As we move closer to the tax filing season, the Tax Cuts and Jobs Act (TCJA) has raised many questions in regards to tax preparation for Milwaukee taxpayers. Below are answers to some of them.
Do I need to adjust my withholding allowances, given that tax brackets have changed?
You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.
Can I take advantage of the new deduction for pass-through business income?
The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).
Can I still deduct mortgage interest and real estate taxes paid on a second home?
Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.
Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.
Are there any changes to capital gains rates and rules that I should know about?
The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.
2018 Long-Term Capital Gains Breakpoints
|Rate||Single Filers||Joint Filers||Head of Household||Married Filing Separately|
|0%||Below $38,600||Below $77,200||Below $51,700||Below $38,600|
|20%||$425,800 and above||$479,000 and above||$452,400 and above||$239,500 and above|
Can I still deduct my student loan interest?
Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.
I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?
The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.
I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?
Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.
This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.
Financial statement information is most useful if owners and managers can use it to improve their company’s profitability, cash flow, and value. Getting the most mileage from financial statement data requires some analysis. It is important that business owners understand what their financial statement actually means.
Ratio analysis looks at the relationships between key numbers on a company’s financial statements. After the ratios are calculated, they can be compared to industry standards — and the company’s past results, projections, and goals — to highlight trends and identify strengths and weaknesses.
The hypothetical situations that follow illustrate how ratio analysis can give company decision-makers valuable feedback.
Rising Sales, Rising Profits?
The recent increases in Company A’s sales figures have been impressive. But the owners aren’t certain that the additional revenues are being translated into profits. Net profit margin measures the proportion of each sales dollar that represents a profit after taking into account all expenses. If Company A’s margins aren’t holding up during growth periods, a hard look at overhead expenses may be in order.
Company B extends credit to the majority of its customers. The firm keeps a close watch on outstanding accounts so that slow payers can be contacted. From a broader perspective, knowing the company’s average collection period would be useful. In general, the faster Company B can collect money from its customers, the better its cash flow will be. But Company B’s management should also be aware that if credit and collection policies are too restrictive, potential customers may decide to take their business elsewhere.
Company C has several product lines. Inventory turnover measures the speed at which inventories are sold. A slow turnover ratio relative to industry standards may indicate that stock levels are excessive. The excess money tied up in inventories could be used for other purposes. Or it could be that inventories simply aren’t moving, and that could lead to cash problems. In contrast, a high turnover ratio is usually a good sign — unless quantities aren’t sufficient to fulfill customer orders in a timely way.
These are just examples of ratios that may be meaningful. Once key ratios are identified, they can be tracked on a regular basis.
Milwaukee small business accounting specialist, Hammernik & Associates, helps small business owners in Wisconsin understand their financial statements to maintain profitability and reduce tax burdens. Please contact our office to let us review your prior financial statements to make sure you are on the right track.
Even if you’ve been using QuickBooks Online for a long time, it’s good to step back and evaluate your actions.
Milwaukee small businesses have many different ways in which they keep track of their accounting. It typically depends on how the business owner prefers to operate. QuickBooks Online is the present and the future of bookkeeping. It allows a business owner to track their financial statements in real time, while also giving their accountant access to reconcile everything.
“Best practices” aren’t enforceable rules. They’re simply guidelines businesses commonly follow in one area or another. If you’re in retail, for example, one best practice might be to always ask customers checking out if they found everything they were looking for. This serves two purposes: It conveys a feeling of concern for the customer’s shopping experience, and it may also lead to increased sales.
QuickBooks Online has many best practices, some of which may serve multiple purposes, including these:
- They keep your company data safe and clean.
- They provide insight on your financial status.
- They save time.
- They can lead you to better relationships with customers and vendors.
Are any or all the following common practices for your business?
Reconcile accounts regularly.
One of QuickBooks Online’s most useful features is its ability to connect to your financial institution’s websites and download cleared transactions. QuickBooks Online also offers tools to help you keep your accounts reconciled online, like you used to do every month when your paper statement came. Reconciling accounts can help you uncover errors. It gives you a truer picture of your cash flow, and it improves the accuracy and timeliness of some reports.
It’s not a particularly pleasant process, but you should be reconciling your accounts regularly in QuickBooks Online. We can help.
Clean up your lists.
