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03/29/2018

Fake Refund Checks Landing in Taxpayer Bank Accounts

So, you’re so excited to have received a surprise tax refund deposited directly into your checking account!  Oops.  Watch out…a new tax scam alert has been issued involving the deposit of fake refunds into bank accounts followed by telephone calls with threats from bogus collections officials.

An IRS Security Summit alert has been issued warning about this new scheme where it appears unsecured tax preparer computer files have been breached.  The number of reported taxpayer victims has jumped from a few hundred to several thousand in just a matter of days leading to the alert.

Tax scam alert fake tax refundsThe IRS Criminal Investigation Division reports that after stealing client data the scammers file fraudulent tax returns claiming tax refunds.  When the refund checks are deposited into the taxpayers’ real bank account, the thieves begin contacting the innocent taxpayers by telephone, claiming they are a debt collection agency hired by the IRS to collect the fraudulent tax refund dollars.  Investigators say the versions of this scam continue to evolve as the criminals come up with new ways to get cash from taxpayers.

In one version of the scam, a voice recording claims a refund was deposited in error and now the taxpayer must forward the money to a collection agency or face criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number.  The recording gives the taxpayer a case number and a telephone number to call to return the refund.

Taxpayers who may have received a refund they did not expect should contact their tax preparer immediately.  They must also contact their bank if a direct deposit was received and instruct the bank to issue a refund to the IRS as the taxpayer contacts the IRS to explain why the deposit is being returned.  Be mindful that both individuals and businesses have been victims of this scam, so deposits to business bank accounts should also be reviewed.

If a taxpayer has received an unexpected paper refund check, they should not deposit it nor cash it, but rather write “void” in the endorsement section on back of the check and contact tax authorities right away.

Be mindful that the IRS never uses an outside collection agency to collect any tax debt, and payments should never be made to any source other than the Treasury Department.

If you think you may have been a victim of this new scam and need more information you may review the IRS notice online or contact one of our tax preparation experts at McRuer CPAs for more information.

03/12/2018

Identity Theft Targets Business Data

Good news. Bad news. New data shows tax-related identity theft is declining rapidly as federal and state tax and law enforcement officials seek solutions together.  Unfortunately, thieves and scammers continue to develop new schemes targeting both individuals and businesses yielding more stolen data and dollars per incident.

Identity thief eyes personal online dataA business can hardly do business without collecting and holding clients’ private and identifying information, including names and addresses, phone numbers, and email addresses.   Many businesses also collect and maintain their clients’ birth dates, credit information, Social Security numbers and more.  If a data security breach occurs, these individuals are at risk for tax-related identity theft.  Their personal information is used to file fake tax returns requesting refunds.  In other schemes, scammers posing as IRS representatives, or federal or state authorities or creditors directly demand payments for taxes that are not owed.

Businesses are warned to keep up with current scam and phishing trends as well as take the necessary steps to secure systems and fix vulnerabilities.  The Federal Trade Commission provides updated online information about securing operations against data breaches, and a new business-focused Data Breach Response Guide.

If you own a business that has been a victim of a data security breach, authorities offer three important steps to take:  notify law enforcement, notify other businesses affected (such as banks, credit issuers and major credit bureaus), and notify individuals.  If Social Security numbers have been compromised, individuals should be alerted to take steps to avoid being a tax-related identity theft victim.

The most popular way to steal from individual taxpayers uses simple data including names, phone numbers, email addresses and home addresses stolen from businesses.  With this basic information, scammers send out emails and make threatening phone calls claiming to be IRS representatives, banks or credit card companies demanding payments on overdue taxes, overdrawn accounts or bills.  They even using text messages contacting innocent victims who are tricked into sharing even more private information.  Criminals will use the IRS logo and language in letters, emails or phone calls that seem legitimate.

Specifically, tax-related identity theft uses a stolen Social Security number to file a fraudulent tax return claiming a refund.  This particular type of scam is being reduced dramatically as new, more-secure information transfers between the IRS and banks track automatic taxpayer refund deposits and checks.

Businesses should also remember that their business identity may also be stolen.  A new type of business tax identity-theft is on the rise.  Cybercriminals are using stolen business information to file fraudulent Forms 1120 – U.S. Corporate Income Tax Returns to capture corporate income tax refunds.  They often obtain this private business information through the business’s website and by hacking into documents stored on unsecured computers.

