Who is eligible to defer employment tax deposits?

• All employers are eligible.
• The ability to defer deposit and payment of employment taxes applies to all employers, whether or not the employers are entitled to Families First Coronavirus Relief Act (FFCRA) paid leave credits and CARES Act employee retention credits.
• No special election is required.
   

What employment taxes and deposits may be deferred?

• The employer’s share of social security tax or 50% of the social security tax on net earnings from self-employment income (collectively “employment tax”) may be deferred.
• The deferral applies to deposits and payments of employment tax required to be paid during the period beginning March 27, 2020 and ending December 31, 2020.
• Form 941 will be revised for the second quarter of 2020.  The IRS indicates it will provide instructions soon regarding how to report deferrals for the first quarter of 2020.
• For self-employed individuals, the deferral applies to employment tax included in estimated tax payments due during the period beginning March 27, 2020 and ending December 31, 2020.

 

When is the deferred employment tax required to be deposited (applicable dates)?

• 50% of the deferred amount must be deposited on or before December 31, 2021.
• The remaining 50% must be deposited on or before December 31, 2022.

 

What is the effect of a Payroll Protection Plan (PPP) loan on the deferral?

• Employers that have received a PPP loan, but whose loan has not yet been forgiven, may defer employment tax as described above.
• When an employer receives the lender’s decision that the PPP loan is forgiven, employment tax due after that date may not be deferred.
• The amount of employment tax deferred through the date the PPP loan is forgiven continues to be deferred and due on the applicable dates.

 

What are the effects of FFCRA paid leave credits and CARES Act employee retention credits on the deferral?

• An employer may defer employment tax as described above prior to determining:
  •     If the employer is entitled to FFCRA paid leave credits or the CARES Act employee retention credit
  •     AND prior to determining the amounts of:
    •         Employment tax deposits that the employer may retain for these credits,
    •         Amount of advance payments of these credits, OR
    •         Amount of refunds of these credits.

Who is eligible for a PPP loan for sole proprietorships and independent contractors?

• A sole proprietorship is a business reporting income on Form 1040, Schedule C.
• Farmers are sole proprietorships reporting income on Form 1040, Schedule F.
• Independent contractors are sole proprietorships reporting income on either
  Form 1040, Schedule C or Form 1040, Schedule 1, Line 8, Other Income.
• Sole proprietorships, farmers and independent contractors pay self-employment tax on their earned income.
• An individual can have self-employment income from multiple sources.
• Self-employed income from all sources is reported on Form 1040, Schedule SE, Line 3.
• Individual partners in service-providing partnerships pay self-employment tax on their share of partnership’s net income.  The SBA has not yet verified if individual partners are eligible for an individual PPP loan.

 

What is the PPP loan amount for sole proprietorships and independent contractors?

• The PPP loan amount is 2.5 times average monthly payroll costs.
• Payroll costs are defined as net earnings from self-employment.
• Certain adjustments apply to sole proprietorships with employees.

 

How is the PPP loan amount calculated for a sole proprietorship without employees?

1. (1)  Determine the net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
2. (2)  Divide Line (1) by 12 to arrive at average monthly payroll costs.
3. (3)  Multiple Line (2) by 2.5 to arrive at the PPP loan amount.

Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.

 

How is the PPP loan amount calculated for a sole proprietorship with employees?

• Payroll costs are calculated as:

1. (1)  Net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
2. (2)  Add back:
   •        Employee wages reduced by wages over $100,000 paid to any employee.
   •        Employer paid health insurance cost for employees.
   •        Employer contributions to a retirement plan for employees.
3. (3)  The sum of Line (1) plus Line (2) equals annual payroll costs.
4. (4)  Divide payroll costs by 12 to arrive at average monthly payroll costs.
5. (5)  Multiply by 2.5 to arrive at the PPP loan amount.

Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.

 

What portion of the PPP loan is eligible for forgiveness?