Some lists in QuickBooks Online aren’t overly long. You don’t have to worry about, for example, Payment Methods, Terms, or Classes. Your lists of customers and vendors, products, and services, on the other hand, can grow unwieldy over the years. This means it can take more time than it should to scroll through lists when you’re using those entities in transactions. It also puts unnecessary stress on your company file. If you can’t delete any, at least make them inactive.
Never leave QuickBooks Online open when you leave your work area.
This goes for everyone, even people who work alone and don’t access their company files away from their work areas. The obvious reason is to keep someone else from getting in and authorizing payments, for example, or otherwise compromising your financial information. It also protects the integrity of your data file in case your internet connection suffers some kind of outage.
Keep track of 1099 vendors.
Whether your company uses 10 vendors or a hundred or more, you may have to supply at least some of them with an IRS Form 1099 at about the same time you’re preparing W-2s for employees. Your 1099-related tasks will be much easier if those individuals and/or companies are earmarked. If you think vendors might need 1099s when you create their records in QuickBooks Online, click in the box to the left of Track payments for 1099 in the lower right corner. Not sure? Ask us.
Classify everything with care.
Every time you have to create a record or transaction where categories are involved (i.e., Classes, Customers and Vendors, Territories), check and double-check that you’ve assigned them the correct classification. Errors here can result not only in problems with daily workflow, but your reports will not be accurate. A related best practice: Create a meaningful group of Classes, and use them faithfully. They’ll help you make better business decisions.
To create your list of Classes, click the gear icon in the upper right and select All Lists | Classes | New.
View reports on a regular basis.
There are some advanced financial reports in QuickBooks Online that we should be creating for you on a regular basis, either monthly or quarterly. These include Profit and Loss, Balance Sheet, and Statement of Cash Flows. The mechanics of creating them aren’t difficult, but analyzing them is. You should be running reports on your own at frequencies that you think would be helpful, like A/R Aging Detail, Unpaid Bills, and Sales by Class Detail.
If you’ve been using QuickBooks Online for a while, you could probably come up with your own list of best practices. If you’re new to the site, consider scheduling some time with us to go over more of them. Develop good habits from the start, and there won’t be nearly as much need for troubleshooting down the road.
Hammernik & Associates has a certified QuickBooks Pro Adviser on staff to help you keep your QuickBooks accurate and compliant. We also are able to get subscriptions at a discounted wholesale rate. Please contact our office if you need help cleaning up your QuickBooks or if you are interested in converting to QuickBooks. Milwaukee small business accounting and QuickBooks Online go hand in hand.
This is a satirical article and is not meant to be serious. No IRS agents were hurt in the writing of this article.
Brewers fever is rampant in Milwaukee. If you have been in my office before, you know how big of a Brewers fan that I am. As I am writing this, I am getting excited to head to Miller Park tonight to watch Game 1 of the National League Championship Series. I like to take any opportunity that I can to try and clash the sports world into the tax world. So, here’s my hot take….The Dodgers are the IRS and the Brewers are Hammernik & Associates.
The Dodgers have one of the highest payrolls in baseball. They bring in money and toss it around like it’s nothing. Remind you of someone? Ah yes, the IRS. The big market Dodgers think they can push the small market around with their buying power and authority, just like the IRS does with Milwaukee taxpayers.
The Brewers’ postseason slogan is, “Defend MKE”. Hammernik & Associates defends the taxpayers of Milwaukee against the IRS anytime that they receive a letter or audited by the IRS. Hammernik & Associates does everything that we can to use the deductions and credits available by IRS law to reduce the money that taxpayers pay the IRS. The best way to combat the big dog is to be knowledgeable and creative with tax law. General Manager, David Stearns, is one of the smartest men in baseball, and used his resources to put together a competitive roster. In addition, Manager, Craig Counsell, uses his creativity to do some out of the box thinking i.e. moving 3rd basemen Travis Shaw to 2nd base, bullpen game in the playoffs.
Dodgers= IRS, Brewers Management=Hammernik & Associates. Baseball games cannot be won without the players, and tax cannot be reduced without strategies. Let’s match some of the Brewers’ roster with tax deductions and credits!
Lorenzo Cain: Educator Expense Deduction – Lorenzo Cain is the smartest player on the field at all times. He not only is a leader, but he teaches the younger guys the right way to play the game.
Christian Yelich: Section 199-A Deduction – Chrisitan Yelich is new to the team just like the 199-A is new to the 2018 tax code. The 199-A deduction is a big-time deduction that is going to provide a huge tax break to small businesses. You see where I’m going here? Christian Yelich has been the main force behind the “small business” that is the Milwaukee Brewers.
