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Tax Planning and Advocacy

04/09/2018

Alimony Tax Deduction Disappearing

Broken heart and dollarIn a change that could be costly for those who must pay alimony, tax reform will eliminate the alimony-payer’s ability to claim a tax deduction for the payments.  Changes are set to take effect for divorces and legal separations after 2018, causing a push-me pull-you effect on current divorce proceedings.

Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction on their federal income tax return.   That is, the taxpayer does not need to itemize deductions to claim the amount of alimony paid, rather it can be deducted directly off the taxpayer’s taxable income.  The receiving spouse must pay income taxes on the alimony they receive as part of their annual gross income.

Note that this is different than tax laws governing child support.  The payer of child support cannot claim the child support as an income tax deduction.  The receiver of child support does not need to report the child support as income.

The Tax Cut and Jobs Act changes the tax law governing alimony beginning in 2019.  Under new rules, there is no allowable alimony income tax benefit for the payer.  Similarly, alimony will no longer be considered as income to the recipient.  To be clear, for divorces and legal separations legally effective due to a court order after 2018, the alimony-paying spouse may not deduct the payment and the alimony-receiving spouse need not report payments as gross income nor pay federal income tax on them.  The tax treatment of child support payments will not change.

The bottom line:  All payments related to divorces and legal separations effective beginning in 2019 will represent nondeductible personal expenses for the payer and tax-free money for the recipient.  The loss of a substantial tax deduction could be expensive for individuals who must pay alimony.

If you are involved in divorce proceedings and anticipate deducting the alimony you may have to pay, the new tax law gives you a major incentive for concluding the agreement by December 31, 2018.  On the other hand, if you will be receiving alimony, you have major incentive to postpone finalizing the agreement until 2019 to receive the payments tax free.  Make certain your divorce attorney is up-to-date on the new tax law that could cost you or save you thousands of dollars.

The new tax law will not apply to existing divorces or separations, so current rules will continue to apply for already-ordered divorces and separation agreements, as well as divorces and separations that have been executed before 2019.  In addition, the new rules will not apply to a modified decree of an agreement that was entered into prior to 2019 unless the decree specifically provides that they should.  This would benefit taxpayers requesting modified agreements due to a change in the income of either the alimony payer or the alimony recipient.

To learn how the new tax law may affect you should you be divorced, legally separated, or seeking a divorce or legal separation, contact one of our tax planning professionals at McRuer CPAs for information.

04/02/2018

More New Business and Investor Tax Rules Released

The rules to calculate how new tax laws will impact business and investors are now being publicly released.  The Treasury Department and the Internal Revenue Service have announced updated guidance is ready for businesses and investors reflecting tax changes under the Tax Cuts and Jobs Act. 

Specifically, 2018 guidance on computing business interest expense limitations as well as withholding guidance on the transfer of non-publicly traded partnership interests will be released April 16th.  More updates are also expected in the weeks ahead as the changes and effects of tax reform are being confirmed and quantified.  Accountants and tax professionals now already have access to the information in order to help taxpayers determine the best tax planning strategies. Investor Business Manager working

A preliminary news release regarding business interest expense says the new tax law imposes a limitation on deductions for business interest incurred by certain large businesses.  For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

The IRS update will list new regulations that the Treasury Department and the IRS intend to enforce, including rules addressing how the business interest expense limitation is calculated at the level of a consolidated group of corporations as well as other rules. A notice on the new guidance makes it clear that partners in partnerships and S corporation shareholders cannot interpret newly amended sections inappropriately to “double count” the business interest income of a partnership or S corporation.

The announcement says that tax reform now interprets a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as part of the conduct of a trade or business in the U.S. if the partnership sold all of its assets.  That means there is a tax due on the sale.  New guidance imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

Also, tax enforcement and collections authorities announce that they intend to issue more rules and procedures soon detailing how a business or individual may qualify for withholding exemptions or reductions in the amount of withholding under this section of the new tax law.  In addition, the notice suspends secondary partnership level withholding requirements.  See also our recent blog on the effects of the new "transition tax" affecting investors.

McRuer CPAs business tax planning experts will have the latest information about IRS guidance on these more complicated new business and investor-related tax laws.   If these provisions apply to you, or if you have questions about how the new tax act may affect you please contact us to schedule a meeting to review your tax plan to make certain it is updated to best benefit from the tax reform.  Call us for your appointment at 816.741.7882 or contact us online.

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.

03/14/2018

IRS Raises Its Interest Rates on Unpaid Overpaid Taxes

The IRS has announced the interest rates it charges on unpaid, overpaid and underpaid income taxes are going up.  IRS interest rates are determined on a quarterly basis and are generally based on the federal short-term rate plus certain percentage points. IRS Interest Rates Going Up

Beginning April 1, 2018, the new interest rate the IRS will charge for underpayment of taxes will be 5% (up from 4.18% in 2017) for individual taxpayers and 7% for large corporate taxpayers.  The interest rate is charged on any unpaid tax from the original due date of the return until the date of payment.  It is compounded daily.

Also this April, the rate for overpayment of taxes will increase to 5% for individuals and 4% in the case of a corporation plus 2.5% for the portion of a corporate overpayment that exceeds $10,000.  It may be hard to imagine someone or a company paying more taxes than they owe, but this happens most often with individuals who must pay quarterly estimated taxes based on a guess of what their income may be.  Overpayments may also occur with  businesses that withhold the incorrect amount of income tax based on unrealized predictions.

If you owe tax and don’t file on time, penalties are assessed in addition to the interest on unpaid tax. The late-filing penalty is usually 5% of the tax owed for each month the return is late up to five months or no more than a total of 25% of the tax owed. If you file more than 60 days after the due date, the minimum penalty you face is $205 or 100% of your unpaid tax, whichever is less.