• The sole proprietorship PPP loan is eligible for forgiveness if:
  1. (1)  At least 75 percent of the loan funds are spent on payroll costs, including the portion of payroll costs equal to the net earnings from self-employment considered in the loan amount calculation.
  2. (2)  The remaining 25 percent of the loan funds are spent for payments of interest on existing mortgages, rent and utilities.
  3. (3)  The above expenditures must be paid within the eight weeks following receipt of the loan proceeds.
  4. (4)  Details are pending regarding the calculation of amounts spent for payroll costs for self-employed individuals.

 

When does the application period begin?

• Sole proprietors and independent contractors can apply for a PPP loan at any SBA provider financial institution beginning April 10, 2020.

 

Labenz & Associates LLC Disclosure:  The information provided is general in nature based on provisions as of April 10, 2020.  Additional provisions may apply.  Please discuss the provisions with your tax advisor and SBA lender.

The CARES Act has changed the life of Qualified Improvement Property (QIP) from 39 years to 15 years, thus making it eligible for bonus depreciation.  This is a technical correction for the QIP issue and is a retroactive change, back to January 1, 2018. 

• QIP is any improvement to an interior, non-structural portion of a commercial building.

 

IRA distributions up to $100,000 made in 2020 will not be subject to the 10% early withdrawal penalty if it’s a “coronavirus-related distribution”.  It is still subject to Federal and state income tax, however.

• The CARES Act also removes the requirement for Required Minimum Distributions for 2020.

 

Starting in 2020, a taxpayer is able to deduct up to $300 for charitable contributions, even if they do not itemize deductions on their Federal income tax return.

• This is a permanent change.
• If they do itemize, then all of the charitable contributions must be deducted below the line and reported on Schedule A.

 

For 2020 only, donations made to charities that are subject to the 60% AGI limit are now allowed up to 100% of AGI for 2020.

• For corporate donors, the limit is increased from 10% to 25%.

 

The Tax Cuts and Jobs Act (TCJA) changes to NOL loss carrybacks and carryforwards have been temporarily replaced.

• Losses from 2018 - 2020 may be carried back for up to 5 years (instead of no carryback allowed by TCJA).
• Losses carried forward to 2019 or 2020 may be used to offset 100% of taxable income (instead of the 80% rule put into place by the TCJA).

 

The TCJA rules regarding limitations on excess business losses have also been repealed for 2018 - 2020.

• Instead of the limit to $250,000/$500,000 on losses, no limit exists.

 

The 30% limit on business interest expense is raised to a limit of 50% for 2019 and 2020.

• In 2020, the adjusted taxable income calculation will be based on the higher of 2019 or 2020 adjusted taxable income.

Enhanced Unemployment Benefits

• Eligible if unable to work due to COVID-19 or business is shut down
• Self-employed individuals are eligible
• Benefit based on income plus $600 per week provided by Federal government
• Benefits for 39 weeks
• Extra $600 from Federal government, will last up to 4 months
• Use https://neworks.nebraska.gov to apply
  •     Appears applications are available for employees
  •     Does not appear to be set up for self-employed persons yet – will need to call

 

Payroll Protection Program

• Eligible if less than 500 employees, including sole proprietorships, independent contractors and nonprofit organizations
• Loan to cover payroll and other operating expenses
• Immediate cash loans and a portion may be forgivable
• Maximum loan is 250% of average monthly payroll
  •     Example:  Monthly payroll $10,000 x 250% = $25,000 maximum loan
• Monthly payroll includes:
  •     Group health benefits
  •     Retirement benefits
  •     State and local payroll taxes
  •     Sole proprietor and independent contractor compensation (up to $100,000 per year)
• Loan may be used for:
  •     Payroll costs
  •     Rent
  •     Interest on mortgages and other debt incurred before 3-1-2020
  •     Utilities
• Loan is forgiven to the extent loan proceeds are used for payroll costs, rent, interest on specified loans and utilities
• Interest rate is 0.5% (one-half percent) and maximum term is 10 years
• Payments can be deferred from 6 months to 1 year
• Application is required for forgiveness providing documentation of costs paid
• Loan forgiveness is reduced in proportion to reduction in number of employees or employee salaries are reduced by more than 25%
• Reduction in forgiveness can be avoided if employees are rehired or compensation is increased in allotted time period
• Apply for Payroll Protection Program loan through any SBA lender (referred to as a 7(a) lender)

