JULY 13, 2021
IRS Update - Patience is the Rule of the Day
Okay, so real data shows that the Tax Season 2021 challenges have officially beat those of the unprecedented Tax Season 2020. We are "fondly" referring to this as Covid Tax Season 2.0.....but not the new & improved version. Here are a couple links if you want some background information on the current state of the IRS backlog....plenty more are available on the internet. Not assertion on reliability of data, political implications or any such stuff, just sharing general information:
This one is from July 12th:
And another from June 30th:
https://www.cnbc.com/2021/06/30/the-irs-has-35-million-unprocessed-tax-returns-from-2021.html
Same message, different sources. Not much has changed in the first two weeks of July.
If you want the official scoop, here's the report from the office of the National Taxpayer Advocate on the 2021 Filing Season. For us tax nerds, it's a pretty interesting read.
https://www.taxpayeradvocate.irs.gov/reports/2022-objectives-report-to-congress/
As we expected, some of the returns were slowed down because the taxpayers claimed 2020 stimulus refunds on their returns that differed from the IRS's records....actually more than 5 million returns have to be manually reviewed for this. We saw this one coming and tried very hard to get the correct information when preparing returns, even though it delayed our ability to get them done quickly. We hoped a little prevention would pay off.
To give a little perspective, when Tax Season 2021 officially ended on May 17, 2021, for this and many other reasons, the IRS had almost 16 million 2020 tax returns awaiting processing, and still had over 1 million 2019 returns still in “the cue”. At the end of Tax Season 2020, which had been delayed until July 17, 2020, the IRS had just over 4 million unprocessed returns, which was considerably higher than any prior years.
The number one cause sighted in the Taxpayer Advocate report: a labor shortage at the IRS....go figure.
So, bottom line, here's what we suggest:
If you have a refund coming:
Just be patient, give the IRS at least another 90 days, if not longer. In addition to processing 2020 returns, the IRS is now focused on mailing monthly 2021 advance child dependent credit payments that were part of the American Rescue Plan Act passed in March 2021. Just one issue the IRS is dealing with, but these have to be out by July 15th, and every month for the rest of the year. There will of course be problems they'll need to resolve as this program extends out.
You can check the status of your refund online at the following link.....there is really nothing more to do right now.
If you owe tax and get a tax due letter from the IRS:
Immediately confirm with your bank that the electronic withdraw has been taken from your account. Keep a copy of the bank record showing the withdraw and the date. This information, and your electronic receipt you hopefully printed when you made the electronic payment, are very important documents. If you are a Snyder & Company client, please send us a copy for your file. If you mailed a check and have a certified mail receipt, confirm the date the item was delivered to the IRS and keep that. If you mailed a check, see if it has cleared the bank yet. Most likely it has not, but do double check.
Be patient...even though the IRS letter says you have to pay by a certain date. This is a computer generated form letter. If you have the above proof of payment, you're good even if you get a second letter. In the unlikely chance you get a Notice of Intent To Levy, and you're a client of ours, please contact us right away. At this stage of the collection point, some action has to be taken.
If you don't have proof of payment, and are still waiting for your check to clear, DO NOT stop payment and reissue another check to the IRS. This really frustrates the process. If your check did get lost in the mail, or at the IRS, it will eventually have to be replaced, and you'll need to argue against penalties and interest. Sending another payment will only make it worse.
If the IRS continues to send notices, you can call the IRS directly yourself.....just know that less than 3% of calls to their 1-800 number are actually getting to a live person. As an option, if you'd like us to step in for you, we can have you sign a Power-of-Attorney form and call the IRS Tax Practitioner line for you. This is a labor intensive process, but we usually have good results. We can at least get a hold on the collection process if needed. Our change orders for handling these start at $500 for the first stage. Additional stages, such as letter writing and appeal filings, are priced as needed based on the facts involved.
While this is not the message of hope we would like it to be, we do hope it helps.....We're here if you need us!
FEBRUARY 11, 2021
Personal Tax Changes for 2020
For some of us it seems that Tax Season 2020 just ended, and now Tax Season 2021 is officially set to open up. Big breath! The extension of the last year's filing deadline from April 15th to July 15th elongated Tax Season 2020. This was necessitated by the Coronavirus quarantine and subsequent government stimulus actions.
This year, the IRS needed a couple of more weeks to get all the stimulus payments out, and to get the information into their system, before they could begin accepting 2020 returns. While these stimulus payments are not taxable income, they do have to be reconciled on the 2020 return. If you didn't receive the full amount you were entitled to, you will get it on your 2020 return. If you received more than you should have, bonus: you get to keep it! This can happen to anyone who added a dependent or whose income fluctuated from 2019 to 2020. This is why a reconciliation is necessary. Be sure to let your tax preparer know how much you received in stimulus payments, including any received in January 2021.
Here are a few other noteworthy items for individual tax returns:
If you don't itemize your deductions (mortgage interest, taxes and charitable donations) and instead take the standard deduction, you can still deduct up to $300 of cash charitable donations. The deduction is based on actual cash donations, not a guesstimate. Non-cash items like clothing to Goodwill do not qualify for this new deduction.
If you have a business &/or a farm, and you received the EIDL Grant (Economic Injury Disaster Loan) and/or the PPP Loan (Payroll Protection Program), remember that these are not taxable income.
However, if you received an Ohio Workers Compensation refund in 2020, it is taxable income.
If you pay self-employment tax, you may be eligible to pay some of your 2020 self-employment tax over a 2-year process with no interest.
If you are normally required to take a minimum distribution from your IRA, you didn’t have to take it for 2020. But this exception was only for 2020, you will need take your RMD in 2021.
If you were directly affected by Covid-19, and you had to take a retirement distribution, you may be able to take that into your taxable income over 3 years instead of paying tax on all of it on your 2020 return. These distributions are also exempt from the 10% early withdraw penalty.
In the past, if you were over age 70 1/2, you were no longer allowed to make a traditional IRA contribution (provided you had earned income). You are now allowed to fund an IRA even after this age.
In the past, if a business wanted to take a qualified retirement deduction such as a 401k or cash balance plan, it had to have the plan in place by December 31st. These businesses now have until the due date of their return to setup a plan and take the deduction. This included the extension if filed.
If you’d like more official information, click below for the IRS news release:
These are just as few highlights. Be sure to discuss them with your tax preparer. If that's not us, we are taking new clients.
Happy Tax Season!
JANUARY 30, 2021
Unemployment Fraud is Rampant
We have received reports from a number of unrelated sources, including government agencies, that a widespread unemployment fraud scheme has been perpetrated. Even in our small firm, several staff and a number of clients have been caught up in it. Colleagues from around the state have shared similar experiences in their communities, showing us how wide spread this fraud has become.