Taxpayers, businesses and tax professionals should remain alert and ask more questions before sharing information.  If you have questions about tax-related identity theft as an individual or business, please contact one of our tax preparation specialists at McRuer CPAs

01/17/2018

8 Ways Tax Reform Affects You in 2018

Tax-ChangesAs we launch into the 2017 tax filing season we are receiving as many questions about the new Tax Cuts and Jobs Act and how it affects 2018 individual and business income taxes as we are about the best planning to file 2017 returns.  To that end, here we are highlighting the 8 most significant ways tax reform may affect you in 2018.  We will continue presenting additional information in the weeks ahead to help you best navigate your income tax planning.

Here are the eight tax change topics we receive the most questions about from both individual and business taxpayers:

  1. Individual income tax rates
  2. Personal exemptions
  3. Standard versus itemized deductions
  4. Child tax credits
  5. Mortgage interest
  6. Deducting state and local property taxes
  7. Estate tax
  8. Corporate income tax rate

Here is a short assessment of how tax reform has affected the eight tax topics compared to 2017 tax law.  These are generalized overviews of the tax law changes, so please keep in mind how they may apply your individual and/or business tax strategy may be different.

Individual income tax rates:  There were seven 2017 tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.  Though President Donald Trump had hoped for three tax brackets, the final 2018 tax reform law was passed with seven tax brackets:  10%, 12%, 22%, 24%, 32%, 35%, and 37%.  Businesses have received the new employee income tax withholding tables and the IRS is working on updating its online calculator for businesses and employees to estimate their income tax liability and how these changes affect their annual tax bill.

Personal exemptions:  The prior law allowed most taxpayers a $4,050 exemption for each household member.  Under the 2018 tax law, personal exemptions are eliminated.

Standard deduction:  The prior tax law allowed a standard deduction of up to $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing jointly, and $9,350 for heads of households.  The new law increase the standard deduction to $12,000 for single taxpayers, $24,000 for married couples filing jointly, and $18,000 for heads of households.

Child tax credits:  The 2017 tax law allowed a $1,000 tax credit for each qualifying child under age 17.  Now that credit is increased to $2,000 per qualifying child, and up to $1,400 is refundable.  A $500 credit has been added temporarily for other qualifying dependents.

Mortgage interest:  The mortgage interest deduction formerly allowed homeowners to deduct interest on mortgages up to $1 million and home equity borrowing up to $100,000.  Under the new law, the borrowing threshold is $750,000 for mortgage borrowing after December 14, 2017.  Mortgages closed prior to that date still qualify for the $1 million limit.  Beginning in 2026 the $1 million limit will return, while the home equity borrowing interest deduction has been eliminated until 2026.

State and local property taxes:  Under the old law Taxpayers itemizing their deductions could deduct state and local real and personal property taxes, and either state and local income taxes or state and local sales taxes.  Under the new law, state and local taxes remain deductible but the combination of all state and local taxes are now capped at $10,000.

Estate tax:   Under the former rules, a 40% tax was levied on qualifying estates of more than $5.49 million per person, or nearly $11 million per married couple transferred upon their death.  The 2018 law increases the overall estate tax exemption to nearly $11 million per taxpayer.

Corporate tax rate:  Previously the tax rate charged on corporate income varied between 15% to 35% depending on the amount of annual taxable income for a flat rate of 35% on all corporate income beyond a certain income amount.  The new tax law simplifies the rate by reducing the maximum corporate income tax rate on all corporate income to 21%.

Though many taxpayers were disappointed that the tax code was not more significantly simplified, the Tax Cut and Jobs Act is the most significant tax reform this country has experienced in more than 30 years.

While these tax changes do NOT affect your current 2017 tax return, they will affect your 2018 tax plan.  Connecting with one of our experienced tax planning professionals will help you make the adjustments that may be needed in your overall tax strategy.  Contact us to learn more about how to make certain you pay only what you owe, no matter how tax reform may affect your bottom line.

01/11/2018

2018 Income Tax Withholding Tables Now Confirmed

The IRS has released the updated 2018 federal income tax withholding tables reflecting the recent tax reform.  This is the first of several updates that will be released in the next few weeks.