 

Economic Injury Disaster Loan (EIDL) and Grants

• Eligible if under 500 employees, including sole proprietorships, independent contractors and nonprofit organizations
• Emergency $10,000 GRANT is available
  •     Apply at https://www.sba.gov/page/disaster-loan-applications
  •     Use the link at the top of the page in the yellow area
  •     Should be direct deposited within 3 days of accepted application
  •     Grant does not need to be repaid
• EIDL Loan
  •     Working capital loan up to $2 million
    •         Can be used for any costs that could have been paid if the disaster had not occurred
  •     Interest rate is 3.75% for businesses and 2.75% for private nonprofits
  •     Maximum loan term is 30 years
  •     Apply for loan online, by mail, in person or by phone
  •     Online application site is https://www.sba.gov/page/disaster-loan-applications
  •     Businesses can apply for both a Paycheck Protection Plan loan and an EIDL loan
    •         EIDL loan must be used for purposes other than those for the Paycheck Protection Plan loan

 

Labenz & Associates LLC Disclosure:  The information provided is general in nature based on provisions as of March 31, 2020.  Additional provisions may apply.  Please discuss the provisions with your tax advisor and SBA lender.

The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19).

•      SBA’s Economic Injury Disaster Loans offer up to $2 million in assistance and can provide vital economic
       support to small businesses to help overcome the temporary loss of revenue they are experiencing.

•      These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid
       because of the disaster’s impact.  The interest rate is 3.75% for small businesses.  The interest rate for
       non-profits is 2.75%.

This loan is different from the loan included in the FFCRA.  Clients who are affected by closed businesses are recommended to get their name on the list.

Website link:  https://disasterloan.sba.gov/

 

On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law.  Below is a brief summary of the tax-related provisions, which are effective April 2, 2020, and expire December 31, 2020.

Paid Sick Leave

•   Small to mid-size employers (1 to 499 employees) are required to provide:
  •       Full-time employees are eligible for up to 80 hours of paid sick leave.
  •       Part-time employees are eligible for the average amount of hours the employee would work over a
          two-week period.
•   Paid sick leave covers days when the employee is unable to work (or telework) due to any of the following:
  •       An employee is caring for a child whose school/day care is closed for reasons related to COVID-19;
  •       The employee is experiencing COVID-19 symptoms and is seeking a medical diagnosis; or
  •       An employee (or a family member whom the employee cares for) is self-quarantined as advised by a health
          care provider or Federal/state or local quarantine order related to COVID-19.
•   These wages are exempt from the employer’s portion of Social Security tax and an additional payroll tax credit
    is allowed for the amount of Medicare tax paid on those wages.

 

Payroll Tax Credits

The paid sick time payroll tax credit can be claimed on a quarterly basis, equal to 100 percent of the amount of sick leave wages paid.  The credit is limited to up to $511 per day ($5,110 total) if an employee is taking time off to care for themselves; or up to $200 per day ($2,000 total) if the sick leave is to care for an individual who is quarantined or showing symptoms of COVID-19 or a minor child whose school/daycare is closed.  The credit is refundable if it exceeds the amount the employer owes in payroll tax.

 

For employers who pay family leave wages under the FFCRA, a separate payroll tax provision allows a 100 percent credit against the employer’s share of the payroll tax for each employee, limited to $200 per day, or a total of $10,000 per employee.  The credit is refundable if it exceeds the amount the employer owes in payroll tax.

 

Self-employed workers, including independent contractors also can claim a credit against their regular income taxes related to sick or family leave.  The credit covers 100 percent of self-employed individuals’ daily self-employment income or 67 percent if an individual is taking care of a minor child whose school/daycare is closed.  The per-day amount is limited to the lesser of $511 per day if for themselves, $200 per day for a minor child or their average daily self-employment income

Labenz & Associates LLC is doing our best to balance the spread of the COVID-19 virus and the tax filing season.  We have taken the following steps to keep both our valued clients and our staff healthy.