Ryan Braun: Child Tax Credit – The child tax credit has been a consistent credit helping families out for years. As of 2018, the child tax credit went from $1,000 up to $2,000. Ryan Braun has been the one consistent on the Brewers over the past decade. This year he has brought his level of play close to the level we had grown accustomed to over the years.
Jesus Aguilar: American Opportunity Credit – The AOTC is one of the biggest credits available, as it offers up to a $2,500 credit. Jesus Aguilar (JESUS BOMBS) is the biggest human being on the roster and packs a big punch at the plate. The play on words here is very fitting as well. Jesus Aguilar was once a bench player, but took full advantage of his OPPORTUNITY to take over an everyday role.
Travis Shaw: Refundable Tax Credits – Refundable tax credits are the most versatile types of tax credits, because they can be used to both reduce tax and get a straight refund. Travis Shaw was forced to become versatile when he was moved to 2B, and he has done a great job with the transition.
Mike Moustakas: Rental Property Deductions – There is a chance Moose comes back to the Brew Crew next year, but for the most part, he is a rental player for the year. Rental properties can be a very good investment….just like Moustakas.
Orlando Arcia: Entertainment Expense Deduction – Watch Arcia snag balls at shortstop….Are you not entertained?!
Erik Kratz: The Senior Tax Credit – He may be only 38, but Kratz Daddy is a senior citizen based on MLB standards.
Manny Pina: Theft & Casualty Loss Deduction – Don’t even try swiping 2nd base on Manny…otherwise, you to will need to take a theft loss deduction.
Jonathan Schoop: Gambling Loss Deduction – This is the only negative one on the list. Almost every gamble David Stearns has taken in free agency and the trade market has paid off, but not this one (so far). With all the gambling winnings Stearns has made, he will need to take this loss to reduce the tax on those winnings.
Jeremy Jeffress: Wisconsin Subtractions From Income – It’s no secret that JJ thrives when he is pitching in Milwaukee, and has struggled during his tenure with other teams. Jeffress has his most success when living in Wisconsin.
There you have it. The Milwaukee Tax Deduction roster. Let me know if you have any good comparisons of your own.
Let’s Go Crew!
Nicholas Hammernik, EA, CTC
Christmas has come early for Wisconsin residents with qualified dependent children. Beginning tomorrow, May 15th, Wisconsin residents can apply for a $100 per child tax rebate online. The purpose of the rebate is to repay sales tax for expenses associated with raising a child. The rebate will return an estimated $122 million to qualified Wisconsin taxpayers. Wisconsin taxpayers have until July 2nd to claim the rebate.
Claim the rebate here —> https://childtaxrebate.wi.gov/_/
Who is qualified to receive the rebate?
Taxpayers with dependent children may qualify, if:
Child must be:
- Under age 18 on December 31, 2017
- A dependent* of the claimant for tax year 2017
- A Wisconsin resident on December 31, 2017
- A United States citizen
If you DID NOT claim your child as a dependent on your tax return for 2017, you are not eligible to claim the rebate.
What You Need to File Your Claim
- Your Social Security number and Wisconsin residency for tax year 2017
- Your qualified child’s Social Security number and date of birth
- If you wish to direct deposit, we’ll need your bank routing number and account number
- If you are a nonresident or part-year resident that moved out of Wisconsin in 2017, you must submit receipts showing at least $100 of Wisconsin sales/use tax paid in 2017 for each child and proof each child was a Wisconsin resident on December 31, 2017
Spread the word about the credit to your friends and family. It is a use it or lose it credit that must be claimed by the July 2nd deadline. If you have any questions regarding the credit, please feel free to contact our office.
Almost two weeks into the 2017 tax filing season, and we get this news bomb laid on us….This morning, in order to avoid another Government shutdown, President Trump signed a budget bill which retroactively extends a few tax laws that had expired for 2017. If you have already filed your tax return, you might need to file an amended tax return to claim some of these deductions.
The most notable changes include:
Exclusion for discharge of indebtedness on a principal residence
The provision extends the exclusion from gross income of a discharge of qualified principal residence indebtedness through 2017. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into in 2017.
Premiums for mortgage insurance (PMI) deductible as mortgage interest
The provision extends the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2017. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000.
Above-the-line deduction for qualified tuition and related expenses
The provision extends the above-the-line deduction for qualified tuition and related expenses for higher education through 2017. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
Three-year depreciation for race horses 2-years-old or younger
The provision extends the 3-year recovery period for race horses to property placed in service during 2017.