Several things to be aware of:
· Fraudulent claims are being filed in someone's name, but being mailed to an address that does not belong to them. If you receive a notice in the mail from Job and Family Services about a claim in someone else's name that has your address, be alert and don't just throw it away. We know some have received the actual debit cards that have the unemployment benefits loaded on them. It appears that part of the plan of the fraudsters was to file claims at multiple addresses, and then file a change of address before the claim was processed. It hit a glitch when the volume of claims that had to be processed was so large that processing of the address changes was delayed.
· Others are receiving fraudulent notices of benefits in their names, mailed to their home addresses. This one is a little more concerning because there is no way of knowing what personal information the fraudsters may have obtained. This information could include social security numbers and dates of birth, in addition to address information. Some are seeing unemployment claims filed for deceased family members or retired elderly relatives.
Some suggestions if you or someone you know gets caught up in this:
· If you receive a debit card with an unemployment benefit loaded, call and cancel the card right away and report the fraud to the credit card company.
· If you receive notice from Job & Family services that a benefit was approved to either you, or to some else using your address, or you receive a 1099-G from the State of Ohio reporting unemployment benefits you did not receive, go to this link at the Job & Family services website and report the identity theft. It includes other links for reporting your identity theft to other agencies, including the three credit bureaus:
https://unemploymenthelp.ohio.gov/IdentityTheft/
· You can file Form 14039 with the IRS to report that your identity was compromised, so that if or when you receive a 1099-G that reports benefits you never received, you will already be on record as not being the true recipient. This should eliminate any IRS notices in the next few years when it looks like you didn't report benefits on your return. Here's a link to that form - it's a fillable PDF, but does need to be printed and mailed:
https://www.irs.gov/pub/irs-pdf/f14039.pdf
Employers also need to watch for notices of unemployment from the Job & Family services for employees that are not part of their company, or for employees who were never laid off. If you receive these, protest the claim right away and go to the Job & Family Services website to report the fraud.
We hope this is helpful - please call us if you have any questions.
JANUARY 27, 2021
Ohio's Alternative City Tax Filing Process
If you do business in Ohio, you are already familiar with Ohio's unique city tax structure. For better or worse, Ohio is one of the few states that allows local level taxing authority. While this system gives the cities local control over their tax rules, it also creates a complex tax compliance burden for business, especially those that earn income in more than one city during the year.
Over the course of the last 20 years the Ohio Legislature and Ohio Municipal Tax League, with the input from business advocate groups like the Ohio Chamber of Commerce, the Ohio Society of CPAs and others, have worked to find some common ground wherein the cities can still retain local tax authority, but the compliance burden on business owners is lessened. Those efforts resulted in the Ohio Municipal Net Profit Tax Return, wherein business can make an active election to file one consolidated city tax return through the Ohio Business Gateway. This election is only for business taxpayers, and is not available for individuals or LLCs that are treated as a disregarded entity.
After making this election, the business files one city return electronically with the State of Ohio, declaring the appropriate portion of income for the city or cities that it did business in during the year. A single payment is made to the State, and it distributes the funds to the appropriate city(ies). This election can be made even if the business only files in one city if they prefer to file and pay electronically. Not all cities have this functionality yet. This then eliminates any filing with individual city tax departments, the City of Columbus, RITA, the CCA, etc.
There is some standardization required to make this work: the return has to be filed electronically with the Ohio Department of Taxation, and all city tax payments, including quarterly estimates, must be paid electronically through the Ohio Business Gateway. The State will not accept checks for this tax. Once a business makes the election, it stays in force until the business revokes it.
If a business wants to use this process, it must make the election no later than the 1st day of the third month of it's current year. For a calendar year business, that is March 1st. For a business with say a September year-end, that would be November 1st.
Unless the election was filed last winter, it is too late to opt in for the 2020 returns that are being prepared now. If you want to use it for the 2021 tax year, the election must be filed by March 1, 2021. If you go this route, you have to notify the cities you file returns with for 2020 that this election has been made, so they can update their taxpayer filing records for next year.
If you'd like more information, here's the Information booklet form the Ohio Department of Taxation:
https://tax.ohio.gov/static/muni-net-profit/taxpayer%20booklet%20020118.pdf
If you are a Snyder & Company client, and you're not already signed up for this, we will be contacting you in the next couple of weeks to see if you have any questions or need help getting registered. The registration process is online, so you may not need our help. If you have made, or will make, this election please let us know so we can prepare your returns accurately.
If you're not a client of ours, and you haven't already done so, talk with your accountant or tax preparer.
As always, give us a call if you have any questions -
JANUARY 18, 2021
Good News on Business Meals
The Consolidated Appropriations Act of 2021 that was signed into law at the end of 2020 included an unexpected surprise. As you are aware, business meals have only been 50% deductible for many years. As a boost to the restaurants that continue to struggle with the impact of the Coronavirus epidemic, the Act now permits business "restaurant meals" to be 100% deducted for the next 2 years, 2021 and 2022. The Act allows full deductibility as long as the meals or beverages are provided by a restaurant.
The meal still needs to qualify as a business expense, meeting the "ordinary, necessary and reasonable" standard. Keep your receipt from the restaurant, as the credit card statement alone is not enough to prove the expense in an audit. On the receipt, make a note of who attended and what the business relationship/purpose was.
Also, it's worth noting that this was not extended to any kind of entertainment. If the outing includes tee times or show times, that portion of the expenses is still non-deductible. Be sure to have receipts documenting the details or you'll most likely lose the deduction for the full event.
JANUARY 15, 2021
Lancaster City Income Tax Rate Increase
Just a reminder to our Lancaster employers and residents that Lancaster's city tax rate increased effective 1/1/21 to 2.2%. Many payroll tax tables from national payroll services, including QuickBooks, do not include these local tax increases in their payroll updates, therefore, you'll need to manually adjust your rate. It's also a good idea to make sure you have updated your Ohio Unemployment tax rate too.
If you've already run your first 2021 payrolls and had not included this adjustment, the best fix is to let your employees know that you'll deduct the shortage from their next paycheck. They should understand that it should have been deducted from their earlier paychecks, so it's just a catchup adjustment. Communicating with them is the important thing.
There are a couple of other ways to correct as well. If this first option doesn't appeal to you, give your account manager a call and we can walk you through another option. If you're not a Snyder & Company client, discuss the options with your tax preparer or accountant.
DECEMBER 21, 2020
Reminder on New Charitable Deduction Rule
After the changes from the 2017 tax bill were fully implemented, many taxpayers no long itemize their deductions such as mortgage interest, taxes and charitable donations, as the standard deductions had increased significantly. It was better for most taxpayers to use the standard deduction, and their returns were less complicated.