•     Client meetings in our office have been suspended for the next few weeks.
•     Please provide your tax return information by mail, PDF or use the drop box in our office vestibule.
•     We are fully available to discuss your questions or provide assistance by email or phone (402) 437-8383.

 

Thank you for your understanding and patience.

A few weeks ago, the IRS released a draft of the new 1040 Schedule 1 form for the upcoming 2019 tax season.  Taxpayers will now be required to check ‘yes’ or ‘no’ to the very first question on this new tax form:

“At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

What does this mean?

This means that ALL taxpayers must now inform their tax preparer whether they have any cryptocurrency (virtual currency) related activities during the year.

Labenz & Associates LLC will add a question to our tax organizers requesting whether or not our clients participated in any cryptocurrency transactions during 2019.  If yes, information will need to be provided to report these cryptocurrency transactions.

The Nebraska legislature recently passed LB 512 requiring each S corporation, limited liability company and partnership with income from Nebraska sources to file a Nebraska income tax return for all tax years beginning on or after January 1, 2019.

Prior to the legislation, these pass-through entities were not required to file Nebraska returns if all shareholders, members and partners were Nebraska residents and all the entity’s income was from Nebraska sources.

The Nebraska Department of Revenue encourages all taxpayers to file tax returns electronically and requires tax preparers who file more than 25 Nebraska corporate or partnership income tax returns to file electronically as well.

Electronically filing a Nebraska corporate or partnership return requires a Nebraska identification number that is assigned by the Department of Revenue.

 

• A business that remits payroll income tax withholding or sales tax to Nebraska will already have an assigned Nebraska identification number to use when electronically filing the Nebraska pass-through return.
   
• A pass-through entity without an assigned Nebraska identification number will need to apply for a number prior to electronically filing a 2019 Nebraska tax return.
   
• Nebraska identification numbers can be obtained online at www.revenue.nebraska.gov/electron/online_f20.html.

 

All S corporations, limited liability companies and partnerships for which we will prepare 2019 initial Nebraska income tax returns will receive a letter and form from our office to complete and return as soon as possible, regarding the Nebraska identification number required to electronically file the 2019 tax return.

BACKGROUND

 

The 2018 tax preparation season is upon us and Labenz & Associates will need more information than ever before from our clients to file certain tax returns.  

 

One of the new tax benefits for 2018 tax returns is the 20% Qualified Business Income (QBI) tax deduction.  This is a great tax benefit for those clients who qualify.  But as discussed below, the new deduction will require us to obtain additional information from our clients to assess qualification and to determine the amount of the deduction.  

 

In certain instances, these will be difficult assessments.  The better the information clients can provide to us, the better we will be able to determine the eligibility to claim the new tax benefits.

 

For noncorporate taxpayers – individuals, estates and trusts who own a business activity – the key question for their 2018 tax returns is:  Will you qualify for the 20% QBI deduction?  The analysis will apply to individuals, estates and trusts with:

 

• One or more rental properties,
• Farmland,
• Ownership interest in an LLC, partnership or S corporation, and
• Businesses operated as a sole proprietorship.

 

A simple example:  Mary and Bob own a hardware store through an S corporation.  The business earned a $100,000 profit in 2018.  Will Mary and Bob qualify for a $20,000 deduction on their 2018 tax return?

 

The purpose of this Alert is to provide an overview of the 20% QBI deduction, including some recently issued IRS guidance, so our clients can help us assess their ability to claim the deduction.  If a client does qualify, we may need more information to quantify the deduction when we prepare the 2018 tax return.  

 

The 20% QBI deduction is determined differently for taxpayers above or below certain taxable income threshold amounts.  Taxpayers below the threshold amount must satisfy one requirement whereas taxpayers above the threshold must satisfy three requirements.

