2018 has come to a close and we here at Proactive Accounting & Tax Services, Inc. hope you enjoyed the festivities of the holiday season and send wishes of a healthy New Year! This newsletter is an update regarding the 2018 Tax Reform which is the most extensive re-write of the Internal Revenue Code since 1986 and was broad and ambiguous in many areas upon its initial delivery. The Proactive Accounting staff continues to analyze and familiarize ourselves with the many new releases of regulations, rulings and other guidance by the IRS. There is still very much of the information that is open for interpretation and will likely lead to future guidance and maybe even some changes to guidance currently released.
In this newsletter we will update and highlight areas of the tax reform that may affect our clients and provide some additional guidance and expectations.
- S Corporation (1120S) and Partnership (1065) Returns are due March 15, 2019
- Personal/Individual (1040) Returns are due April 15, 2019
- C Corporation (1120) Returns are due April 15, 2019
Personal Filing Form 1040
W-2 Withholding Issues:
The final bill kept the seven-bracket structure and mostly lowered the rates as compared to prior years. Our prior newsletter recommended that our clients that are W-2 employees update W-4s so that the withholdings would be more in line with the tax reform. A simulation performed by the Treasury Department from the Government Accountability Office shows that only “6% of taxpayers will have wages with accurate withheld taxes, while 21% of taxpayers (nearly 30 million) households will be under withheld, meaning they will have a balance due”.
We highly recommend comparing your W-2 income and tax withholding from a most recent year to date paystub(s), applying the tax brackets to calculate total tax, and reduce by withholdings to arrive at possible balance due or refund. It is not safe to simply rely on prior year filings, so feel free to reach out to our office for assistance in being PROACTIVE.
New Look to Form 1040:
The 2018 Form 1040 (the form used to file personal/individual returns) is structured like a “postcard”. Pages 1 and 2 of the new form are mostly for purposes of showing taxpayer names, address, filing status, and other general information. The new additional schedules, six (6) in total, now populate and summarize the information formerly on the 2017 and prior years Form 1040. Our office is becoming acquainted with the new form and schedules, but please note that some additional preparation and explanation time will be required for this year’s filing.
Due Diligence Considerations:
The areas listed below will require a stronger and more conservative focus by our firm going forward due to the due diligence requirements set forth for our licensing by the AICPA and the IRS.
- An engagement letter setting forth the professional services provided in preparation of the tax return(s) must be signed and dated prior to beginning preparations
- All documents provided must be in tax format where applicable; All information/documents have been received prior to turning into our office
- Mileage logs MUST be provided to be reported on return. We can no longer accept rough estimates, “similar to prior year”, and the like. Spreadsheets and print outs from an application with your phone is acceptable.
- All returns must be reviewed by the client(s) and approved by signature and date prior to electronically filing
CHANGES TO THE LAW – INDVIDUALS:
- The threshold for deducting medical expenses is 7.5% of AGI for all taxpayers for 2017 and 2018. In 2019, that will change to 10%.
- The itemized deduction for state and local taxes is limited to $10,000 ($5,000 MFS). (This limit includes both state and local income taxes withheld in W-2 wages or paid as estimates and real property taxes.)
- The Child Tax Credit increased to $2,000 per qualifying child and the phase-out threshold increased. It also increases the portion of the credit that is refundable to $1,400.
- There is a new Family Tax Credit of up to $500 for dependents who are not a qualifying child for purposes of the Child Tax Credit.
- For the charitable contribution deduction, the percentage of AGI limitation for cash to public charities and certain other organizations increased from 50% to 60%.
- The estate and gift tax exemption amount increased to $11,180,000.
- The long-term capital gain and qualified dividend income maximum tax brackets no longer follow the tax brackets for regular income tax purposes.
- The parent’s rate is no longer used to calculate the kiddie tax. Instead, taxable income attributable to net unearned income is taxed at the estates and trusts tax rates for both ordinary income and net capital gains.
ELIMINATION OF TAX PROVISIONS:
- Personal exemption deductions are suspended.
- The phase-out of itemized deductions based on adjusted gross income (AGI) is suspended.
- Itemized deduction for home equity interest (other than debt used to buy, build or improve) is no longer allowed. The home mortgage interest deduction debt limit is reduced to $750,000 ($375,000 MFS) with certain exceptions.
- Miscellaneous itemized deduction subject to the 2% floor are no longer allowed which includes tax preparation fees, investment/brokerage fees, unreimbursed work expenses.
- Personal casualty loss and theft deductions are eliminated unless the loss is incurred in a federally declared disaster area.
- The moving expense deduction and income exclusion is allowed only to members of the Armed Forces (or their spouses or dependents).
- No charitable contribution deduction is allowed for a payment to a higher educational institution in exchange for the right to purchase tickets or seating at an athletic event.
- Alimony is not deductible by the payer nor includible in income by the recipient for agreements entered into after December 31, 2018.
- Effective for 2019, the shared responsibility payment under the Affordable Care Act for not having minimum essential health insurance coverage is zero.
TAX PLANNING – INDIVIDUALS:
- Estimated Income Tax: If you receive income that is not subject to withholding, you may need to pay estimated tax. This may include income such as self-employment (1099), pass through income from K-1s (ownership in Partnership or S Corporation), interest, or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. Our tax governing agencies are considered a “pay as you go” system, meaning as you earn income, you should be paying taxes. Typically estimates are paid four times a year (April, June, September and January). We can help you figure out how much estimated tax you may need to pay. The final estimated tax payment for 2018 is due on January 15, 2019. For those of you who are already set up on estimates, remember this can be the biggest source of errors if our staff is not provided with thorough information (i.e. cleared checks; the vouchers; dates paid; and which agency was paid.