The updated withholding information, now posted online (click here to view the new tables), shows the new rates for employers to use for computing employee withholding amounts.  Employers are requested to begin using the 2018 withholding tables as soon as possible, but not later than February 15, 2018. They should continue using the 2017 withholding tables until they have fully implemented the new 2018 withholding rules. Calculating pay and taxes

When employees will see the changes in their paychecks will vary depending on how quickly their employers implement the new tables, and how often they are paid — generally weekly, biweekly or monthly.  Most employees will begin seeing paycheck increases in February.

The new withholding tables are designed to work with the Forms W-4 that workers should have already filed with their employers to claim withholding allowances.  Employees do not have to do anything at this time.

Acting IRS Commissioner David Kautter says the IRS will be providing more information in the next several weeks to help employers and individuals understand and review the withholding changes and the other tax reform affecting payrolls and paychecks.  Kautter explains the new tax withholding tables are designed to produce the correct tax withholding amount for taxpayers with simpler tax situations.  He says the revisions are also aimed at avoiding income tax over- and under-withholding as much as possible.  Soon the IRS will release additional updated information for taxpayers with more complicated tax plans.

Meanwhile, the IRS is working on revising its online withholding tax calculator to reflect the new tax law data and expects the calculator will be available by the end of February.  A revised Form W-4  is also being developed.  Both the Form W-4 and the online calculator will estimate the effect of changes such as itemized deductions, child tax credit increases, the new dependent credit and the repeal of dependent exemptions. These tools may be used by employees wishing to update their withholding in response to new tax reform law, to reflect changes in their personal circumstances in 2018, and by workers starting a new job.

If you have any questions, please don’t hesitate to contact us at McRuer CPAs online or call us at 816.741.7882.

01/03/2018

Withholding Guidance for Small Business Coming Soon

Hand and calculatorThe IRS has released a short update to answer questions from small businesses about how soon they should implement changes from the newly approved tax reform bill.

Currently, the IRS says it plans to "issue the withholding guidance some time in January, and employers and payroll service providers will be encouraged to implement the changes in February."  The updated information is supposed to be designed to work with the existing Forms W-4 that employees have already filed.  This is to make certain no additional action by taxpaying employees will be needed regarding the amount of taxes that should be withheld for each individual.

The 2018 withholding guidelines should enable taxpayers to see changes from the tax reform bill reflected in their paychecks as early as February.  Until the new tables are released, employers and payroll service providers are asked to continue to use the 2017 withholding tables and systems.

If you have any questions, please don't hesitate to contact McRuer CPAs online or call us at 816.741.7882. 

12/19/2017

What the Tax Reform Bill Means For Individuals

Although the exact details are not yet confirmed, we expect a number of changes in the new tax reform bill will affect individuals of all incomes.   The Journal of Accountancy, a leading resource on legislative matters affecting accounting regulations, has issued the following summary of the tax bill's expected reforms.  As a service to you, we are providing this summary in its entirety for your review.  Please contact us to set up a tax planning session to review strategies that you may now need to include in your individual tax plan.

What the Tax Reform Bill Means For Individuals

The Tax Cuts and Jobs Act, H.R. 1, agreed to by a congressional conference committee on Friday and expected to be voted on by both houses of Congress during the week of Dec. 18, contains a large number of provisions that would affect individual taxpayers. However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals would expire after 2025. At that time, if no future Congress acts to extend H.R. 1’s provision, the individual tax provisions would sunset, and the tax law would revert to its current state.

Here is a look at many of the provisions in the bill affecting individuals.

Tax rates

For tax years 2018 through 2025, the following rates would apply to individual taxpayers:

Single taxpayers

Taxable income over

But not over

Is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

 

37%


Heads of households

Taxable income over

But not over

Is taxed at

$0

$13,600

10%

$13,600

$51,800

12%

$51,800

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$500,000

35%

$500,000

 

37%


Married taxpayers filing joint returns and surviving spouses

Taxable income over

But not over

Is taxed at

$0

$19,050

10%

$19,050

$77,400

12%

$77,400

$165,000

22%

$165,000

$315,000

24%

$315,000

$400,000

32%

$400,000

$600,000

35%

$600,000

 

37%


Married taxpayers filing separately

Taxable income over

But not over

Is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$82,500

22%

$82,500

$157,500

24%

$157,500

$200,000

32%

$200,000

$300,000

35%

$300,000

 

37%


Estates and trusts

Taxable income over

But not over

Is taxed at

$0

$2,550

10%

$2,550

$9,150

24%

$9,150

$12,500

35%

$12,500

 

37%


Special brackets would apply for certain children with unearned income.