Also incorporated into the bill is a series of additional provisions that will go into effect for the 2018 tax year. The following are noteworthy:
Requirement for new Form 1040SR for seniors
The provision requires that the IRS publish a simplified income tax return form, designated a Form 1040SR, for use by persons who are age 65 or older by the close of the taxable year. The form is to be as similar as possible to the Form 1040EZ. The use of Form 1040SR is not to be restricted based on the amount of taxable income to be shown on the return, or the fact that the income to be reported for the taxable year includes social security benefits, distributions from qualified retirement plans, annuities or other such deferred payment arrangements, interest and dividends, or capital gains and losses taken into account in determining adjusted net capital gain. This provision is effective for taxable years beginning after the date of enactment.
Prohibition of modifying user fee requirements for installment agreements
The provision prohibits increases in the amount of user fees charged by the IRS for installment agreements. In addition, the IRS is required to waive the fees imposed for installment agreements for taxpayers whose income falls below 250 percent of the poverty line and have agreed to make the payments by electronic means through a debit account. Further, for those taxpayers whose income falls below 250 percent of the poverty line, are unbanked, and successfully complete an installment agreement, the fee would be reimbursed at the end of the installment agreement period.
Individuals held harmless on improper levy on retirement plans
The provision allows amounts, including interest, returned to an individual from the IRS pursuant to a levy to be contributed to the IRA, or employer-sponsored plan, without regard to normal contribution limits. In addition, the IRS is required to pay interest on an amount returned. The provision is effective for levied amounts, and interest thereon, returned to individuals in taxable years beginning after December 31, 2017.
Hammernik & Associates is here to keep up with the tax law changes to make sure you receive the proper deductions and credits. Please contact us if there was something extended that applies to you, and you need to amend a tax return.
One of the main focuses of the tax reform was to provide tax breaks to both small business and corporations. This includes sole proprietors whom file a Schedule C on their tax return. So, if you have been thinking of starting your own business, 2018 is the time to do it. The tax savings on pass through entities is going to greatly impact small business owners in Milwaukee, Waukesha, and all of Southeastern Wisconsin. It will be important to begin tax planning throughout the year to make sure you make adjustments based on the new laws. Let’s take a more in-depth look at the specifics of the deductions….
Tax Reform Provides New 20% Deduction
The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.
Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation, because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.
You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.
When can you as a business owner qualify for this new 20 percent tax deduction with almost no complications?
To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of
- $315,000 or less if married filing a joint return, or
- $157,500 or less if filing as a single taxpayer.
Example. You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).
If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.
Some unfriendly rules apply to what Section 199A calls a specified service trade or business, such as operating as a law or accounting firm. But if the doctor, lawyer, actor, or accountant has defined taxable income less than the thresholds above, he or she qualifies for the full 20 percent deduction on his or her qualified business income.
In other words, if you are a lawyer with the same facts as in the example above, you would qualify for the $30,000 deduction.
Once you are above the thresholds and phaseouts ($50,000 single, $100,000 married filing jointly), you can qualify for the Section 199A deduction only when
- you are not in the out-of-favor group (accountant, doctor, lawyer, etc.), and
- your qualified business pays W-2 wages and/or has property.
Phaseout for New 20% Deduction
If your pass-through business is an in-favor business and it qualifies for tax reform’s new 20 percent tax deduction on qualified business income, you benefit at all times, including being above, below, or in the expanded wage and property phase-in range.
On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the out-of-favor group and you benefit only when you are in or below the phaseout range.
Once your taxable income exceeds the threshold amounts above, you arrive in one of the four possible categories below:
- Phase-in range for a non-specified service trade or business
- Phaseout range for a specified service trade or business
- Above the phase-in range for an in-favor non-specified service trade or business
- Above the phaseout range for an out-of-favor specified service trade or business
If your taxable income is going to be above the threshold amounts that trigger the phase-in or phaseout issues, contact us so we can spend some time on your tax planning.
How the 20% Deduction Works for a Specified Service Provider
As discussed above, the 20 percent tax deduction under new 2018 tax code Section 199A is a very nice tax break for business owners, except for owners with high income who also fall into the out-of-favor group.
In general, the out-of-favor group includes lawyers, doctors, accountants, tax professionals, consultants, athletes, authors, securities traders, actors, singers, musicians, entertainers, and others.
