New Qualified Business Income Deduction

Headlines about the new tax law and its impacts are daily news. Some of the tax law changes are clear and easy to understand. Other changes are incredibly unclear and difficult to interpret. One particularly ambiguous tax law change is the new deduction for “qualified business income” contained in the 2017 Tax Cuts and Jobs Act. It’s so confusing that the AICPA requested “immediate guidance” from the IRS last month.

 

The new deduction is the lesser of 20% of qualified business income or 50% of W-2 wages paid by pass-through businesses that operate as a sole proprietor (reported on Schedule C), partnership, Subchapter S Corporation, or owner of rental property (reported on Schedule E). Sounds pretty simple, but it’s really not.

 

More guidance will be coming at some point, but business owners often can’t wait to make decisions. Based on what is now known, businesses need to look closely at three considerations to know whether they are eligible to take the new qualified business income deduction:

 

  1. Excluded Businesses

Right off the bat, specified businesses are excluded from taking this new deduction. Businesses providing accounting, legal, consulting, and architect services are specifically excluded. Businesses that “rely on the skills and expertise of the owner or employees” are also excluded. That last part is certainly open to interpretation, and one of the reasons the AICPA’s requested IRS guidance.

 

  1. Income Level

The deduction of 20% of qualified business income is subject to a dollar limit, based on the owner’s filing status. For example, the dollar limit for a single individual is $157,500 and $315,000 for married couples filing a joint tax return. At first glance, this sounds pretty awesome, but required adjustments could reduce the limit.

 

  1. Wages Paid

After calculating 20% of qualified business income, compare it to 50% of total wages paid to employees. Sole proprietors don’t pay themselves wages, so this deduction is not available to them unless they pay wages to employees. Remember, it’s a “lesser of” situation, so if one option is zero, no deduction. Understanding the type of business entity and how workers are paid is essential to getting this right.

 

The number of complexities and variables to consider about qualified business income and the new tax deduction for pass-throughs are too long and dense to cover here. Plus, the IRS still needs to issue guidance to help business owners — and their accountants – make informed decisions and file their taxes next year. So stay tuned!

New Tax Withholdings

The IRS issued new tax withholding tables for employers in January 2018, designed to reflect the new tax law passed in December 2017. By now, you’ve probably seen the results in a higher net paycheck. Seems like a pretty nice deal. But will you feel the same way next tax season?

 

The new tax withholding tables may not account for all of your income and deductions, which could result in under- or over-withholding income taxes compared to your tax liability. You could end up giving the government an interest-free loan — your refund. Or, you could end up having to pay a chunk of money when you file. You could even owe interest and penalties!

 

How can you avoid all of that? Compare your withholdings and any estimated tax payments to your projected tax liability. More easily said than done.

 

You have two options for verifying that your taxes are covered for next tax season:

 

  1. Do It Yourself (DIY)

Most people have all the information needed to figure out if their tax withholdings are enough to cover their tax liability. Pay stubs or online pay information reflect how much you earn and have withheld each pay period and year-to-date. Apply a little arithmetic to the pay information, and you can figure out your income and withholdings for the year. Have a completed copy of your most recent tax return handy. Information on that return can help you estimate income and other items for 2018.

 

It’s really important to know about the new tax law changes to estimate your 2018 income and deductions. To help with that, the IRS published a Withholding Calculator at https://www.irs.gov/payments/tax-withholding so taxpayers can make sure they have the right amount of withholding.

 

  1. Get Professional Help

No, not that kind of professional help. I mean help from a tax professional. The IRS Tax Calculator may be a great tool for taxpayers with simple situations. People with more complicated financial situations might need to meet with a tax preparer to get insight on how 2018 will differ from 2017 because of the new tax law. Sure, you’ll pay a fee for that service, but peace of mind is extremely valuable.

 

Avoid expensive surprises next tax season by figuring out now whether your tax withholdings will cover your 2018 income tax liability. Whether you Do It Yourself or get help from a tax professional, you’ll have peace of mind that your taxes are covered.

 

Save for Retirement and Get a Tax Credit

Saving on your 2017 income tax bill while saving for retirement could be an even better deal than you thought. In addition to reducing your taxable income by funding an IRA or employer-provided salary-reduction arrangement, eligible taxpayers could also get a Saver’s Tax Credit.

 

A tax credit is a dollar-for-dollar reduction of your tax bill, as opposed to a tax deduction, which reduces your taxable income. A tax deduction reduces your tax bill based on your tax rate – the higher your tax rate, the higher your tax savings.

 

Figuring out whether you could receive a Saver’s Credit depends on the answers to three questions:

 

  1. Who is eligible for the credit?

    To claim the Saver’s Credit for 2017, the taxpayer must be at least 18, cannot be a full-time student, and cannot be claimed as a dependent on another person’s return. Her or his adjusted gross income cannot be more than specified limits, based on filing status (i.e., $62,000 for married filing jointly, $46,500 for head of household, or $31,000 for single, married filing separately, or qualifying widow(er).