Standard deduction: The bill would increase the standard deduction through 2025 for individual taxpayers to $24,000 for married taxpayers filing jointly, $18,000 for heads of households, and $12,000 for all other individuals. The additional standard deduction for elderly and blind taxpayers is not changed by the bill.

Personal exemptions: The bill would repeal all personal exemptions through 2025. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions.

Passthrough income deduction

For tax years after 2017 and before 2026, individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. (Special rules would apply to specified agricultural or horticultural cooperatives.)

A limitation on the deduction would be phased in based on W-2 wages above a threshold amount of taxable income. The deduction would also be disallowed for specified service trades or businesses with income above a threshold.

For these purposes, “qualified business income” would mean the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. These items must be effectively connected with the conduct of a trade or business within the United States. They do not include specified investment-related income, deductions, or losses.

“Qualified business income” would not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner.

“Specified service trades or businesses” include any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of one or more of its employees.

The exclusion from the definition of a qualified business for specified service trades or businesses phases in for a taxpayer with taxable income in excess of $157,500 or $315,000 in the case of a joint return.

For each qualified trade or business, the taxpayer is allowed to deduct 20% of the qualified business income with respect to such trade or business. Generally, the deduction is limited to 50% of the W-2 wages paid with respect to the business. Alternatively, capital-intensive businesses may yield a higher benefit under a rule that takes into consideration 25% of wages paid plus a portion of the business’s basis in its tangible assets. However, if the taxpayer’s income is below the threshold amount, the deductible amount for each qualified trade or business is equal to 20% of the qualified business income with respect to each respective trade or business.

Child tax credit

The bill would increase the amount of the child tax credit to $2,000 per qualifying child. The maximum refundable amount of the credit would be $1,400. The bill would also create a new nonrefundable $500 credit for qualifying dependents who are not qualifying children. The threshold at which the credit begins to phase out would be increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

Other credits

The House version of the bill would have repealed several credits that are retained in the final version of the bill. These include:

  • The Sec. 22 credit for the elderly and permanently disabled;
  • The Sec. 30D credit for plug-in electric drive motor vehicles; and
  • The Sec. 25 credit for interest on certain home mortgages.

The House bill’s proposed modifications to the American opportunity tax credit and lifetime learning credit also did not make it into the final bill.

Education provisions

The bill would modify Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Certain homeschool expenses would also qualify as eligible expenses for purposes of the Sec. 529 rules.

The bill would modify the exclusion of student loan discharges from gross income, by including within the exclusion certain discharges on account of death or disability.

The House bill’s provisions repealing the student loan interest deduction and the deduction for qualified tuition and related expenses were not retained in the final bill.

The House bill’s proposed repeal of the exclusion for interest on Series EE savings bond used for qualified higher education expenses and repeal of the exclusion for educational assistance programs also do not appear in the final bill.

Itemized deductions

The bill would repeal the overall limitation on itemized deductions, through 2025.

Mortgage interest: The home mortgage interest deduction would be modified to reduce the limit on acquisition indebtedness to $750,000 (from the current-law $1 million).

A taxpayer who has entered into a binding written contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases that residence before April 1, 2018, will be considered to have incurred acquisition indebtedness prior to Dec. 15, 2017, under this provision, meaning that they will be allowed the current-law $1 million limit.

Home equity loans. The home equity loan interest deduction would be repealed through 2025.

State and local taxes: Under the final bill, individuals would be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes.

The conference report on the bill specifies that taxpayers cannot take a deduction in 2017 for prepaid 2018 state income taxes.

Casualty losses: Under the bill, taxpayers can only take a deduction for casualty losses if the loss is attributable to a presidentially declared disaster.