 

TAXABLE INCOME UNDER $157,500 SINGLE AND $315,000 JOINT

 

Single individuals, estates and trusts with 2018 taxable income at or under $157,500 and married filing jointly with taxable income at or under $315,000 (the threshold amount) can qualify for the 20% QBI deduction by satisfying one requirement – their business activity must be classified as a “trade or business activity”.

 

A trade or business activity is not a defined term, but prior Court cases and the recently released IRS guidance shed some light on activities that will be considered a trade or business.  Examples:

 

• Taxpayer, employees of the business activity or their agents must be involved in the activity with continuity and regularity.
• A hobby or amusement type activity does not qualify.
• Operating five days a week as a plumbing business, hardware store, dental practice or law practice are clear examples of a trade or business.
• Farmland and rental properties are the most difficult business activities to determine whether they rise to the IRS requirement of a trade or business activity.  Examples are below:

 

• An individual owns farmland which is cash rented or crop shared with a tenant.  The farm owner pays certain bills and is involved in certain decisions.
• An individual owns two or three duplexes and collects rents, pays bills and arranges maintenance.
• Do either of these business activities rise to being defined as a “trade or business activity”? 

 

To address rental situations, the IRS offered a safe harbor.  The rental activity (or multiple activities, if the taxpayer chooses to treat them as a combined enterprise) can be classified as a trade or business activity if all the requirements below are met.

 

• Separate books and records are maintained for each rental activity (or the combined enterprise, if grouped together).
• There are at least 250 hours or more of rental services performed per year for the activity.
• Starting January 1, 2019, taxpayer maintains contemporaneous records, including time reports or similar documents, which support the 250 hours of rental service activities.
• The taxpayer includes a statement on their tax return, under penalties of perjury, verifying the rental enterprise meets the above requirements.
• Note:  Commercial and residential rental properties cannot be combined for the above requirements.

 

Triple net leases and vacation homes do not qualify as a trade or business activity under the safe harbor even if the 250 hours requirement can be documented.  Self-rentals do qualify even if the 250 hours requirement is not met if the self-rental is combined with a trade or business activity that is commonly owned by the taxpayer that is not a C corporation.

 

TAXABLE INCOME OVER $157,500 SINGLE AND $315,000 JOINT

 

Taxpayers with taxable income over the threshold amounts who have business activities that satisfy the trade or business requirement outlined above either by itself or on a combined enterprise basis must satisfy two additional requirements to claim the 20% QBI deduction:

 

Requirement #1 – THE TRADE OR BUSINESS CANNOT BE A SPECIFIED SERVICE TRADE OR BUSINESS.

 

For whatever reason, when Congress created the new 20% QBI deduction, certain trades or businesses were specifically excluded from claiming the deduction if the taxpayer’s income is above the threshold amount.  These trades or businesses are defined as Specified Service Trade or Businesses (SSTB) and include the following:

 

• Trade or business of performing services as an employee, or
• Trade or business of performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.

 

IRS guidance tried to address questions about who is and who is not an SSTB.  For example, with the right facts, surgery centers could fall outside the health field, as well as research, testing and the sale of pharmaceuticals and medical devices.

 

If your taxable income is above the threshold amount and your business activity includes an SSTB, a decision will need to be made if your business activity qualifies when we prepare your 2018 tax return.

 

The IRS provided a de minimis exception to address situations where a business activity with multiple trades or businesses, of which one or more is an SSTB, could still qualify for the 20% QBI deduction.  

 

For business entities with gross receipts less than $25 million for a taxable year:

 

• The business qualifies for the deduction if less than 10% (lowered to 5% if gross receipts greater than $25 million) of gross receipts are from SSTB activities.
• If the 10% de minimis exception is not met, but taxpayer has separate books and records, it may be possible to split the business between SSTB and non-SSTB activities.  If the qualifications are met, some portion of the business activity may still qualify for the 20% QBI deduction.

 

Requirement #2 – THE TRADE OR BUSINESS MUST HAVE WAGES OR INVESTMENT IN DEPRECIABLE ASSETS.