  2. What 2017 contributions are eligible for the credit?

    Eligible contributions include funding a 2017 traditional or Roth IRA made by April 17, 2018. Salary reduction plan contributions, such as to an employer’s 401(k), SIMPLE IRA, SARSEP, 403(b), or 457(b) plan, are also eligible. Rollover contributions of any type are not eligible for the Saver’s Credit.

  3. How much is the Saver’s Credit?

    The amount of the Saver’s Credit is based on a percentage of the contributions that were made for 2017. The credit rate is between 10 and 50 percent, depending on income and filing status. For example, a single taxpayer with earned income of $31,000 who makes a $1,000 IRA contribution for 2017 is eligible for a $500 Saver’s Credit.

Using your Vehicle for Business

If you are a business owner, you probably use your personal vehicle for business. The IRS allows you to deduct the business use of your vehicle on your tax return (medical and charity use, too – more about that below). Of course, the IRS has rules to follow in order to take that tax deduction. The beginning of the new tax year is a good time to review those rules and how to follow them.

 

Step One to deducting the business use of your vehicle is to keep a log of your business miles. Actually, you need to track all of your miles. Your tax return will need to include the total miles driven during the year, the total commuting miles and total business miles.

 

Step Two is to determine which of the two allowable vehicle deduction methods gives you the bigger tax benefit. You may have to track the information for both methods to figure out which is best for your situation.

 

The first method is the Standard Mileage Rate Method, which is adjusted annually based on the overall operating expense studies done by the IRS. The studies take into consideration the costs of maintenance, repairs, depreciation, registration, gasoline prices, etc. The standard mileage rate for business use of a vehicle will increase slightly in 2018 to 54.5 cents per mile (from 53.5 cents in 2017).

 

The second method is the Actual Expense Method. This method requires that the taxpayer not only maintain a log of total miles, business miles and commuting miles, but also report the details of the actual cost of operating the vehicle, including repairs, maintenance, gasoline, oil, registration, insurance, inspections, car washes, etc.

 

The total actual vehicle operating expenses are deducted at the percentage of business miles of the total miles driven during the year. For example, if you drove a total of 15,000 miles in 2017 with 3,000 for business (20%), and spent $4,500 to operate your vehicle, you could deduct $900, or 20%, of the vehicle operating costs on your taxes

 

Expenses for parking fees and tolls attributable to business use are deducted separately, whether you use the Standard Mileage Rate Method or Actual Expense Method.

 

Driving for medical or moving purposes may be deducted at 18 cents per mile for 2018, which is one cent higher than for 2017.The rate for service to a charity is unchanged, at 14 cents per mile.

New Tax Bill: Christmas Gift or Lump of Coal?

As this blog “goes to press,” H.R.1, To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 — aka the Tax Cuts and Jobs Act – is undergoing its final vote to be passed by Congress. President Trump has promised to sign it before Christmas.

Ho, ho, ho!! Is this a gift or a lump of coal in your Christmas stocking? Well, as is often the answer with taxes — It Depends. This tax bill is packed with changes for almost every individual and business U.S. taxpayer. Whether that is a good change or a bad change depends on your circumstances. It also depends on your ability to do tax planning or to hire a qualified tax professional to help you to navigate through the planning process.

Most people don’t have the time to keep up with tax law changes. Interpreting tax law changes is also daunting. If you decide to hire a professional, how do you decide where to get reliable and accurate tax advice?

 

Ask any tax professional you consider engaging these three questions, and make sure you feel good about the answers:

 

  1. How Do You Keep Up with Changing Tax Laws?

Tax laws are changing now, and they will continue to change. It’s important to work with a tax professional who keeps up, so you don’t have to. A qualified tax professional should be able to describe attending conferences, webinars, or other continuing education every year to stay current.

 

  1. What are Your Experience and Credentials?

Tax preparation is an unregulated industry where anyone can participate. Ask all tax professionals you are considering for examples of experience with different tax situations, client types, and complex issues. Working with a credentialed professional, like a CPA or Enrolled Agent, helps ensure the person is qualified. Finally, ask for references – and contact them.

 

  1. How Do You Communicate with your Clients?

Feeling comfortable with your tax professional’s communication style and manner is important. Does the tax professional regularly communicate with and educate her or his clients? Is she or he available if a tax-related question or issue comes up, even after the tax deadline?

 

The Tax Cuts and Jobs Act makes tax planning even more important than ever. If you need help figuring out whether you got a gift or a lump of coal in your Christmas stocking in 2017, ask these three important questions to find a qualified tax professional to advise and educate you.

Year-end Donation Time is Here!