Congress made an exception to these rules for 2020 as part of the CARES stimulus bill passed this spring. For this year, ALL taxpayers can deduct charitable contributions of up to $300, even if they otherwise use the standard deduction. This was intended to give qualified charities a stimulus boost, as they too were dramatically impacted by the pandemic. Just a note: you have to actually make the donations to qualify for the deduction, it's not a "gimme" in any way.
This deduction includes monetary gifts of cash, checks or credit card charges, as well as non-cash donations such as tangible items like clothing, furniture, etc. All the other rules are still in place as well - including:
Only gifts to qualified 501(C)(3) organizations will count;
The gift has to be made by December 31,2020 - this includes any checks postmarked and credit card charges made by that date, or items delivered to the charity by that date;
Non-cash items of clothing, toys, etc have to have a value calculated that is detailed and reasonable;
It's best to get a receipt from the charity acknowledging the donation, regardless of whether it's cash or items. A canceled check can be used in some situations, but a receipt is always the best.
The IRS has some great detail guidance on their website at this link:
https://www.irs.gov/newsroom/how-the-cares-act-changes-deducting-charitable-contributions
While this rule is intended to benefit a great number of taxpayers, and hopefully a great number of charities, there are a number of other charitable contribution strategies that offer a greater tax benefit to some taxpayers. If you'd like more information on these, please give us a call.
We are wishing you all a safe and blessed holiday season. Even as we scale back our holiday parties and travels, we can hopefully spend more quality time this season within our closer groups.
DECEMBER 11, 2020
IRA Distribution Rules Suspended For 2020
For 2020 only, as part of the Covid relief bill they passed this spring, Congress suspended the Required Minimum Distribution (RMD) rule that makes taxpayers with IRA's withdraw and pay tax on a minimum amount each year. Mostly it applies to those over age 70 1/2, but it can also apply to those who inherited an IRA. The objective of the rule is to make sure that tax is eventually paid on the funds. These were never intended to be permanently tax deferred. This one time relief was passed because of the market losses in the spring - Congress didn't want taxpayers to have to sell investments that had dropped in value, just to make the RMD.
The general wisdom is to leave as much in the IRA as possible, so it grows tax free. Therefore, this one time suspension on the RMD is worth considering. That said, every situation is different, so you should get some input from your trusted advisors.
Also, beneficiaries who inherited IRAs will still have to take the full amount out over the original maximum number of years. This deferral will increase your future RMD's; it doesn't add an extra year to the required distribution time limit.
The IRS has some helpful information on this as well:
If you're in this situation, this is something worth considering. As always, give us a call if you have any questions.
NOVEMBER 23, 2020
IRS Issues New Ruling on PPP Loans
As we've shared in earlier Tax Bytes, when Congress designed the program, it specified that the PPP Loan Forgiveness is NOT taxable income. The IRS released their position in the early summer that, although they recognize Congress's intent, there are other existing tax laws that still apply. These existing rules specify that any expenses paid by non-taxable income are not deductible.
The impact to taxable income is the same whether the loan is taxed, or the expenses are not deducted. Taxable income will be increased by the forgiven loan amount. It will take an act of Congress to change that outcome, and we all have opinions on when or if that will happen. This has been the world as we knew it all summer.
However, what we didn't know, was how to apply these rules when there are multiple tax years involved. Is taxable income increased in 2020, when the deductions were all paid, or in 2021, which is when most borrowers will receive the official forgiveness? To provide guidance, last week, the IRS issued Revenue Ruling 2020-27 - read through it, but the most important part is the HOLDING on page 8.
https://www.irs.gov/pub/irs-drop/rr-20-27.pdf
This Revenue Ruling gives us clarity as to which tax return(s) are impacted by the current law. Though in many ways their answer seems contrary to other tax rules, it does give us the practical answer.
In a nutshell, nearly all of the impact will fall on the 2020 tax returns. The IRS clearly says that if forgiveness is pending, or reasonably expected, (meaning presumably that a forgiveness application will be filed) then the expenses that are used to request forgiveness CANNOT be deducted in 2020, even though they were paid that year. Any payroll, rent, utilities that will be used to determine how much of the loan meets the forgiveness standards are not to be deducted on the 2020 tax returns. Presumably, if for some reason full forgiveness is not granted, it may be necessary to file an amended 2020 return if one has already been filed. To avoid amending, it may be prudent to extend filing of the 2020 return until the amount being forgiven is certain.
If you are trying to estimate your 2020 tax bill, you should definitely factor this impact into your numbers. Consider doing another "what-if" scenario without the tax hit, just in case Congress would provide some relief. For now, it is what it is.
As always, give us a call if you'd like to discuss more....or if you just need to vent....we're here for you.
NOVEMBER 2, 2020
BWC Approves 5-Billion-Dollar Dividend!
In response to Gov. DeWine’s request, the Ohio Bureau of Workers' Compensation has approved a 5 billion dollar dividend for Ohio employers. This dividend is expected to be mailed to eligible employers in mid-December.
Read more on BWC’s website:
OCTOBER 27, 2020
Small Business Relief
There are several exciting new grant opportunities available to small businesses and restaurant and bar businesses. The State has released Cares Act funds in the form of two grants that some of you are eligible to use. Applications will be accepted online Monday, November 2nd and will be first come first serve. Please note that you will be required to establish a registration with the State of Ohio and you will need to have the proper required documentation in electronic format as part of the application process. The list of required documentation and registration instructions can be found on the website under “Terms and Conditions for Participation” at https://businesshelp.ohio.gov/ More information on each of these grant opportunities can be found at the links below.
Click HERE for Small Business Relief Grant Info
Click HERE for Bar & Restaurant Assistance Fund
We encourage any of you that are eligible and considering applying to carefully read the information included in the resources provided.
OCTOBER 12, 2020
PPP forgiveness:
Ready, Set…..Almost.. for some of us……
On Thursday October 8, 2020 the SBA issued RIN 1505-AC71: "Business Loan Program Temporary Changes; Paycheck Protection Program - Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules"......wow, that's a mouthful (or eyeful I guess since we're reading this).
If you'd care to read the full text, here's the link:
I am not qualified to speak on the administrative rules of the government, and I'm not really sure what an "interim final rule" is, but it contains some meaningful administrative relief for those PPP recipients with loans of $50,000 or less. The SBA is now in the process of developing Form 3508S, which can be used by these "small recipients" to apply for expedited forgiveness. They will still have to attach support for the payroll and other qualifying expenses, but won't have to work through the complicated calculations for the other two hurdles. There is still a chance they won't qualify for full forgiveness.
The form has not been released, but it is expected to be a basic affidavit with a requirement to attach supporting documentation for the allowed expenses. If expenses cannot be validated then presumably the loan will not be fully forgiven. Banks are allowed to rely on the information provided without subsequent verification. We'll know more when the new form comes out.