Gambling losses: The bill would clarify that the term “losses from wagering transactions” in Sec. 165(d) includes any otherwise allowable deduction incurred in carrying on a wagering transaction. This is intended, according to the conference report, to clarify that the limitation of losses from wagering transactions applies not only to the actual costs of wagers, but also to other expenses incurred by the taxpayer in connection with his or her gambling activity.

Charitable contributions: The bill would increase the income-based percentage limit for charitable contributions of cash to public charities to 60%. It would also deny a charitable deduction for payments made for college athletic event seating rights. Finally, it would repeal the statutory provision that provides an exception to the contemporaneous written acknowledgment requirement for certain contributions that are reported on the donee organization’s return—a current-law provision that has never been put in effect because regulations have not been issued.

Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law would be repealed through 2025 by the bill.

Medical expenses: The bill would reduce the threshold for deduction of medical expenses to 7.5% of adjusted gross income for 2017 and 2018.

Other provisions

Alimony: For any divorce or separation agreement executed after Dec. 31, 2018, the bill would provide that alimony and separate maintenance payments are not deductible by the payor spouse. It would also repeal the provisions that provide that such payments are includible in income by the payee spouse.

Moving expenses: The moving expense deduction would be repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.

Archer MSAs: The House bill would have eliminated the deduction for contributions to Archer MSAs; the final bill does not include this provision.

Educator’s classroom expenses: The final bill does not change the current-law allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.

Exclusion for bicycle commuting reimbursements: The bill would repeal through 2025 the exclusion from gross income or wages of qualified bicycle commuting expenses.

Sale of a principal residence: The bill would not change the current rules regarding exclusion of gain from the sale of a principal residence.

Moving expense reimbursements: The bill would repeal through 2025 the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.

IRA recharacterizations

The bill would exclude conversion contributions to Roth IRAs from the rule that allows IRA contributions to one type of IRA to be recharacterized as a contribution to the other type of IRA. This would prevent taxpayers from using recharacterization to unwind a Roth conversion.

Estate, gift, and generation-skipping transfer taxes

The bill would double the estate and gift tax exemption for estates of decedents dying and gifts made after Dec. 31, 2017, and before Jan. 1, 2026. The basic exclusion amount provided in Sec. 2010(c)(3) would increase from $5 million to $10 million and would be indexed for inflation occurring after 2011.

Alternative minimum tax

While the House version of the bill would have repealed the alternative minimum tax (AMT) for individuals, the final bill keeps the tax, but increases the exemption.

For tax years beginning after Dec. 31, 2017, and beginning before Jan. 1, 2026, the AMT exemption amount would increase to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return) and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds would be increased to $1 million for married taxpayers filing a joint return and $500,000 for all other taxpayers (other than estates and trusts). The exemption and threshold amounts would indexed for inflation.

Individual mandate

The bill would reduce to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after 2018.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

If you have questions about how the tax law changes will affect your business and what your next steps should be, please contact us online or call 816.741.7882 to set up an appointment to discuss details with one of our tax planning experts at McRuer CPAs.

How Tax Overhaul Would Change Business Taxes

Although the exact details are not yet confirmed, we expect a number of changes in the new tax reform bill will affect both large and small businesses.   The Journal of Accountancy, a leading resource on legislative matters affecting accounting regulations, has issued the following summary of the tax bill's expected reforms. As a service to you, we are providing this summary in its entirety for your review.

How Tax Overhaul Would Change Business Taxes

The tax reform bill that Congress is expected to vote on this week contains numerous changes that will affect businesses large and small. The Tax Cuts and Jobs Act, H.R. 1, would make sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.

Here are many of the bill’s business provisions.

Corporate tax rate

The bill would replace the current graduated corporate tax rate, which taxes income over $10 million at 35%, with a flat rate of 21%. The House version of H.R. 1 had provided for a special 25% rate on personal service corporations, but that special rate does not appear in the final bill. The new rate would take effect Jan. 1, 2018.

Corporate AMT

The bill would repeal the corporate alternative minimum tax (AMT).

Depreciation

Bonus depreciation: The bill would extend and modify bonus depreciation under Sec. 168(k), allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation would then be phased down over four years: 80% would be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates would be pushed out a year.)

The bill would also remove the requirement that bonus depreciation is only available for new property.

