $157,500
$165,001 to $315,000
32
$157,501 to $200,000
$315,001 to $400,000
35
$200,001 to $500,000
$400,001 to $600,000
37
over $500,000
over $600,000
The new withholding tables are posted here:
https://www.irs.gov/pub/irs-pdf/n1036.pdf
If you have questions about this or anything about the new law, please feel free to reach out any time.
Our latest blog: New Tax Brackets in 2018. Subscribe here: [link]
What’s the standard deduction per person for 2018? Find out more: [link]
Biz Tip: For 2018 there are seven tax rates or brackets ranging from 10 percent to 37 percent. [link]
The 2017 Tax Cuts and Jobs Act revised some foundational deductions, exemptions, and tax brackets for the 2018 tax year. [link]
Here’s a rundown of what’s changed in deductions, exemptions, and tax brackets for the 2018 tax year. [link]
A few itemized deductions have been eliminated or capped for 2018. Find out more here: [link]
What are the new tax brackets for 2018? [link]
New Tax Brackets in 2018. Sign up for our newsletter: [link]
BizBoost News Volume 7, Issue 20 For distribution 3/26/18; publication 3/29/18
The Home Office Deduction: Regular Method
Has your friend, neighbor or colleague told you that if you take the home office deduction, it will be a “red flag” to the IRS that will trigger an audit? Well, that is just not true! 2017 is the last tax year that you can take a home office deduction since the Tax Cuts and Jobs Act excludes it for tax years 2018-2025. In order to claim the home office deduction, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business. Regular Use: This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test. Exclusive Use: A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility. You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.
Your home can qualify as a principal place of business if:
A business use of the home deduction is allowed if the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business. The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible. The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:
Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area. If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses. If your total income is less than your total expenses, your home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation. If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket. Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities. The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance. When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify? If so, take the deduction, reduce your taxes, and don’t worry about that “red flag” because if you are audited, there will be no change on your return because you know the rules! Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.
Our latest blog: The Home Office Deduction: Regular Method. Subscribe here: [link]
Will taking the home office deduction trigger an audit? Find out more: [link]
Biz Tip: A business use of the home deduction is allowed if the taxpayer meets clients in their home. [link]
To qualify for the home office deduction, you are required to meet two tests. Find out more: [link]
Know the rules of home office deduction to reduce your taxes. [link]
Your home can qualify as a principal place of business if the office is used regularly and exclusively for business. Find out more here: [link]
Do you qualify to take the home office deduction? [link]
The Home Office Deduction: Regular Method. Sign up for our newsletter: [link]