The benefit of this process is that it allows small loan recipients to by-pass the additional tests for full-time equivalent employees and individual employee salary or wages. Without this provision, small recipients would have to incur additional time and expenses to calculate these thresholds, which are complex, and would face repayment requirements if they couldn't meet the thresholds. Of the 5.2 million PPP loans approved, 3.57 million, nearly 70% of them, will be able to use this process. Though this accounts for the majority of the number of loans, it only accounts for about 12% of the total dollars lent out.
For PPP loans above $50,000 but less than $150,000 we are still recommending a wait and see strategy. For loans above the $150,000 there is no reason to wait, but there is no hurry either. Of the 90,000 forgiveness applications filed since the portal opened in August, none have been reviewed by the SBA yet.
Hang in there......we're almost there.
We would greatly appreciate your time to review us on Google by clicking the link below.
Thank you in advance! It really means a lot to us!
Second, because the extended Covid related recovery has taken longer than anyone could have predicted in March and April, even with the relaxed requirements to only use 60% of the loan for payroll, and having a 24 week time period to use it, it is possible that some small businesses may not completely clear all three hurdles for forgiveness. If they can't, then they may have to pay some of the funds back. And you get into the finer details such as: what if I tried to rehire my employees but they refused to come back? Do I have to pay back some of the loan because I didn't get back to full employment? Patience is still the recommendation for this group.
For those with loan amounts in excess of $150,000, we recommend that they start the application process after they have their 3rd quarter payroll reports filed AND after their 24 week period is over. Some borrowers have already submitted their applications, but we are not aware of any who have yet been approved. There is no way to know how long the forgiveness application process may take.
If you'd like to get more specific details on the forgiveness application process, here's a link to the SBA's website for official guidance:
Remember, too, there is another key issue hanging out there: will there be any income tax consequences from this program? As the law stands today:
The loan is still a loan and sits on the balance sheet with no tax consequences.
The forgiveness, once obtained, is not taxable income according to Congress's rules.
The payroll and other expenses paid with PPP funds are non-deductible expenses, according to the IRS (based on the existing Tax Code).
Net result, the business's taxable income will be higher once the PPP forgiveness is granted.
Which begs the next question: what happens if the expenses are paid in 2020, but the loan isn't forgiven until 2021?...........good grief!!!
Stay Well. Stay Tuned. This year will be over....someday.
SEPTEMBER 4, 2020
Hot Off the Press:
A little guidance on the President's Executive Order
In our Tax Byte on September 1st, we shared what was known at that time, about the Presidential Memorandum that President Trump signed August 8th permitting the suspension of certain employee's social security tax withholding, essentially giving qualifying employees an immediate 6.2% pay increase. Because the President does not have the power to cut taxes without Congress's vote, it was written as a payroll tax deferral. It was not available to any employee essentially making $104,000 or more per year.
The IRS issued Notice 2020-65 last week, and has now given some clarification that was made available through our tax research providers.
Most important to note is that the employer is considered to be the "taxpayer" in the situation, and therefore the employer has the ability to opt-in, or can opt-out, of the program. If the employer opts-out, they should send a communication of such to its employees. We suggest again explaining to them that it is only a deferral program, and that the employee would have to pay back any deferred taxes next year.
If the employer decides to opt-in to the program, there are guidelines as to how to calculate qualifying payroll, what to do about bonuses, etc.
The big downside for the employer in this program is that, if an employee leaves the company prior to paying back the advance, for any reason, the employer is then responsible for repaying the amount. This is a strong disincentive for employers to participate. The risk to the employers that opt-out of the program is that if Congress would decide later to forgive the repayment for those employees, then the opportunity for a government benefit is probably lost.
The IRS is continuing to work on additional guidance. We again suggest talking to your tax advisor and employment law attorney.
Stay well!
SEPTEMBER 1, 2020
Payroll Tax Deferral
President's Executive Order
The President's order instructs Employers NOT to withhold the 6.2% social security on wages earned between September 1, 2020 and December 31, 2020, essentially giving EMPLOYEES a 6.2% pay increase. This only applies to employees who make less than $4,000 in any bi-weekly pay period.
While this sounds like a tax "cut", it’s actually a tax "loan". Repayment of these deferred taxes through extra withholding must start on January 1, 2021, and be repaid in full by April 30, 2021, or penalties and interest will be charged. The President has vowed he will try get these repayments forgiven, but nothing is certain.
There are additional details explained at the IRS's website and in its guidance, Notice 2020-65, that was released Friday, August 28th. QuickBooks, ADP and other larger payroll processors, are struggling to update their payroll process systems, especially without clarifying instructions. They are currently seeking additional guidance from the Treasury Department.
Additional information and Notice 2020-65 can be found in this link:
Our advice is to be patient and see what additional guidance is offered. Or contact your employment attorney to discuss your legal rights and responsibilities. Explain to your employees that (1) not everyone will qualify for the tax savings, and (2) it will have to be repaid in short time. They may be less interested in the temporary pay increase.
It's unclear whether or not employees can opt out this deferral, and whether or not employers will avoid additional penalties if something goes awry. For us & our employees....we are taking a wait-and-see-approach.
As always, call with any questions.
AUGUST 17, 2020
IRS still recovering - Take 2
We received this today in the IRS e-News for Small Business that validates what we suspected was the case. Here's an excerpt and the IRS's advice:
Issue Number: 2020-14
Inside This Issue:
1. Pending Check Payment and Payment Notice:
If a taxpayer mailed a check with or without a tax return, it may be unopened in the backlog of mail the IRS is processing due to COVID-19.
Any payments will be posted as the date the IRS received them rather than the date the agency processed them. To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.
To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and penalties may still apply. See www.irs.gov/payments for options to make payments other than by mail.
It's going to be very long Tax Season 2020 for sure - patience seems to be the order of the day.
As always, give us a call if you have any questions.
AUGUST 13, 2020
IRS still recovering from COVID
We know that the IRS cut back on staffing during the initial COVID quarantine, and we know that most departments are back up and running, including the Tax Practitioner line that we work with closely. We know that during April/May/June, many (maybe even most?) of the remaining IRS resources were shifted to focus on getting the stimulus checks out that Congress ordered. All of this has created a significant backlog.
The IRS staff are telling us when we call, that they are working through the backlog and to be patient with them. We are told to wait until "eight weeks after August 1" before we make any additional inquiries (their words, not ours).
This is just our general observation and advice, but we are surmising that the checks that were mailed to the IRS in June/July have been caught in the mailroom stockpile. Meanwhile, the IRS computer didn't need a COVID quarantine, and has been processing returns electronically through E-file. When the computer doesn't see the payment in the system to match the return, it kicks out a notice showing tax, penalty and interest due. If the payments are not caught up and posted in 30 days, another automatic notice may be generated in the next few weeks.
