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4 posts from February 2018

02/13/2018

Investors Eye Effects of New Transition Tax

International investingAs corporations determine the impact of the one-time new tax reform-mandated ‘transition tax’ on overseas earnings, it’s important for investors to consider how the tax may impact a public company’s cash flow when valuing its stock.

A Tax Cuts and Jobs Act (TCJA) provision assesses a one-time ‘transition tax’ on accumulated 2017 untaxed earnings held overseas by considering those earnings repatriated.  Generally, foreign earnings held as cash or cash equivalents are taxed at 15.5 percent.  Remaining earnings are taxed at 8 percent.

Many American corporations have held their foreign-earned profits overseas for years to escape the world’s-highest 35% U.S. corporate tax rate.  As the new tax reform package imposes this one-time tax, the U.S. will relinquish its right to tax foreign profits.  The U.S. will then switch its corporation taxation method to a “territorial tax” system.

Under a territorial tax system businesses must pay income taxes only on the income earned within the subject country’s boundaries.  The tax liability is determined by the subject country’s tax laws, and no other nation’s corporate tax may be charged.  European nations have followed this tax method for decades, and it avoids double taxation.  TCJA supporters say this tax change, coupled with the new flat 21% corporate tax rate, will return jobs and American investment dollars back home.

However, this TCJA tax payment may complicate traditional methods used to analyze a company’s financial statements and attractiveness as an investment.  Corporations may pay the new one-time tax in eight annual installments under a back-loaded schedule, with a maximum 25% tax payment expected in the 8th year.  While this TCJA provision offers corporate taxpayers a potential significant overall tax savings, The Wall Street Journal reports that huge household-name US corporations like Microsoft, McDonald’s and Johnson and Johnson may pay billions to repatriate these earnings they otherwise would not have.  Financial analysts advise investors that this change may impact these companies’ cash flow as a percentage of their earnings – which is an important measure of a stock’s market value.  Investors should consider the impact of the new lower US corporate tax rate on a subject business’s cash flow remembering that at the same time the subject company owes the final and largest one-time tax payment, which may also be partly offset by tax credits, deductions, deferred tax liabilities and more.

Tax reform and consumer confidence have lifted the stock market to record-breaking levels. Now investors and analysts following corporations with foreign profits must re-think how they value companies as they determine what to buy or sell.

If you have any questions or need more information, please contact one of our wealth accumulation experts at McRuer CPAs online, or call 816.741.7882.

02/09/2018

New Tax Law Cuts Personal Casualty Loss Deduction

Tax reform has eliminated a taxpayer’s deduction for personal casualty losses unless the loss occurs in a federally-declared disaster area.  Many taxpayers may consider contacting their insurance provider to determine they are adequately covered in the event of a loss.

House destroyed by fireIn the past, an individual could claim as an itemized deduction certain personal casualty losses that were not compensated by insurance or other means.  These casualty and theft losses must have been related to your home, household items or vehicles; and included losses from storms, fire, theft and even shipwreck.  Total casualty losses may be deducted if they exceeded 10% of adjusted gross income, and were more than $100 for each occurrence.

The new Tax Cuts and Jobs Act has eliminated the personal casualty and theft loss deduction for tax years 2018 through 2025, except for casualty losses incurred in a federally-declared disaster area.  The deduction for declared disaster area losses are subject to the former $100-per-casualty and 10%-of-AGI limitations.  The IRS describes a casualty loss as the damage, destruction or loss of your property resulting from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or volcanic eruption.  It does not include normal wear and tear or progressive deterioration.

These tax deduction changes may motivate taxpayers to review homeowner, flood and auto insurance policies to determine whether they should add coverage knowing there will be no casualty deduction unless the precipitating event is so catastrophic and widespread that it prompts a federal declaration.  It may also be prudent to learn whether your policy pays replacement cost coverage or actual cash value.  Note that replacement cost coverage may pay only replacement value for your damaged items at their depreciated value.

If you have any questions about the ­­­changed personal casualty loss deduction, please contact one of our tax preparation experts at McRuer CPAs online or call 816.741.7882.

02/06/2018

New Business Tax Credit for Family and Medical Leave Approved

Daugher and elderly mom walkingA new federal tax credit is available for 2018 through the end of 2019 for eligible employers  providing their employees paid family and medical leave.  The new tax credit is part of the Tax Cuts and Jobs Act that has employers hoping the first version of the business tax credit will become permanent as more employers switch to paid time off (PTO) compensation as an employee benefit.