 

For taxpayers above the threshold amount, the 20% QBI deduction for non-SSTB business activities are limited to the greater of the following:

 

• 50% of wages paid to employees during the taxable year and reported on Form W-2, or
• 25% of the wages paid to employees during the taxable year plus 2.5% of the original cost of depreciable tangible property owned at the end of the taxable year.
• Note:  Wages paid to owners only qualify if paid by an S corporation.

 

How this limitation impacts taxpayers above the threshold will vary greatly by taxpayer and by type of business activity.  For example:

 

We have found most banks have sufficient wages, whereas real estate investors will generally rely on the 25% of wages and 2.5% of depreciable tangible property to cover their 20% QBI deduction.  

 

Taxpayers who own farmland that is either crop share or custom farmed and have no wages and limited tangible property will have a significantly reduced 20% QBI deduction due to these limitations.

 

ALL IS NOT LOST

 

Remember – even if your business activity does not qualify for the 20% QBI deduction, all is not lost.

 

Early planning in 2019 may enable the business activity to qualify in 2019.  For example:

 

• Triple net leases could be converted to a more active type lease;
• Partnerships or LLC’s could be converted to S corporations and wages paid to owners;
• Business structures or ownerships can be adjusted; or
• Taxpayers close to the threshold amounts can utilize planning techniques to insure their 2019 taxable income is below the threshold, making qualification simpler.

 

Please discuss your qualification for the 20% QBI Deduction with your Labenz & Associates tax advisor.  We are here to help. 

The Internal Revenue Service (IRS) has issued regulations regarding partnership audit rules effective for partnership tax years beginning on or after January 1, 2018 and may require an amendment to the partnership’s operating agreement.

Partnerships must designate a partnership representative (PR) with a substantial U.S. presence.

• Substantial presence requires availability to meet with the IRS in the U.S., a U.S. taxpayer identification number (TIN), a street address in the U.S. and a telephone with a U.S. area code.
• The PR receives all audit and other IRS correspondence and has the authority to bind the partnership.
• Designation of the PR is made on the partnership’s Form 1065 tax return for the tax year to which the designation applies and is effective on the date the partnership return is filed.
• The PR is not required to be a partner in the partnership.
• If no PR is appointed, the IRS will designate one.
• In general, it makes sense for a new partnership to designate its PR when formed.

 

Partnership audits will be conducted at the partnership level. 

• IRS adjustments will be determined, and any tax will be assessed and collected, from the partnership, generally at the highest individual or corporate tax rate in effect for the year the audit adjustments become final. 
• The adjustments and tax will NOT be assessed and collected from the partners for the year under audit at each partner's tax rate.
• Partners are not able to opt out of the partnership procedures.

 

Eligible small partnerships with 100 or fewer partners can elect out of the partnership audit rules for any tax year.  The election must be made every year on the timely filed Form 1065.

• If the election out is made, all adjustments and tax will be assessed and collected on amended returns from the partners for the year under audit at each partner’s tax rate.

• The election out is only available if each of the partners are eligible:  Individuals, C corporations, estates of deceased partners, certain foreign entities and S corporations are eligible partners.
• A partnership that has an S corporation partner must furnish the names and TINs of each S corporation shareholder.  Also, each of the S corporation shareholders must be counted as a partner for determining the 100-partner threshold.
• Partners that prevent the entire small partnership from being able to elect out are partnerships, trusts, disregarded entities, estates of individuals that are not deceased partners and certain foreign entities.

 

If not eligible for the small partnership election out, the partnership can make a valid “push-out” election within 45 days after receipt of the final IRS audit adjustments.

• The partnership must provide statements to the IRS and to each of the partners from the audited year showing each partner’s share of the adjustments.
• The partners pay tax on the adjustments in the year the statement is furnished, plus interest.

 

All partnerships for which we prepare tax returns will receive a form from our office to complete and return as soon as possible, regarding specific information about partners and the partnership representative to be designated.

As the end of 2018 rapidly approaches, we are sharing this alert as a reminder that 2018 is not business as usual from a Federal and state income tax year-end planning perspective.