Be patient and don't be alarmed. Confirm with your bank first to make sure the check hasn't cleared. If it has, then there's a different issue that should be followed up on sooner rather than later. If the check has not cleared yet, then be patient and give it until "eight weeks after August 1" (September 25th that is); if the check still has not cleared, or if another late noticed is received, then it will be time to contact the IRS and work on a resolution.
Stay well!
JULY 31, 2020
The PPP Saga Continues
CAUTION: the following details are in reference to pending legislation in Washington - none of this is law yet.
On Monday July 27th, the Republican led U.S. Senate passed its next round of stimulus, referred to the HEALS Act, that spends another $1 trillion dollars on economic relief in response to the ongoing Coronavirus pandemic.
In May, the Democratic lead U.S. House of Representatives submitted their next round of pandemic stimulus relief in their bill, referred to it as The Heroes Act, at a price tag of $3 trillion dollars.
Now that both groups have submitted their proposals, the negotiations for a compromised bill can begin. With the clock ticking toward the November election, it is guaranteed to be an interesting process.
There are many articles available online contrasting these two bills, and trying to read their crystal balls on what a compromised package might look like.
Here's a link that provides more of an overview on the Senate bill:
This one provides a comparative summary of The CARES Act that was signed into law at the end of March, and the House presented Heroes Act and the newly proposed Senate HEALS Act:
All we can say is be patient, and stay tuned......
JUNE 4, 2020
PPP Loan Forgiveness - Version ??.0
The Senate passed the House measure with no real modifications. Any differences in concept will be settled by the SBA as it interprets the bill and devises guiding regulations. As we shared last week the highlights are:
Extends the covered period over which businesses can use the funds and still be eligible for forgiveness from eight weeks to 24
Lowers the 75% requirement for covered payroll costs to 60%
Extends the payback period for unforgiven amounts from two to five years
Extends the time to call all employees back to pre-COVID levels, though this time period has not yet been decided
Extends the time to file for forgiveness after the end of the covered period from 6 months to 10 months
Defers interest and payments until after the loan is forgiven
There are other provisions as well, but these are the highlights. Now we wait for the SBA's guidelines to give us more detailed instructions. While helpful, this continual fluctuation in the rules makes it very challenging to plan for complete forgiveness.
We anticipate that the Excel workbook we previously shared will be revised in the near term. Our best recommendation right now is to plan out the 24 week period, after the SBA provides more guidance, and see if there is anything further to do. If the funds are all spent properly and there is full forgiveness, then it will be a matter of filing the forgiveness application when you can.
Stay tuned.....and stay well!
MAY 18, 2020
SBA releases guidance on PPP Loan Forgiveness
The following is the link to the SBA's recently released Paycheck Protection Program Loan Forgiveness Application & Instructions. It does not resolve all the critical outstanding questions, but it does give guidance on some outstanding issues.
https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
So far, the 8-week period has not been extended. We understand that this will take an act of Congress, so it may be time to write to your legislator.
The new application form and instructions does clarify the beginning & ending of the period: it begins on the day the funds are received into the business checking, and that day counts as Day 1. Thus if the loan was approved on Tuesday, and the funds deposited into the business account on Thursday, the following Wednesday is the end of Week 1. Count forward from there.
Also, the instructions include provisions that allow payroll, rent and utilities that are incurred during the 8 weeks, but not yet paid by the end of it, to be counted, as long as they are paid by their next scheduled date. For instance, if your 8-week period ends during a payroll cycle, you can still count those wages to that date, even though they were not paid until the next regular pay date which is outside the 8-week period. The same holds true for rent and utilities. This clarification is helpful.
As we've said, the devil is in the details....always, always, always. Here is a link to a great article from Tony Nitti that walks through the application in non-technical terms and with good examples. Warning: refresh the caffeine drink of your choice before reading, it's still a lot of detail to work through.
The Excel spreadsheets we mentioned last week will need to be revised now for this guidance, and may be revised again before we're done with this whole process. If you would like a new copy, please email your account manager. As we shared last week, we are happy to provide you with a change order quote to assist with this. Just give us a call.
Stay well!
MAY 11, 2020
PPP Loan Forgiveness
While the PPP application process presented some challenges, as was expected given the speed at which the program was implemented, the loan forgiveness process makes the application process look simple. Various stakeholders have asked for clarification on a number of the details, and more are still needed. The SBA is continuing to issue new guidance and clarifications regularly. Visit their FAQ's frequently to see the most current:
The calculations for determining forgiveness are detailed and complex. To obtain full forgiveness, in addition to meeting the 75% payroll usage threshold, there is a full time equivalent (FTE) factor, as well as a requirement that no employee have more than a 25% reduction in actual pay. There are two optional lookback periods to benchmark this data against, and there are some allowed deductions that could be used to help meet the thresholds. This is not for the faint of heart!
We have two different Excel modeling tools that allow the user to factor in different assumptions to see the impact they would have on the amount forgiven. One of the tools is a condensed version, and would be best for someone with a straightforward situation. For those that need to plan for different contingencies, we have a second, more complex modeling tool that allows various assumptions & "what if" strategies. We did not create these tools, and each spreadsheet includes assumptions that impact the calculations. If requested, we can share these tools. There may be others available online as well.
We are here to help you though this maze, of course. We were happy to help our clients navigate the PPP Application process with no change order pricing, however planning the loan forgiveness will be much more involved. We will continue addressing your general PPP questions as part of our unlimited access service philosophy. Beyond general questions, there are three different levels of assistance that we think our clients may need. As each client's situation is unique, we will price this change order separately as requested. Below is a general scope and price range of this change order to give you a general idea:
Level 1 Some of the PPP situations will be more straightforward than others. We expect that clients may prepare calculations (perhaps using one of the tools noted above) and seek our feedback and recommendations on the calculations. At this level of service, we would look over your calculation once during the eight-week period and provide feedback and guidance to assist in your planning. We estimate the pricing for this level of service to range from $500 - $2,500.
Level 2 For those with more complexity and challenge, such as rehiring furloughed staff at different points during the eight-week period, there may be a need to prepare calculations and review the assumption and recommendations multiple times. At this level of service, we would review your calculations up to three times during the forgiveness period and provide feedback and recommendations. This would assist you in trying to maximize forgiveness of the loan when variables change during the forgiveness period. We estimate the pricing for this level of service to range from $1,500 - $5,000.
Level 3 We offer this level for clients who want us to take the lead over the process, where we will perform the forgiveness calculations, monitor and update the calculations with each payroll during the forgiveness period, and provide recommendations. We anticipate this would be for those with more complexity and variables. This level of service will help you stay on track to achieve maximum forgiveness of the loan and will differ greatly for each business. There are various factors and assumptions that will impact the pricing at this level (number of employees, number of furloughed employees, rehired employees, etc.). As such, we estimate the pricing for this level of service to range from $4,000 to $15,000.