- Charitable Contributions: When making contributions of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the charity. If the contribution is $250 or more, you must maintain a contemporaneous written receipt from the charitable organization.
- Make Annual Gifts to Individuals: Consider making gifts to family and other heirs. The annual gift tax exclusion for 2018 is $15,000. You can make gifts of this size or less to an unlimited number of individuals. Consider strategies like helping children and grandchildren fund ROTH IRA’s as a way to transfer wealth. In addition, paying qualified higher education expenses (tuition) directly for someone is not subject to the annual gift exclusion limits.
- Update Your Will or Trust: If you haven’t updated your estate planning in recent years now is the time. Consider the unique needs of heirs, including special needs trusts. Consider making discounted lifetime gifts to reduce the value of your estate, if you anticipate your estate will be subject to estate tax.
Gifts to heirs using family limited partnerships can facilitate the use of discounts. Taxpayers with significant estates should also consider gifting the ownership of life insurance policies to avoid paying estate tax on the value of a life insurance policy. Consider remembering your favorite charities in your estate plans. Please consider including us in your discussions with your attorney.
Meals & Entertainment: The IRS released that business meals with clients, prospects, and referral sources are 50% deductible much like prior tax years. Documentation of a substantial and bona fide business discussion is required to take the deduction and should be maintained in your records. The only meals that are 100% deductible are those that are reimbursed or are for the purposes of a celebration for an employee(s). None of which can be lavish and extravagant.
All entertainment remains 0% deductible including admission fees, tickets, food and beverages.
20% Business Deduction: The 20% Business Deduction, officially titled Code Section 199A Deduction, is similar to the Domestic Activities Deduction, which was repealed in the 2018 Tax Reform. Non-corporate taxpayers may deduct up to 20% of domestic qualified business income from a Partnership, S Corporation or Sole Proprietorship (pass through entities that give owners K-1s). This deduction is limited to wages paid or on wages paid plus a capital element and is phased out for taxpayers with taxable income above the outline thresholds (married filing jointly $315,000; all others types of filers $157,500). Additional limits will apply to specifically defined types of businesses in the computation of the 20% Business Deduction including health, law, accounting, financial services, and brokerage services.
TAX LAW CHANGES
- There is no longer a separate tax rate for personal service corporation’s (PSCs).
- The two-year carryback provision for net operating losses (NOLs) has been eliminated except for certain losses, farming and casualty insurance companies. In addition, the net operating loss deduction (NOL) is limited to 80% of taxable income.
- There is no meals and entertainment deduction for membership dues or activities generally considered to be entertainment, amusement or recreation.
- Alternative Minimum Tax (AMT) for C corporations has been repealed.
- All taxable income of a C corporation is taxed at a flat rate of 21%.
- The 70% dividends received deduction is reduced to 50%. The 80% dividends received deduction is reduced to 65%.
- The depreciation limitations for luxury automobiles have been increased.
TAX PLANNING – BUSINESSES:
- The § 179 limit for 2018 is $1,000,000 for purchases of qualifying assets. The new law expands the definition of §179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.
- The new law increases the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50%. Special rules apply for longer production period property and certain aircraft.
The definition of property eligible for 100% bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if certain factors apply. Call us to see if you could benefit from this change.
- Succession Planning: If you plan to exit or transition your business to new ownership, it will pay to do some tax planning well in advance. Not only can tax planning be financially rewarding, but a well thought out tax plan can give you peace of mind.
- S Corporation Election: Consider incorporating and electing S Corporation status or, if your business is already incorporated, consider switching from C to S Corporation status. Remember that with an S Corporation conversion or election comes specific responsibilities including owner(s) now being included in payroll reporting and appropriate (sometimes extensive) legal documents. Call to discuss whether converting to S Corporation makes sense.
- Separating business and personal accounts: If you are a business, then you should act as a business. Mixing personal and business banking and credit card accounts is viewed negatively by the IRS and other taxing authorities and should be avoided. Setting up separate business accounts from your personal should be a top priority if you have not already done so. Reach out to us to discuss how to handle, track, and the possible implications, etc.
- Tracking your business transactions and mileage: Our staff is well versed in assisting clients in tracking business transactions so please reach out if you are searching for an easier, less invasive way to be more proactive in your recordkeeping. Additionally, make sure to use some sort of mileage tracker such as a phone application. Make sure to also keep receipts related to business transactions. While the bank and credit card statements detail most transactions, the IRS prefers to use receipts as their 3rd party verification during an audit. Records should be kept for 7 years. Call us if you have any questions about our “File Cabinet Accounting and Record Retention” concept.
Estimated Income Tax: Most of our business clients are pass through entities, a Partnership (Form 1065) or an S Corporation (Form 1120S) and, as such, the business return filed with the IRS for these types of entities is for informational purposes only and no tax is due at that level. Rather, the K-1 produced for the owner(s) is passed through to the owner’s individual tax rate. Estimated taxes are usually a result of these types of entities and should be discussed with our office. It is also important to note that while you may owe taxes personally due to the business, this is not an expense to the business itself.