 

The 2018 tax year is the first year the changes made by the 2017 Tax Cuts and Jobs Act go into effect for most businesses and individuals.

 

MAJOR BUSINESS CHANGES

 

• Corporate tax rate.  The C corporation tax rate was reduced to a flat 21 percent rate.  For some corporations this will be a tax rate increase.

 

• Section 199A pass-through deduction.  A new 20 percent tax deduction was created for businesses, including farming and rental real estate, operating as a sole proprietorship, S corporation, limited liability company or partnership.  The new tax deduction comes with a great deal of complexity and requires review prior to year-end for optimization.

 

• Depreciation.  More liberal depreciation rules were put into effect starting September 17, 2017.  The new rules carry over into 2018 and future tax years.  Both new and used equipment purchases qualify for some of these new liberalized rules, including business acquisitions.  Coordinating with the new Section 199A tax deduction is required.

 

• Like-kind exchanges.  Like-kind exchange of personal property was repealed.  Now all car and equipment trade-ins are taxable.

 

• Cash method of accounting.  Expansion of the ability to utilize the cash method of accounting may provide an opportunity for additional flexibility for year-end planning.

 

• Interest expense deduction.  A limitation on the use of interest expense as a tax deduction was enacted for larger corporations.

 

MAJOR INDIVIDUAL CHANGES

 

• Section 199A deduction.  The Section 199A deduction from pass-through entities is discussed above.  Managing your taxable income is important to maximizing your Section 199A deduction.

 

• Standard deduction increase.  For many individuals, the increased standard deduction may limit the ability to itemize tax deductions each year.  Bunching deductions in alternative years will become an important planning tool for many individual taxpayers.  

 

• Limit on state and location tax deduction.  The itemized deduction for state income tax, real estate tax and personal property taxes is limited to a combined $10,000 annually.

 

• Charitable giving alternatives.  Direct charitable gifts from IRA accounts for individuals over 70 ½ and the use of donor advised funds will become important planning tools for those with charitable giving objectives.

 

• Reduced Federal withholding.  The 2018 Federal income tax withholding tables could cause individual taxpayers to owe money when they file their 2018 tax return.  Check your withholding before year-end so you can plan for this possibility. 

Meals and Entertainment

 

Activity	2018 Expenses (New Law)	2017 Expenses (Old Rules)
Office holiday parties,   summer picnics	100% deductible	100% deductible
Entertaining clients	Meals 50% deductible	50% deductible
	Meals with prospects   and referral sources –   50% deductible	50% deductible
	Events such as theatre   tickets, sporting tickets,   golf outings – not   deductible, meals 50%   deductible, if separated   on invoice or receipt	50% deductible
	Charitable event tickets –   charitable portion   deductible, meals 50%   deductible if separated   on invoice or receipt	Tickets to qualified charitable   events – 100% deductible
Business meetings of employees,   stockholders, agents or directors	50% deductible	50% deductible
Expenses for attendance at a   501(c)(6) business meeting or   convention of a business league	Meals – 50% deductible	50% deductible
Employee travel meals	50% deductible	50% deductible
Meals provided for the   convenience of the employer	50% deductible   (not deductible after 2025)	100% deductible if a   de minimis fringe benefit;   otherwise 50% deductible

 

Examples

 

Example Activity	2018 Expenses (New Law)	2017 Expenses (Old Rules)
Meal with a client in town (not   away from home)	50% deductible	50% deductible
Meal with a client while traveling   away from home	50% deductible	50% deductible
All employee meeting with food   and beverages served after	100% deductible	100% deductible
Open house for customers and   employees	Employee portion –   100% deductible Customer portion –   50% deductible	Employee portion –   100% deductible Customer portion –   50% deductible
Company sponsors a table at a   charitable event attended by   employees and customers	Value of meals – 50% if   separated on invoice   or receipt (Remainder is charitable contribution)	Meals – 50% deductible (Remainder is a charitable contribution)
Golf sponsorship and outings   $1,000 of which $300 is   charitable contribution	Meals – 50% deductible if   separated on invoice   or receipt Cost of golf – Not   deductible (Remainder is charitable contribution)	Meals and golf –   50% deductible (Remainder is a charitable contribution)

• Note the cost of the meal must not be lavish or extravagant under the circumstances.
• Assumes appropriate documentation exists in all instances.
• Additional guidance and clarification from the IRS is still forthcoming.