We are here to take care of you in whatever ways makes the most sense, given your specific situation. Please call a member of your team to discuss your needs, and we can provide a firm customized quote for you. Thank you for your confidence in letting us help you navigate these unchartered waters.
APRIL 17, 2020
Possible Funding for Small Businesses
We have recently been made aware of another potential funding opportunity for up to a $5,000 grant for small businesses with 3 - 20 employees through the U.S. Chamber of Commerce Foundation. While we don't know all the details of the program, here's a link to their website if you'd like more information:
https://savesmallbusiness.com/#eligibility
MARCH 27, 2020
What is the Paycheck Protection Program? (A Simple Guide)
By Owen Yin on March 27, 2020
The U.S. federal government just passed a big coronavirus relief bill, aimed at supporting small businesses through this difficult time.
One of the measures in the bill is the Paycheck Protection Program—here’s everything you need to know.
Further reading: The Coronavirus Relief Bill—Every Benefit for Small Businesses
What is the Paycheck Protection Program?
The Paycheck Protection Program is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. You can read the bill in its entirety here.
Program highlights
· There is no cost to apply.
· The funding is meant to help retain workers, maintain payroll, and cover rent/mortgage/utility expenses.
· The loan covers expenses dating back to February 15, to June 30 2020
· The loan can be forgiven and essentially turn into a non-taxable grant.
Do I qualify for the program?
Likely yes! This program is more extensive than the SBA disaster loan. Small businesses, sole proprietorships, independent contractors, and self-employed individuals can all qualify.
· Sole proprietorships will need to submit schedules from their tax return filed (or to be filed) showing income and expenses from the sole proprietorship.
· Independent contractors will need to submit Form 1099-MISC.
· Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.
How does this differ from the SBA disaster loan?
· No personal or business collateral is required. The SBA disaster loan may require collateral for loan amounts over $25,000.
· It’s ok if you also have access to credit elsewhere. To receive a SBA disaster loan you generally need to have no other source of credit.
· The funding covers a more restrictive set of purposes (details below). The SBA disaster loan can cover most operating expenses.
· Your loan can be forgiven if you follow the terms. The SBA disaster loan requires repayment.
How is this similar to the SBA disaster loan?
· You need to demonstrate your business was economically affected by COVID-19.
· It’s free to apply.
· Your loan is long-term (maximum 10 years) and low-interest (maximum 4%).
· You have an extended deferment period (6-12 months, depending on your lender) before you begin repayment.
· There is no prepayment penalty.
What can I use the funds for?
You must acknowledge that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. Funds you use for other purposes will not be eligible for forgiveness.
The funds can be used for:
· Payroll and commission payments
· Group health care benefits/insurance premiums;
· Mortgage, rent, and lease payments
· Utilities
· Interest on any other debt obligations that were incurred before the covered period.
How much funding can I receive?
The SBA will ask you to provide documentation on your business’s payroll, mortgage, rent, and utility payments over the previous 12-month period. They will calculate the monthly average cost of those expenses. The maximum amount they can offer is 2.5 times that monthly average cost, but no more than $10 million.
If you are a seasonal employer, the monthly average cost will be calculated differently. The SBA will use a 12-week period beginning either February 15, 2019 or March 1, 2019, and ending June 30, 2019.
If your business did not exist before June 30, 2019, the SBA will look at your costs in January and February 2020.
Note that if you receive a loan under the Paycheck Protection Program, you may no longer be eligible for an EIDL SBA loan for the same purpose of covering payroll
How can I get my loan forgiven?
In the 8 weeks following your loan signing date, all expenses related to the following can be forgiven:
· Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
· Mortgage interest—as long as the mortgage was signed before February 15, 2020
· Rent—as long as the lease agreement was in effect before February 15, 2020
· Utilities—as long as service began before February 15, 2020
When submitting your application for loan forgiveness, you must provide the following documentation (no exceptions):
(1) Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in subsection (d), including:
· (A) payroll tax filings reported to the IRS
· State income, payroll, and unemployment insurance filings
(2) Documentation to prove your mortgage, lease, or utility payments
· cancelled checks
· payment receipts
· account statements
(3) A certification from a representative of the eligible recipient authorized to make such certifications that:
· (A) the documentation presented is true and correct; and
· (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
(4) any other documentation the Administrator determines necessary.
The lender must make a decision within 60 days of your forgiveness application submission.
What are the conditions for loan forgiveness?
The purpose of the Paycheck Protection Program is to, well, protect paychecks. You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period.
The amount that can be forgiven will be reduced…
· In proportion to any reduction in the number of employees retained.
· If any wages were reduced by more than 25%.
If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages, as long as you do this by June 30, 2020.
Note: These guidelines are based on the official 880-page bill. The SBA has been given 30 days to issue official guidance regarding loan forgiveness. We’ll share updates as soon as we learn of them.
JANUARY 2, 2020
Reminder of new Overtime Rules
Just a quick reminder that the federal government updated the overtime rules this year, with the new rules taking effect January 1, 2020. There are several updates in the new rules, and we suggest employers read more in the below links. The biggest impact will be the increase of base salary level for supervisory employees to be exempt from overtime. The previous limits of $455/week ($23,660/year), has been increased to $684/week ($35,568/year).
The price for violating DOL overtime rules include paying back overtime pay to the employees, as well as possible fines and penalties. It is important to have all employees, including those paid on a salaried basis, keep track of their hours weekly in case the DOL reviews the Company's pay practices and determines employees are owed overtime pay. If there is no documentation of their hours then they will be imputed by the government.
Here's more information:
US DOL News release:
https://www.dol.gov/newsroom/releases/whd/whd20190924
May 28, 2019
Reduction in Ohio Small Business Deduction
Currently, the State of Ohio exempts the first $250,000 of income for small businesses, and caps the income tax rate on the rest of the business income at 3%. Referred to as the Business Income Deduction, and calculated on the Ohio Schedule IT BUS, this rule passed originally under then Governor Kasich’s administration and his efforts to make Ohio more business friendly.
The change proposed in House Bill 166 would reduce the exemption amount to $100,000 and remove the 3% tax rate cap. The net result will be an increase in taxes on the business owners for most all of Ohio’s closely held businesses.
There are, of course, two sides to every issue. Ohio business owners offer that this tax reduction helps them be more competitive with larger chain stores, and they use their tax savings to invest in their businesses and communities. The other perspective is that this tax reduction only benefits a segment of Ohio taxpayers, and across the board tax rate reductions would benefit all taxpayers.