If you file on time, pay some of the tax you owe, but don’t pay all the tax that is owed, then you’ll generally have to pay a late-payment penalty of .5% (one-half of one percent) of the outstanding balance of tax you owe per month, until the tax is paid in full.  So, there is a benefit to paying as much as you can, if not all you owe, when you file your tax return.

If there are months in which both the late-filing and late-payment penalties apply, then the 0.5% late-payment penalty may be waived.

Interest rates on under- and over-paid taxes have ranged from a high of 9% in the 1995 and 2001 tax years, to a low of 3% from 2011 to 2016 tax years.

If you don’t pay the tax you owe when you file your tax return, you’ll receive a notice from the IRS in the form of a letter, basically a bill, for the amount you owe. The bill is the official start of the collection process.  It will include the amount of the tax, plus any penalties and interest accrued on your unpaid balance from the date the tax was due.

The IRS has the right to levy (seize) assets such as wages, bank accounts, social security benefits, and retirement income. The IRS may also seize your property (including your car, boat, or real estate) and sell the property to satisfy an outstanding tax debt. In addition, any future federal or state income tax refunds that you're due may be seized and applied to your federal tax liability.

In some cases, you may be able to work with the IRS to decrease what you owe in penalties and interest if you can prove a hardship, but your case will be subject to IRS discretion.

Because the unpaid balance is subject to interest that compounds daily and a monthly late payment penalty, it is in a taxpayer’s best interest to pay a tax liability in full as soon as possible. If you are not able to pay in full, you may qualify for an installment agreement with the IRS with several options to pay.

You may discover interest rates and any applicable fees charged by a credit card company or bank are lower than the combination of interest and penalties imposed by the Internal Revenue Code. So, you may consider exploring outside options to pay the IRS in full and make other arrangements to avoid ongoing penalties and interest.

If you have any questions about the issue of filing and paying taxes you owe on time and in full, please contact one of our tax preparation specialists at McRuer CPAS.

03/05/2018

Tax Refund Roundup

When we file our tax return and expect a tax refund, it may seem like forever before we receive the refund check or deposit.  There are ways to track the progress of your tax refund as well as receive some updated general information about how refund payments are handled.

The IRS says it processes about nine out of 10 refunds in less than three weeks.  Processing a refund check doesn’t guarantee the check will be in a taxpayer’s hands in three weeks, but does say that, generally, it takes three weeks to receive a tax return, process it and confirm a refund check.  The check should then be mailed or auto-deposited in a taxpayer’s designated account.  The simpler the tax return, the faster the processing time.

Any taxpayer may use the fast “Where’s My Refund?” online tool to monitor a refund’s status.  E-Filers may use this tool within 24 hours of filing their return.  Paper filers must wait 4 weeks after mailing their tax return before this tool will begin showing their refund status.  There is also a mobile app taxpayers may use called IRS2Go, available in both English and Spanish.

Celebrate Tax Refund Experience shows several factors may slow down the processing of any tax return and refund check.  More complicated returns containing several pages of documents such as deduction and tax credit forms, and several Forms 1099 take longer to review and confirm.  Something as simple as failing to sign the tax return will cause delay as the IRS must contact the taxpayer by mail to request any updates, changes or information before a refund check may be issued.

You may be surprised at how many refunds are delayed by simple taxpayer mistakes like a missing signature, incorrect Social Security number, or a simple math error – especially on self-prepared tax returns.  These kinds of errors are significantly reduced when professional tax preparers are used to prepare and file even simple returns.

Sometimes taxpayers are victims of identity theft, but don’t realize it until they submit their tax return and the IRS informs them someone else has already used their Social Security number to request a refund.  The IRS will contact the legitimate taxpayer by mail about the suspected fraudulent tax return.  A taxpayer must then go through what may be several months of investigation and paperwork to verify their identity and Social Security number before receiving their refund.

Electronic receiving a refund through direct deposit is the easiest, fastest and safest way to receive a tax refund.  Each year more taxpayers choose direct deposit.  In the 2016 tax year, 8 out of 10 taxpayers requested their refunds be deposited this way.  Taxpayers may also request their refund check be split and auto-deposited in up to three different bank accounts.

If you need more information or would like to discuss your options for receiving your tax refund, please contact us online or call us at McRuer CPAs at 816.741.7882.

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.

01/05/2018

Tax Filing Season Starts January 29 for 2017 Tax Returns

Tax-DayThe IRS has announced that this year’s filing season will officially begin January 29th.  That is the first date that completed tax returns will be accepted by the IRS, though tax preparation may be completed before then so returns may be ready to submit on the first available day for processing.  The date is a bit later than the launch of the 2016 filing season, which began January 23rd.

The agency has been updating its systems since November to accommodate tax law changes for 2017.  Going forward, it's not yet clear how long it will take the IRS to adjust to the newly passed tax reform law that will implement major changes affecting individual and business income and other taxes in 2018.  Those tax reform changes do not affect your individual 2017 tax return.

The deadline to submit your 2017 individual federal and state income tax returns is April 17th this year.  The date is on the 17th of April because April 15th is a Sunday and April 16th is a holiday in the District of Columbia.

The IRS will not begin accepting federal income tax returns until January 29th.  It also reminds taxpayers that, by law, it cannot issue refunds related to claims for the earned income tax credit or the additional child tax credit until mid-February.

If you have any questions or need help with the preparation of your individual or business income tax returns, please contact us at McRuer CPAs online (click here) or by calling 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.

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