Full guidance regarding the credit has not yet been released, but a general review indicates eligible employers may claim a tax credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).  To receive the credit, employers must provide at least two weeks of FMLA leave and pay workers at least 50 percent of their regular earnings.  Both full-time and part-time workers, if employed for at least a year, must be offered paid leave for an employer to be able to claim the tax credit.  Part-time employee qualifying for paid leave must be determined on a prorated basis.

The credit will range from 12.5% to 25% of the cost of each hour of paid leave, depending on how much of a worker's regular earnings the benefit replaces.  The government will cover 12.5% of the benefit's costs if workers receive half of their regular earnings, increasing to 25% if workers receive their entire regular earnings while on leave.  So if the leave payment rate is 100% of the normal rate, then the credit is raised to 25% of the on-leave payment rate.  The maximum leave allowed for any employee during any tax year is 12 weeks.

Employers may only apply the credit toward workers they have employed for at least a year, and who were paid no more than $72,000 for 2017.  The wage ceiling will be inflation adjusted going forward.

As they await more specific guidance, Society for Human Resource (SHRM) members debate whether most company PTO policies qualify for the tax credit, as many do not offer paid ‘family and medical leave’ as a separate provision as the new tax law requires.  Instead, they say most companies designate their PTO benefits for vacation, personal, medical or sick leave; none of which are considered as ‘family and medical leave’ under FMLA.  The human resource professionals say that employers should review their paid-time-off policies to assure they are drafted to qualify them for the tax credit.

SHRM also points out the credit does not apply to paid leave mandated under state or local law.  Further, they suggest that policies may need to include nonretaliation provisions to assure employees won’t be penalized for taking the paid leave.

For more on the effect of the new tax credit on your business, please contact one of our business tax planning experts at McRuer CPAs online or call 816.741.7882.

02/01/2018

Child Tax Credit Doubles Under New Tax Law

Beginning in the 2018 tax year, under the Tax Cuts and Jobs Act, the tax credit available per qualifying child for taxpayers with children under age 17 will double.

Picture of mom with son in kitchenPreviously (including for 2017 tax returns), the child tax credit was $1,000 per qualifying child, but was subject to rules that made it complicated to figure.  For example, for married couples filing jointly the credit was reduced by $50 for every $1,000 by which their adjusted gross income (AGI) exceeded $110,000.  The threshold was $55,000 for married couples filing separately, and $75,000 for unmarried taxpayers.  To the extent the $1,000-per-child credit exceeded their tax liability, taxpayers received a refund of up to 15% of earned their income above $3,000.  An additional complication; for taxpayers with three or more qualifying children, the excess of the taxpayer's yearly social security taxes over the taxpayer's yearly earned income credit was refundable.  In all cases the refund was limited to $1,000 per qualifying child.

Starting in 2018, the child tax credit increases to $2,000 per qualifying child under 17.

There are six IRS tests that must be met to qualify for the child tax credit:

  1. Age Test:  The child claimed as your dependent must be under age 17 at the end of the tax year.
  2. Relationship Test:  The child must be your daughter, son, foster child or adopted child. The child may also be a grandchild or a descendant of one of your siblings and must meet the 5 other criteria to qualify.
  3. Support Test: The child must not have provided more than half of their own “support,” meaning the money they use for living expenses.
  4. Dependent Test: You must claim the child as your dependent on your federal income tax return.
  5. Citizenship Test: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  6. Resident Test: The child must have lived with you for more than half of the tax year.

Under the Tax Cuts and Jobs Act, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child.  In addition, the earned income threshold is decreased to $2,500 (from $3,000 under pre-Act law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The Act also substantially increases the credit’s "phase-out" thresholds.  Starting in 2018, the total credit amount allowed for a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000.  The threshold is $200,000 for all other taxpayers.  So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

In order to claim the credit for a qualifying child, you must include that child's Social Security number (SSN) on your tax return.  Under pre-Act law you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).  If a qualifying child does not have an SSN, you will not be able to claim the $2,000 credit, but you can claim the $500 credit for that child using an ITIN or an ATIN.  The SSN requirement does not apply for non-qualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you are claiming a $500 credit.

Tax reform also allows a new $500 credit (per dependent) for any dependents who are not qualifying children under 17 beginning this year (2018).  There is no age limit for the $500 credit, but the tax tests for dependency must be met.

The changes made by the Act should make these credits more valuable and more widely available to many taxpayers.  If you have children or other qualifying dependents under age 17, and would like to learn if these changes can benefit you, please contact one of our tax preparation experts at McRuer CPAs online or call 816.741.7882.

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