On June 21, 2018, the U.S. Supreme Court (the Court) issued a decision in South Dakota v. Wayfair, overturning the physical presence standard requirement for states to impose sales and use tax filing obligations on companies doing business in a state.  As a result, companies are in the process of understanding how the Wayfair decision impacts their sales and use tax filing requirements.

 

We are alerting our clients that the Wayfair decision could also have other state tax filing implications, including income and franchise taxes as examples.

 

The Court observed in their Wayfair ruling that targeted advertising and electronic sales may allow a business to have “substantial virtual connections” to a state without traditional physical presence.  The Court noted that other functions of e-commerce, such as websites leaving cookies on customer hard drives and applications that can be downloaded on customer phones, may be considered to create something akin to a physical presence in a taxing state.

 

Given the Court's conclusion that “physical presence is not necessary to create substantial nexus”, the Wayfair decision could impact other state taxes, such as state income or franchise taxes, for companies conducting business activities in a state without necessarily having a physical presence.

 

For example, even prior to Wayfair, many state and Federal courts have taken the position that the physical presence standard does not apply for purposes of state income taxes.  Many states have been emboldened to enact “factor presence” laws tied to sales, property or payroll in their state.  Wayfair decision type states have attempted to subject companies to their state tax regime if they are doing business in their state even without physical presence.

 

The Court has declined to hear challenges to economic nexus laws for state income tax filing purposes.  With the test announced in Wayfair, more states may enact aggressive legislation.  Effects are likely to be especially pronounced in the handful of states that have taken the position that physical presence is not necessary for the state to assert income tax nexus against a company doing business in their state.  Physical presence is not required to establish nexus with Nebraska. [Neb. Rev. Stat.  §77-2734.04(5)]. 

 

We believe the Wayfair decision may empower states to not only enact legislation, but also pursue audit and collection activities against companies doing business in their state that currently are not subject to their state taxing regime.

 

Therefore, we believe it is necessary for companies that have customers or clients in multiple states to actively review their state filing positions in light of the recent Wayfair decision.

 

Please contact us if you need assistance with such a review or have questions about the Wayfair alert. 

Congress is currently working on a massive tax reform proposal that could change many aspects of income tax law. It is uncertain what the final version of the bill will look like or if anything will get passed at all, but there are still income tax planning opportunities available under the current law. We highlight below a few strategies you may want to consider before the end of the year to reduce your 2017 taxes.

• Postpone income until 2018 and accelerate deductions into 2017 including:
• Maximize your charitable contributions including prepayment of athletic event seating donations.
• Prepay real estate taxes, state income taxes and miscellaneous itemized deductions (e.g., investment fees) unless you  are in an alternative minimum tax situation.
• Defer any year-end bonuses.
• If you have a health savings account (HSA), maximize your contributions for 2017 in December.
• For individuals age 70 ½ or older, consider making charitable gifts up to $100,000 per person directly from your  individual retirement account (IRA).
• Maximize your retirement plan contributions.
• Reduce potential capital gains by selling securities in a loss position.

 

We also want to alert you to some new rules that will affect our partnership and LLC clients.

• Beginning with partnership tax years starting on or after January 1, 2018, the partnership will be liable for any assessments levied on prior years’ tax returns.
• This will eliminate the need to proceed against individual partners.
• Current partners will be held responsible for tax liabilities of prior partners.
• The “tax matters partner” will be replaced with a “partnership representative.”
• This person will have complete authority to act on behalf of the partnership and the partners when dealing with the IRS.
• This person also has the authority to make various elections.

 

In light of these changes, we recommend you review your partnership or LLC agreement with your attorney as soon as possible to ensure it addresses the significant changes required.

If you would like our assistance with any of your year-end planning questions, please let us know.