Getting just a little more technical, the out-of-favor “specified service trade or business” group includes any trade or business
- involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
- where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or
- that involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities (Sections 475(c)(2) and 475(e)(2), respectively).
Notably, engineers and architects who had previously been in the out-of-favor professionals group somehow escaped the group with passage of this new law.
When you are a member of the out-of-favor group, your Section 199A deduction on your out-of-favor business is zero when you have taxable income of more than
- $415,000 if married filing a joint return, or
- $207,500 filing as a single taxpayer.
Preserve the Deduction with an S Corporation
Will your business operation create the 20 percent tax deduction for you?
If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.
As mentioned above, to qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).
If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you pay W-2 wages or have property.
Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.
Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets
- $10,871 on his self-employment taxes, and
- $17,500 on his newfound 20 percent deduction under new tax code Section 199A.
Tax Reform Destroys Entertainment Deductions for Businesses
First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent.
And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.
For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment.
Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit.
The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.
Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:
- Business meals with clients or prospects
- Tickets to sports games—football, baseball, basketball, soccer, etc.
Entertainment That Survived Tax Reform
As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.
Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.
That’s the bad news. The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct
- entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
- expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
- expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
- expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
- expenses for goods, services, and facilities you or your business makes available to the general public;
- expenses for entertainment goods, services, and facilities that you sell to customers; and
- expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.
When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:
- Renting your home to your corporation.
- Taking your employees on an employee party trip.
- Partying with your employees.
- Making your vacation home a deductible entertainment facility.
- Creating an employee entertainment facility.
- Deducting the entertainment facility, because facility use creates compensation to users.
If you would like our help implementing any of the strategies above, please don’t hesitate to contact us.
Tax Reform Cuts Deductions for Employee Meals to 50 Percent
Tax reform (Public Law 115-97) includes winners and losers.
Employers who for their convenience provided business meals for their employees are losers—50 percent losers to start and then total losers later.
Meal costs that were 100 percent deductible for perhaps a half century or more are now limited to 50 percent, and that 50 percent becomes a big fat zero deduction beginning January 1, 2026.
Employee meals that were 100 percent deductible but are now 50 percent deductible beginning January 1, 2018, include
- meals served at required business meetings on your business premises;
- meals served at required business meetings in a hotel or other meeting place that passes the test for business premises but is located outside of the office;
- meals served to employees who are required to staff their positions during breakfast, lunch, and/or dinner times;
- meals served to employees at in-office cafeterias; and
- food and meal costs for employees who are required to live on premises for the convenience of the employer.
For 2018, you need an account in your chart of accounts that says something like “meals subject to 50 percent cut.” In this category, you can put travel meals and the meals above.
Tax Benefit for Business Vehicle Trade-In Eliminated
Beginning January 1, 2018, tax reform no longer allows Section 1031 exchanges on personal property such as your business vehicle.
The trade-in was the most common 1031 exchange of a business vehicle. Now, because of tax reform, the vehicle trade-in is simply the sale of the old vehicle to the dealer and the purchase of a new vehicle. The sale to the dealer creates gain or loss on the sale just as it would on an outright sale.
But having a taxable event does not necessarily mean that you are going to pay more taxes. There’s more than one nifty silver lining for many business taxpayers in this lost ability.
For example, if you pay self-employment taxes, you usually come out ahead if you use the “sell and buy” strategy rather than the trade-in strategy (Section 1031 exchange).
With the sell-and-buy strategy, you save self-employment taxes because
- you don’t pay self-employment taxes on the sale of your existing business vehicle, and
- you deduct depreciation and Section 179 expensing on your new vehicle (even when you use IRS mileage rates, you benefit).
Owners of S and C corporations don’t generate any self-employment tax savings on the sales and purchases of new vehicles. They just have gains and losses.
If you operate as a corporation and the sale or trade-in of your existing vehicle is going to produce a big taxable gain, why do it? Before tax reform, when you could avoid taxes with the trade-in, you could easily justify the newer vehicle. This isn’t the case with tax reform. More than ever, it’s important to calculate your tax result before you sell or trade in a vehicle or other personal property.
Tax Reform Creates Taxes on Employee Fringe Benefit for Bicycles
Tax reform created taxes on the employee fringe benefit for bicycles. You could (and can) deduct your costs for reimbursing employees for their qualified bicycle transportation costs. But tax reform now makes this bicycle transportation benefit a taxable event for your employees.