Luxury automobile depreciation limits: The bill would increase the depreciation limits under Sec. 280F that apply to listed property. For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.

Sec. 179 expensing: The bill would increase the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increase the phaseout threshold to $2.5 million. These amounts would be indexed for inflation after 2018.

The bill would also expand the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It would also expand the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Accounting methods

Cash method of accounting: The bill would expand the list of taxpayers that are eligible to use the cash method of accounting by allowing taxpayers that have average annual gross receipts of $25 million or less in the three prior tax years to use the cash method. The $25 million gross-receipts threshold would be indexed for inflation after 2018. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross-receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.

Farming C corporations (or farming partnerships with a C corporation partner) would be allowed to use the cash method if they meet the $25 million gross-receipts test.

The current-law exceptions from the use of the accrual method would otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities would continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of such method clearly reflects income.

Inventories: Taxpayers that meet the cash method $25 million gross-receipts test would also not be required to account for inventories under Sec. 471. Instead, they would be allowed to use an accounting method that either treats inventories as nonincidental materials and supplies or conforms to their financial accounting treatment of inventories.

UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test would be exempted from the uniform capitalization rules of Sec. 263A. (Current-law exemptions from the UNICAP rules that are not based on gross receipts are retained in the law.)

Expenses and deductions

Interest deduction limitation: Under the bill, the deduction for business interest would be limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction could be carried forward indefinitely (with certain restrictions for partnerships).

Any taxpayer that meets the $25 million gross-receipts test would be exempt from the interest deduction limitation. The limitation would also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses would be allowed to elect out of the limitation.

For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer’s gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).

Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.

Net operating losses: The bill would limit the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)

Taxpayers would be allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions would be repealed. However, farming businesses would still be allowed a two-year NOL carryback.

Like-kind exchanges: Under the bill, like-kind exchanges under Sec. 1031 would be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange is received on or before that date.

Domestic production activities: The bill would repeal the Sec. 199 domestic production activities deduction.

Entertainment expenses: The bill would disallow a deduction with respect to (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.

Qualified transportation fringe benefits: The bill would disallow a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Meals: Under the bill taxpayers would still generally be able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the bill would expand this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, would not be deductible.

Partnership technical terminations: The bill would repeal the Sec. 708(b)(1)(B) rule providing for technical terminations of partnerships under specified circumstances. The provision does not change the current-law rule of Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.

Carried interests: The bill would provide for a three-year holding period in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer. It would treat as short-term capital gain taxed at ordinary income rates the amount of a taxpayer’s net long-term capital gain with respect to an applicable partnership interest if the partnership interest has been held for less than three years.

The conference report clarifies that the three-year holding requirement applies notwithstanding the rules of Sec. 83 or any election in effect under Sec. 83(b).

Amortization of research and experimental expenditures: Under the bill, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.

Year of inclusion: The bill would require accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The bill would provide an exception for taxpayers without an applicable or other specified financial statement.

Credits

The bill would modify a number of credits available to businesses. The House version of the bill would have repealed a large number of business credits, but the final bill generally does not repeal those credits. Changes to business credits in the final bill include:

Orphan drug credit: The amount of the Sec. 45C credit for clinical testing expenses for drugs for rare diseases or conditions would be reduced to 25% (from the current 50%).

Rehabilitation credit: The bill would modify the Sec. 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit would be claimed over a five-year period.

Employer credit for paid family or medical leave: The bill would allow eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any tax year is 12 weeks. However, the credit would only be available in 2018 and 2019.

Compensation

Covered employees: Sec. 162(m) limits the deductibility of compensation paid to certain covered employees of publicly traded corporations. Current law defines a covered employee as the chief executive officer and the four most highly compensated officers (other than the CEO). The bill would revise the definition of a covered employee under Sec. 162(m) to include both the principal executive officer and the principal financial officer and would reduce the number of other officers included to the three most highly compensated officers for the tax year. The bill would also require that if an individual is a covered employee for any tax year (after 2016), that individual will remain a covered employee for all future years. The bill would also remove current exceptions for commissions and performance-based compensation.

The bill includes a transition rule so that the proposed changes would not apply to any remuneration under a written binding contract that was in effect on Nov. 2, 2017, and that was not later modified in any material respect.