Tomorrow is Thanksgiving, the beginning of Giving Season and that annual scurry to make charitable tax deductions before year-end. Non-profit organizations typically receive a large percentage of their donations in November and December. So now is a great time to remember four important facts about charitable tax deductions, before you write that check or click “Donate” on that website.

 

Whatever charity your heart tells you to support, you also expect to save some tax money. But how can be sure that your donation is deductible? Just in time for Giving Season, here are answers to four common questions about charitable donations – Which, Who, What, and How:

 

Which Donations are Deductible?

You can only deduct donations to qualified charities that meet IRS non-profit status requirements. Qualified charities include humanitarian, religious, educational, scientific, and cruelty-prevention organizations. A list of qualified charities is posted on the IRS’ “Exempt Organizations Select Check” tool.

 

Who Can Take a Deduction?

Under current tax law, donations to qualified charities can only be deducted by taxpayers who itemize their deductions using IRS Schedule A. Donation deductions could be limited if your adjusted gross income exceeds a specified amount, based on your filing status.

 

What Documentation is Needed?

You must maintain a bank record or other written communication from the charity. Documentation must contain the name of the organization, the date of the donation and the amount. Donations of $250 or more must be acknowledged in writing by the charity stating the date and amount of the donation. Your deduction could be reduced by the value of anything you received in return, such as the cost of a fundraising dinner.

 

How about Property Donations?

Donations don’t have to be monetary. You can also donate items such as clothing, household goods, vehicles, stock, or real estate. Property donations are subject to more reporting rules than monetary donations. Donated vehicles valued at more than $500 and donated real property and other items valued over $5,000 are subject to even more rules and documentation requirements.

 

Want more information? Consult a qualified tax professional or check out the IRS website at here.

 

Too Late to Reduce or Avoid 2017 Tax Penalties?

All year, you’ve been meaning to check whether your tax withholding and estimated payments will cover your tax liability. But 2017 has been super busy. It’s mid-November, and you’re just getting around to it. Is it too late to reduce or avoid tax penalties if you owe? Maybe not…

 

To avoid a penalty for 2017, tax withholdings or estimates must total 90% of your 2017 tax liability, or 100% of your 2016 tax liability, whichever is lower. Wage earners usually have taxes withheld from their pay throughout the year. Self-employed individuals and wage earners with a side gig need to make estimated tax payments.

 

Since 2010, the IRS has seen an increase in the number of taxpayers assessed underpayment penalties and interest, up 40% from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That can really add up!

 

Here are four ways to avoid being one of those statistics:

 

  1. Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2017 refund.

 

  1. Pay estimated tax for 2017 if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due in advance of the fourth quarter payment deadline on January 16, 2018, will stop the clock on 2017 interest accruals.

 

  1. Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.

 

  1. Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired.

 

Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. To raise awareness, the IRS recently launched a new “Pay as You Go, So You Don’t Owe” web page, with tips and resources designed to help taxpayers. Portions of the site focus on self-employed taxpayers, including those with side gigs. The sharing economy page explains tax withholding and estimated tax payments to reduce or avoid tax penalties.

Tax Scam Calls Still Happening

It’s still happening. It happened to me just last week. I came home to a voicemail telling me that four warrants are out for my arrest and I need to pay up or turn myself in. Of course, the caller conveniently provided a callback number. The caller also sounded automated. Who would fall for that? You might be surprised…

 

Hundreds of unsuspecting taxpayers are still being defrauded of thousands of dollars. Otherwise, the scam callers would stop. It wouldn’t be worth their time. Taxpayers should not take the bait and fall for this trick. But it can be really intimidating to get a threatening call about what is already a scary topic – your taxes.

 

Four tips to help taxpayers avoid getting scared enough to become a scam victim:

 

  1. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.

 

  1. The real IRS will not:
  • Call to demand immediate payment
  • Call someone who owes taxes without first sending a bill in the mail
  • Demand tax payment without allowing the taxpayer to appeal the amount owed
  • Require a taxpayer to pay in a certain way, such as with a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring in law enforcement to arrest a taxpayer who doesn’t pay
  • Threaten a lawsuit

 

  1. Special circumstances when the IRS will come to a home or business include:
  • When a taxpayer has an overdue tax bill
  • When the IRS needs to secure a delinquent tax return or a delinquent employment tax payment
  • To tour a business as part of an audit
  • As part of a criminal investigation

 

  1. IRS Revenue Agents who may conduct a visit to a taxpayers home or business carry two forms of official identification that have serial numbers. Taxpayers can check both IDs. Revenue Agents conducting audits may call taxpayers to set up appointments, after having first notified them by mail. By the time the IRS visits a taxpayer at home, the taxpayer would be well aware of the audit.

 

Have you been called or visited by someone impersonating the IRS? Don’t be scared or intimidated. Hang up the phone and visit IRS.gov for information about how to detect and report tax scams.