In what for this tax reform is an interesting twist, businesses may continue to pay the monthly $20 bicycle benefit, but they must add the benefit to the employee’s W-2 and subject it to withholding and payroll taxes. The employee continues to come out ahead with the bicycle reimbursement even though it’s taxable.
Example. Say the employee receives a $100 reimbursement and pays taxes at the 25 percent rate. The employee is $75 ahead ($100 – $25).
If you are an employer, you should consider continuing this fringe benefit because it does help your employee with his or her physical health and it costs you almost nothing. Because of tax reform, you’ll have to change your payroll for this fringe benefit, but that’s not likely to cause much trouble.
As everyone knows, the Government is currently shutdown. The IRS is part of the Government. So what does a shutdown mean for you when you file your tax return?
First, it is important to remember that the BEFORE the shutdown even happened, the IRS was not filing tax returns until January 29th. So, if the Government is back up and running by that time, business will go on as usual. However, if the Government is still shutdown a week from now, some things will be affected, while some may not.
Issues that would be put on hold:
- No tax refunds issued – Keep in mind that many refunds that involve certain credits will not be released until February 27th regardless.
- No processing of non-disaster relief transcripts
- No processing of forms 1040X, amended returns
- No non-automated collections
- No audit or examinations (some exceptions apply)
- No whistleblower office activity
Here’s a partial list of functions that directly impact taxpayers which will typically continue if the government shuts down:
- Processing of returns with payments
- Mailing tax forms
- Appeals (statutory deadlines will not be changed)
- Call centers (only during filing season)
- Civil and criminal tax cases
- Certain communications to taxpayers
- Active criminal investigations
To sum it up, the biggest issue here would be a delay in refunds being issued. However, you will still be able to file your tax return on 1/29/18. If you are typically an early filer, we would suggest you continue to do so. Filing early will reduce your chances of being a victim of ID theft. Please keep in mind this is the tentative plan and these plans can be changed. We will update with any changes as they happen.
As it does every year, the Internal Revenue Service has announced the inflation- adjusted 2018 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable or medical purposes.
Beginning on Jan. 1, 2018, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:
- 54.5 cents per mile for business miles driven (including a 25-cent-per-mile allocation for depreciation). This is up from 53.5 cents in 2017
- 18 cents per mile driven for medical purposes. This is up from 17 cents in 2017
- 14 cents per mile driven in service of charitable organizations.
The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for over 15 years.
Something to consider… The 2018 rates are based on 2017 fuel costs. Based on the potential for substantially higher gas prices in 2018, it may be appropriate to consider switching to the actual expense method for 2018, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that the option is available for 2018.
Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates, as long as standard mileage was used in the first year the vehicle was operated. However, the standard mileage rates cannot be used if you have used the actual expense method in previous years. This rule is applied on a vehicle-by-vehicle basis. The business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.
Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.
The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, employees may no longer take a deduction on their federal returns for unreimbursed employment-related use of their cars.
If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give us a call or ask your tax consultant during your tax meeting.
You would think the day after Christmas would be a pretty quiet day at the office…The phone has been ringing off the hook. It seems that the chatter around the Christmas tree was all about the new tax reform. It’s the old, “My neighbor said I could deduct this” theory that we often get. So, I am here to set the record straight….go tell your neighbor they are wrong 🙂
There are news articles out there encouraging taxpayers to prepay their 2018 property taxes now to save money in taxes. While this would be an effective strategy for some taxpayers due to the higher standard deduction in the tax reform, it is not going to work in Wisconsin. Some other states, mainly on the east coast, have a different way of billing for property taxes which may allow them to pay for 2018 now. However, based on Wisconsin state statutes you cannot do that if you own real estate here. Wisconsin is just billing out the 2017 real estate taxes now, your 2018 assessment will not be available until next year.
Here is what your local village or county will tell you:
The Village is not collecting 2018 property taxes which are due January 31, 2019. Per state statute, the Village may not accept prepayments on 2018 taxes in 2017.
State statute 74.13(1)(b)(3) reads “…General property taxes, special assessments, special charges and special taxes may be paid in advance of the levy during the period from August 1 until the 3rd Monday in December.” 2018 property tax amounts will not be available until December 2018.
While it may be a good idea for some to try and take advantage of the last year with the old rules of itemize deductions, unfortunately this is not an option. However, if you typically pay your real estate tax bill in installments, it may make more sense for you to pay your entire 2017 tax bill before the year ends.