Qualified equity grants: The bill would allow a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. An election to defer income inclusion with respect to qualified stock must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

Taxation of foreign income

The bill would provide a 100% deduction for the foreign-source portion of dividends received from “specified 10% owned foreign corporations” by domestic corporations that are U.S. shareholders of those foreign corporations within the meaning of Sec. 951(b). The conference report says that the term “dividend received” is intended to be interpreted broadly, consistently with the meaning of the phrases “amount received as dividends” and “dividends received” under Secs. 243 and 245, respectively.

A specified 10%-owned foreign corporation is any foreign corporation (other than a passive foreign investment company (PFIC) that is not also a controlled foreign corporation (CFC)) with respect to which any domestic corporation is a U.S. shareholder.

The deduction is not available for any dividend received by a U.S. shareholder from a CFC if the dividend is a hybrid dividend. A hybrid dividend is an amount received from a CFC for which a deduction would be allowed under this provision and for which the specified 10%-owned foreign corporation received a deduction (or other tax benefit) from any income, war profits, and excess profits taxes imposed by a foreign country.

Foreign tax credit: No foreign tax credit or deduction would be allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction.

Holding period: A domestic corporation would not be permitted a deduction in respect of any dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend.

Deemed repatriation: The bill generally requires that, for the last tax year beginning before Jan. 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. For purposes of this provision, a specified foreign corporation is any foreign corporation in which a U.S. person owns a 10% voting interest. It excludes PFICs that are not also CFCs.

A portion of that pro rata share of foreign earnings is deductible; the amount of the deductible portion depends on whether the deferred earnings are held in cash or other assets. The deduction results in a reduced rate of tax with respect to income from the required inclusion of preeffective date earnings. The reduced rate of tax is 15.5% for cash and cash equivalents and 8% for all other earnings. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The separate foreign tax credit limitation rules of current-law Sec. 904 apply, with coordinating rules. The increased tax liability generally may be paid over an eight-year period. Special rules are provided for S corporations and real estate investment trusts (REITs).

Foreign intangible income: The bill would provide domestic C corporations (that are not regulated investment companies or REITs) with a reduced tax rate on “foreign-derived intangible income” (FDII) and “global intangible low-taxed income” (GILTI). FDII is the portion of a domestic corporation’s intangible income that is derived from serving foreign markets, using a formula in a new Sec. 250. GILTI would be defined in a new Sec. 951A.

The effective tax rate on FDII would be 13.125% in tax years beginning after 2017 and before 2026 and 16.406% after 2025. The effective tax rate on GILTI would be 10.5% in tax years beginning after 2017 and before 2026 and 13.125% after 2025.

Definition of U.S. shareholder: The bill would amend the ownership attribution rules of Sec. 958(b) to expand the definition of “U.S. shareholder” to include a U.S. person who owns at least 10% of the value of the shares of the foreign corporation.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the Journal of Accountancy’s editor-in-chief, tax.

If you have questions about how the tax law changes will affect your business and what your next steps should be, please contact us online or call 816.741.7882 to set up an appointment to discuss details with one of our tax planning experts at McRuer CPAs. 

11/16/2017

McRuer CPAs 2017 Year-End Tax Guide

The 2017 calendar year is wrapping up quickly. While many of us have our eyes on the holiday season, this is the time to review your personal and business financial goals. Think of it as a  “checkup” to make certain you make the most effective, tax-savvy financial moves to end this year fiscally healthy.

"Timely financial planning is one of the best gifts you can give yourself as it will affect you and/or your business for years to come."

Even with significant tax reform expected for the 2018 tax season, we are still working under the federal and state tax laws that are on the books for 2017 taxes. We have compiled a quick tax tip guide to review some of the financial topics that we have determined to be the most important and relevant tax issues for most taxpayers for year-end review.

Click now to download the 2017 McRuer CPAs Year-End Tax Tips Guide.

Each individual and business is unique, so consider discussing your options with a professional in time to make any tax-saving moves that may help your particular needs. Please contact us if you have any questions or would like to schedule a year-end tax planning session with a McRuer CPAs Tax Planning Team Member.  If you are already a McRuer CPAs client, the year-end planning session is free.  Call us at: 816.741.7882.