We suggest that all business owners make themselves aware of the issue, and talk with their accountant about the possible impact to them if this becomes law.
The following is a link to a post from the Lancaster-Fairfield County Chamber of Commerce that provides more detail on the Bill:
https://conta.cc/2EwpCzP
December 19, 2018
Does paying real estate taxes early still make sense?
For many of us, it has been a common tax savings strategy to pay our real estate taxes for the next year by December 31st, and to pay the State and Local income tax estimates due on January 15th before the end of December. Doing so made them a deduction for the current year, instead of having to wait until the following year’s tax return was filed almost 18 months later. Before you head over to the county auditor’s office, you should consider the new rules. It may no longer be worthwhile to do so.
The Tax Cut & Jobs Act passed in December 2017 was designed to reduce taxes. It order to reduce taxes some deductions were capped and others were completely eliminated. One of the deductions that was capped is the deduction for state and local taxes, now referred to as SALT. This deduction includes real estate taxes, as well as state, city and school district income taxes. Now, regardless of the total amount paid for these taxes, the most that can be included in itemized deductions for the year is $10,000.
If you’ve already exceeded this cap for the tax year, opting to pay taxes in December won’t make a difference when filing your 2018 tax return. And as we shared in previous Tax Bytes, many taxpayers will take the new larger standard deduction now, instead of itemizing, so it won’t make a difference in those situations.
If your total SALT amount is under this limit, give us a call and we can see if there are other strategies that makes sense for you.
We hope you are having a wonderful Holiday Season! Snyder & Company counts you as one of our many blessings.
December 14, 2018
What is a DAF, you ask?
In a prior Tax Byte, we recommended the use of a Donor Advised Fund, or DAF, as a way of maximizing your charitable contribution deduction. This fund is a charitable investment account, used to provide donations to the charitable organizations that you care about. Because a public charity holds the funds, you receive the tax deduction when you put the money into the fund, not when the fund sends the money to your charity.
Here’s the process:
· Setup the DAF with a qualified charitable foundation. This foundation must be IRS approved.
· Make a non-refundable donation of either cash or, better yet, appreciated stock, to the foundation.
· Give instructions to the foundation on who, when and how much you would like them to donate.
You need to understand that you do give up control of the donated funds. You have advisory privileges over which charities your fund will help, hence the name, Donor Advised Fund. The foundation will honor your donation wishes as much as possible, but there are restrictions and guidelines they have to follow. For example, they cannot make grants to individuals, even if there is a legitimate need.
Some foundations also limit grants to a specific charity, church or geographic area. Some may preclude grants to federally approved charities because that charity’s mission is not consistent with the foundation’s mission. The foundation staff will share this information with you when setup the Donor Advised Fund.
The benefit of this strategy can be significant, as you take the tax deduction all in one year, even though the money is sent to your charities over a number of years.
As always, complicated stuff…. please feel free to call us if you have any questions.
December 6, 2018
End of Year - Business Tax Write Offs
As we head into what I fondly call “holiday vortex” it’s a good time to think about your 2018 tax bill…okay, maybe “good time” is a stretch, but you know what I mean.
The Tax Cut & Jobs Act tax bill passed last December gave businesses the ability to completely write off fixed asset purchases, new or used, for the next 5 years. There are, of course, some restrictions, but in general, purchases of equipment, vehicles, office equipment, etc. can be completely expensed in the year they are acquired. The Sec. 179 Expense Election is still in effect too, so you can pick or choose the one that works best for your situation.
For example, if you financed the purchase of a $100,000 dozer, and you take delivery before the New Year’s Eve party, you can deduct up to $100,000 when you file your 2018 tax return.
The main requirement is that the asset be “placed in service” by 12/31/18. It does not matter how or when it is paid for, but it has to be in use by the end of the year. Just ordering it won’t get you there, it has to be delivered and functional. You can decide next year when preparing your 2018 tax return how much you want to write off.
It may be better to take the deduction in 2019 instead. If that’s the case, you can order it in December to take advantage of the year end deals, but take delivery next year. That will make it a 2019 expense.
In any investment decision, don’t just spend money to save taxes. Make sure it’s a good investment that will either make or save the business money.
As always, there are many more details involved here – give us a call if you have questions.
November 29, 2018
Preserving Tax Benefits of Charitable Gifts
(In honor of Giving Tuesday)
One potential impact of the new tax bill may be the reduction in donations to charities. Only taxpayers who can itemize their deductions get a tax benefit for making donations. That rule did not change, but the 2017 Tax Bill nearly doubled the standard deduction. As a result 28 million taxpayers will no longer use the itemized deduction to save taxes, including gifts to charities. They will just use the standard deduction (the good news is they don’t have to keep their receipt for donating clothing and household items.)
That said, there are still some ways to get tax benefits for donations, including:
· Taxpayers over age 70½ can make Qualified Charitable Distributions (QCDs) from their IRA. There are rules and limits, but done properly these withdraws are excluded from taxable income. Senior taxpayers can get this tax benefit whether they itemize deductions or not.
· A long-time charitable strategy that has not changed is the donation of appreciated stock. Taxpayers take a tax deduction for the VALUE of the stock, not what they paid for it. If they paid $100 for a stock that is now worth $5,000, and they donate the stock to the proper charity, their tax write off is the $5,000.
· Bunching donations in alternate years is another option, and using a Donor Advised Fund can enhance any of these strategies. Donor Advised Funds are established with charities such as our Fairfield County Foundation.
Sorry, but there is just no way to simplify these topics in a Tax Byte. It is food for thought. Talk to your tax professional. If that’s us, give us a call. If it’s not us, we are accepting new clients.
Thank you!
2017 Tax Reform: Highlights of the Tax Cuts and Jobs Act
Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Most of the changes will go into effect with the 2018 tax year. Many of the changes to individual taxes are set to expire after 2025; however, business provisions are structured as permanent. Here's a quick rundown of the key provisions of the new tax law. This is not an all-inclusive summary of the changes.
INDIVIDUAL TAXES
Lower tax brackets for individuals: the table below reflects the old and the new individual tax brackets and income ranges
Disappearing or reduced deductions, larger standard deduction. Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction. The standard deduction in 2018 will be higher than the amounts that were to take effect for 2018, as reflected in the following table:
Suspension of personal exemptions. Prior to the Tax Cuts and Jobs Act, individuals subtracted a personal exemption amount ($4,150) generally for the taxpayer, spouse, and any dependents to arrive at taxable income. The new law suspends the provision for deducting personal exemptions.
Limitation for deducting state, local, and property taxes. Prior to the Tax Cuts and Jobs Act, individuals could deduct as an itemized deduction income and property taxes paid at the state and local levels. The new law allows no more than $10,000 as an itemized deduction for these types of state and local taxes.
