The Tax Cuts and Jobs Act (TCJA) contains 2 provisions that will impact the way taxpayers are able to use Net Operating Losses (NOLs) to offset taxable income. A taxpayer has an NOL when allowable deductions exceed taxable income in a year. Under prior tax laws, a taxpayer could carryback or carryforward the NOL to offset taxable income in a different year. If electing to carryback an NOL, a taxpayer could get an immediate refund of tax paid in prior years. If electing to carryforward an NOL, a taxpayer could use the loss as a deduction against future taxable income. The following is a summary of the changes made to the treatment of NOLs under the TCJA.

Carryback/Carryforward Changes
Prior to the recent tax law changes, business NOLs were eligible to be carried back 2 years or forward for the next 20 years to offset income in those years. The TCJA has eliminated the 2 year carryback period. For tax years ending after December 31, 2017, NOLs can only be carried forward, not back. Additionally, the 20 year carryforward limitation has been lifted, allowing losses to carry forward indefinitely. For NOLs generated in tax years ending December 31, 2017 and prior, they will still have a carryforward period of only 20 years. The new rules regarding carrybacks and carryforwards only apply to NOLs generated in tax years ending after December 31, 2017.  

There is one exception to this new rule. Farmers are still allowed a 2 year carryback period.

Limitation on NOL Deductions
Under old tax laws, an NOL could be used to offset all of a taxpayer’s income in a following year. However, starting with NOLs generated in tax years beginning after December 31, 2017, NOL deductions are limited to 80% of your taxable income.  NOLs carried over from tax years beginning before December 31, 2017 will be fully deductible against 100% of taxable income in future years.

The law lists two different effective dates for these changes to the NOL rules, one for years ending after December 31, 2017 and one for years beginning after December 31, 2017. This could be an oversight that is handled through a technical correction to the TCJA or it could stand. We expect more clarification on this as regulations are released in the coming year.

Tax Planning Considerations
Here are some things to consider if you have or expect to have an NOL:

• 2017 will be the last year to use a carryback to realize an immediate tax benefit by getting a refund of tax paid in a prior year. When carrying forward, you will need to wait a year or more to realize any tax benefit.
• Carrying back a loss doesn’t always get you the highest tax benefit. If you were in a lower income tax bracket in the prior year, the benefit would not be as high if you were using it in a year that you are in a higher tax bracket. If you are expecting higher income next year, you might get a higher tax benefit by carrying forward the loss. For example, if your NOL is $100,000 and you were in the 15% tax bracket in the carryback year, your tax benefit would be $15,000. However, if you expect to be in the 35% tax bracket next year, your tax benefit would be $35,000 for a difference of $20,000 in tax savings!
• If you have NOLs from before and after December 31, 2017, they will need to be tracked separately so that they can be applied to 100% or 80% of taxable income as warranted.
• The generation of NOLs is expected to increase as a result of the increased bonus depreciation deductions allowed. However, it could be better to save these deductions for a year when they can be used against 100% of taxable income as depreciation rather than limited to 80% of taxable income as NOLs. If you expect a business loss, consider saving the purchase of equipment for the following year, if possible.

​
The TCJA also added a provision that limits the business losses that are able to offset other non-business income. Any business losses not allowed due to this rule are able to be carried forward as NOLs. We will cover this new business loss limitation in next week’s Tax Act Tuesday article.

As always, tax laws are complicated. Be sure to ask your client service contact how the new rules will impact you.

Do you have a question about a specific provision in the new tax law? If so, send your question to marketing@rlhcpa.com and we could feature your question in an upcoming edition of our Tax Act Tuesday blog!

On January 11, 2018, the IRS released new federal income tax withholding tables for 2018 via Notice 1036. These new tables reflect changes made by the Tax Cuts and Jobs Act passed in December. Employers should begin using the tables as soon as possible and no later than February 15, 2018. The new tables are designed to work with existing Forms W-4 that employers have on file and reflect changes in the standard deduction, repeal of personal exemptions, and changes in tax rates and brackets. The IRS is working to revise their online tax calculator, which they anticipate will be done by late February.

The IRS expects that most employees will see an increase in their paychecks after use of the new withholding tables. A copy of the new withholding guidelines can be found here.