04/13/2017

Taxes on Tips

While tips are discretionary and reflect a happy customer, taxes on tips are not optional and, if overlooked, can cause unhappy headaches for both taxpayers and their employers.

Tip jar picAll cash and non-cash tips are considered income and are subject to Federal income taxes. Tips include cash left by a customer, tips added to debit or credit card charges, and tips received from other employees or employer through tip sharing, tip pooling or other arrangements.

Employees who receive tips regularly are responsible for keeping a daily tip record and reporting all tips on their individual income tax return.  They must report tips that total $20 or more in any month by the 10th of the following month regardless of total wages and tips for the year.

If an employee doesn’t have or isn’t assigned a tip-tracking and reporting tool, the IRS provides a Daily Record of Tips (Form 4070) that an employee may use to document tips in the manner which is considered sufficient proof of tips received. Reliable proof of tip income would include copies of restaurant bills and credit card charges that show the amounts customers added as tips.

Automatic service charges that are often added onto bills are not considered tips, but rather are treated as regular wages so any taxes owed would be withheld by an employer on an employee’s next paycheck. Examples of service charges include things like bottle service charges, gratuity that is automatically added to a bill for large parties, delivery charges, and room service charges.

Employers must withhold income, social security and Medicare taxes on tips just as they would on other income earned by their employee.  If tips are not reported to an employer as required, an employee may face a penalty of 50% of the unpaid social security and Medicare taxes due.

If there are any unreported tips, a taxpayer must file a report of the income through another Form 4137 "Social Security and Medicare Tax on Unreported Tip Income" which helps the employee figure the amount that is subject to tax and how much is owed.

It can be a tedious process especially for workers who make money through a predetermined hourly wage with unpredictable tip income added to the total.  Workers who receive their tips at the end of each shift must make certain they record the tip amounts on their monthly tip report to their employers.  The taxes owed would then be deducted from their next paycheck. It’s possible that hourly wages may not cover the taxes owed. When this happens, any remaining taxes owed can paid out of the next paycheck through an employer agreement. This is the area where most problems occur as tax obligations on tips for one month may impact several paychecks.  It’s up to the employee to keep track of required tax payments so that there are no outstanding payroll taxes owed at year’s end.

If you need more help understanding how to record and report tip income, please contact one of our tax preparation experts at McRuer CPAs.

02/10/2017

W-2 Scam Targets Small Business

Question-yikA5pBiEThe IRS has issued a new tax-related identity-theft scam warning to small businesses and human resources professionals.  The email phishing scam uses a business owner’s, corporate officer’s or human resource professional’s name in what looks like company or even official tax agency emails. The emails request copies of employee Forms W-2 from company payroll, internal accounting or human resources departments.

This is the second time the email scam has been identified as attacking businesses nationwide. The IRS urges business owners, internal accountants and company payroll officials to double check any executive-level requests for lists of Forms W-2 or Social Security Numbers.

The W-2 scam first appeared in early 2016. The IRS reports that cybercriminals tricked payroll and human resource officials into disclosing employee names, SSNs and income information. The thieves then attempted to file fraudulent tax returns to create fraudulent income tax refunds in a tax-related identity theft scheme.

This phishing variation is known as a “spoofing” e-mail.  It will contain, for example, the actual company chief executive officer’s name.  In this variation, the “CEO” sends an email to a company payroll office or human resource employee requesting a list of employees and information including their SSNs.

Crime investigators say some of the wording used in actual scam emails included:

  • “Kindly send me the individual 2016 Forms W-2 (PDF) and earnings summaries of our company staff for a quick review.”
  • “Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary).”
  • “I want you to send me the list of Form W-2 copies of employees’ wage and tax statement for 2016.  I need them in PDF file type, and please send it as an attachment.  Kindly prepare the lists and email them to me asap.”

Working together in the Security Summit, the IRS, states and tax industry representatives have made progress fighting against tax-related identity theft.  However, cybercriminals continue developing more sophisticated tactics to impersonate taxpayers in their effort to steal even more data.

For more information about tax-related identity theft and other tax scams, click here to link to The Security Summit’s national taxpayer awareness campaign called “Taxes. Security. Together.

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