Limitation on deducting home mortgage and home equity interest. Prior law allowed for an itemized deduction for mortgage interest on home acquisition indebtedness of up to $1 million and home equity interest on indebtedness of up to $100,000. The Tax Cuts and Jobs Act limits the deduction for mortgage interest to $750,000 of home acquisition indebtedness and suspends the deduction for interest on home equity indebtedness. The lower limit will only apply to new mortgages occurring after December 15, 2017.
Medical expense threshold temporarily reduced. For the years 2013 through 2016, medical expenses had to exceed 10% of a taxpayer’s adjusted gross income before they could be deducted as an itemized deduction. The new law lowers the threshold to 7.5%, which is where the threshold was prior to 2013. This provision takes effect for the 2017 tax year; however, it is scheduled to expire after 2018.
Charitable contribution deduction limit increased. Prior law allowed taxpayers a deduction for charitable contribution that was generally limited to 50% of adjusted gross income. The new law increases this limitation to 60% of adjusted gross income.
Miscellaneous itemized deductions are suspended. Prior law allowed taxpayers to deduct as itemized deductions certain miscellaneous items once they exceeded 2% of adjusted gross income. These items include unreimbursed employee expenses, job search expenses, investment fees, safe deposit box rent, tax preparation fees, and various others. The new law suspends the deduction for miscellaneous itemized deductions.
Moving expenses no longer deductible and reimbursements now taxable. Prior to the Tax Cuts and Jobs Act, a taxpayer could generally claim a deduction for certain moving expenses incurred in connection with a new job if the workplace was at least 50 miles farther from the taxpayer’s former residence than the former place of work. Similarly, employers were able to reimburse employees for certain moving expenses, and those reimbursements were not includible in income for the taxpayer. The new law suspends the deduction for moving expenses and removes the exclusion from income of moving reimbursements. There are exceptions to these rules for military personnel.
Child tax credit increased. Prior law allowed a tax credit of up to $1,000 per qualifying child under the age of 17. This credit began to phase out when adjusted gross income exceeded certain levels. For single filers, the adjusted gross income phase-out started at $75,000, and for married couples filing jointly, the phase-out started at an income level of $110,000. The new law increases the credit to
$2,000 per child and increases the income levels of phase outs to $400,000 for married couples filing jointly and $200,000 for all other taxpayers.
Repeal of the Obamacare (Affordable Care Act) individual mandate. A non-tax provision of the Tax Cuts and Jobs Act is the elimination of the individual mandate that required individuals who were not covered by a health plan that provided at least minimum essential coverage to be subjected to a “shared responsibility payment”. This provision takes effect after December 31, 2018.
Increased exemption for federal estate and gift taxes. Prior law allowed the first $5.6 million ($11.2 million for a married couple) to be exempt from federal estate taxes. The new law doubles these exemption amounts.
Other individual tax provisions include the following:
o Modifications to how the “kiddie tax” is calculated;
o Longer holding period for “carried interest”;
o Ability to deduct personal casualty and theft losses is suspended, except for federally declared disaster areas;
o Deductions for “professional gamblers” are limited to the amount of gambling income;
o Eliminates charitable deductions for payments made to institutions of higher learning in exchange for the right to purchase tickets or seating to an athletic event;
o Eliminates the deductibility of alimony paid for divorce agreements executed after December 31, 2018. This provision also eliminates the inclusion of alimony as income for the receiving spouse;
o Suspends the tax-free nature of qualified bicycle commuting reimbursements;
o Increases the exemption amount for alternative minimum tax (AMT), which means less taxpayers will be impacted by AMT;
o Allows 529 plans to disburse funds not only for higher education, but also for tuition at elementary or secondary schools up to $10,000 per year.
BUSINESS TAXES
Corporate tax rates are reduced to 21%. Prior law subjected corporations (C-corporations) to graduated tax rates of 15% (income less than $50,000), 25% (income between $50,000 and $75,000), 34% (income between $75,000 and $10,000,000), and 35% (income over $10,000,000). Personal service corporations (doctors, lawyers, accountants, etc.) paid tax at a flat rate of 35%. The new law replaces these rates with a fixed rate of 21%.
Increased Section 179 expensing. Under prior law, a business could elect to expense up to
$500,000 of qualifying property in the year placed into service. The $500,000 was reduced once property purchases exceeded $2 million in a year. The Tax Cuts and Jobs Act increases the $500,000 to $1 million and the phase-out amount starts at $2.5 million.
Extended and expanded bonus depreciation. The new law allows business to deduct 100% of qualifying property placed in service after September 27, 2017 and before January 1, 2023. The percentage is scheduled to decrease annually from 2024 to 2027.
Shorter lives for farming equipment and machinery. The new law shortens the depreciable life for most farm equipment and machinery from seven years to five. Additionally, the new law allows for farming equipment depreciation to be calculated using the same method that non-agriculture businesses use.
Shorter lives for real estate improvements. The new law generally allows for most qualified improvement property to be depreciated over 15 years instead of longer periods of 27.5 years or 39 years.
Limitation on deductible interest expense. Under prior law, interest paid or accrued by a business generally is deductible in the computation of taxable income. The new law disallows interest expense that is in excess of 30% of a business’s adjusted taxable income. This provision generally applies to businesses with over $25 million in annual receipts.
Elimination of 2-year carryback for net operating losses. Prior law allowed for businesses who incurred a net operating loss (NOL) to carryback the loss to the two prior years and carried forward 20 years. The new law repeals the 2-year carryback option, except for losses incurred in farming. In addition, the new law limits the NOL deduction to 80% of taxable income for losses arising after 2017, and NOLs can be carried forward indefinitely.
Domestic Production Activities Deduction (DPAD) is repealed. Prior to the Tax Cuts and Jobs Act, certain types of businesses could take a 9% deduction for certain activities. This provision is repealed with the new law.
Restrictions on like-kind exchanges. Under prior law, the like-kind exchange rule provided that no gain or loss was recognized to the extent that property, which included a wide range of property from real estate to tangible personal property, is exchanged for property of a like-kind. The new law limits these exchanges to real estate.
Fringe benefit expense limited. Prior to the Tax Cuts and Jobs Act, a business could deduct 50% of expenses relating to meals and entertainment. The new tax law disallows the deduction of entertainment expenses.
Business deduction for pass-through entities. S-corporations and partnerships do not pay taxes at the entity level, but rather the income flows through to the individual shareholders or partners.Thus, the corporate tax rate cut noted previously would not apply to these types of entities. The new law provides for individuals to receive a 20% deduction for “qualified business income” from a partnership, S-corporation, or sole proprietorship subject to limitations. There are many complexities in the legislation regarding the deduction, as well as rules and regulations that will need to be issued by the IRS to further detail the nuances of this new Code section.