The IRS also issued Notice 2018-14 that outlines the following points:

• Use of the 2017 Form W-4 to claim exemption from income tax withholding for 2018 is allowed.
• Employees are no longer required to give their employers a new Form W-4 within 10 days of a change of status resulting in fewer withholding allowances.
• The optional withholding rate on supplemental wage payments is 22% for taxable years 2018 through 2025.
• Withholding on annuities or similar periodic payments where no withholding certificate is in effect is based on treating the payee as married and claiming three withholding allowances.

Act 72 (HB 1421) clarifies that annual registration statements must be postmarked by the annual due date of the filing rather than received by the BCO by the due date. This change puts the Bureau in line with the IRS and other taxing authorities.
​
Act 72 also increases the deemed approval time for charitable organization, solicitor, and fundraising counsel registration filings from 10 to 15 days, giving the Bureau more time to review and process registration filings.

Additionally, the Bureau revised Form BCO-10 in August 2017. Be sure to use this new form when filing your annual registration statements this year. Please let us know if you need any help in meeting these filing requirements.  

February 28 – Payers must file most other Forms 1099 (except certain Forms 1099-MISC due Jan. 31) with the IRS. (April 2 if filing electronically.)
 
March 1 – Farmers and fishermen who did not make 2017 estimated tax payments must file 2017 tax returns and pay taxes in full.
 
March 2 – Automatic extension deadline for employers and health care providers to provide Forms 1095-B and 1095-C to individuals.
 
March 15 –

• 2017 calendar-year S corporation income tax returns are due.
• 2017 partnership returns are due.
• Deadline for calendar-year corporations to elect S corporation status for 2018.

Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe into that world.

The IRS is paying close attention
The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you’ll have to report your transactions in Bitcoin and the like to the IRS. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you don’t, you just might be!
​
It’s property, not money
Note that the IRS doesn’t consider Bitcoin or other virtual currencies as money, because they aren’t legal tender. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it as income based on its fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.
​
Be aware of the risk
In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances. Do your research on storage and security before you invest. And if you need help with any tax questions related to virtual currency, don’t hesitate to call.

For many business owners, building their successful businesses began by accurately determining what they had. Whether their businesses provide products, services, or ideas, the success they experienced didn’t come to them blindly. It likely took years of refinement, study, and analysis to figure out the best way to establish and deliver the thing that makes the business successful. The same is true when discussing business exits.
​
As owners set their business exit goals, they may find that the resources that they currently have do not allow a financially independent business exit. That is, if those owners were to exit their businesses with their current resources, they would likely need to go back to work at some point to stay personally solvent. For those owners, a business exit is less a retirement and more of a headfirst dive into a pool of new challenges and opportunities. When they dive headfirst into that new phase, they want to make sure there’s enough water in the pool to keep them afloat after they’ve jumped.

Owners who exit their businesses on their terms and who can dictate how they spend their post-exit lives tend to show similar patterns of action. After they establish what their business exit goals are, they evaluate the resources they currently have versus the resources they believe they will need to achieve a financially independent future beyond the current business. The difference between what you have now and what you need for financial freedom is called the Asset Gap.
Sometimes, the Asset Gap is small or non-existent. Many owners believe that they fall into this bucket. They believe that they have more than they will need or that their businesses are worth more than they are. However, it’s much more common for owners to discover—sometimes too late in the process of exiting their businesses—that they’ve overestimated what their businesses are worth to a potential buyer while underestimating what they need to live the post-exit life they desire. How does this happen?

Overestimation of the business’ value occurs when owners take a biased view of their companies and assume that their companies are worth as much or more than similar companies, possibly based on an assumed rule of thumb that doesn’t really exist. It makes sense that owners fall into this mind-set: They’ve often built their businesses from the ground up and have reaped the benefits of their success. Because they’ve put so much work and money into the business, they tend to put an overly subjective value on the business. When they look to find buyers, they can be surprised—and sometimes offended—when the value of the business to them doesn’t reflect the value of the business to the potential buyer.

Underestimation of post-exit needs occurs when owners assume that they can live on less than what they currently spend. However, the opposite is usually true. Do you plan to downsize your house, get rid of your nicest car, travel less, and avoid new hobbies or business ventures? In short, living on less after exiting is often an unachievable and unbelievable myth.
​
Do you know what your business is worth objectively? Do you know how much money you’ll really need to exit your business on your terms? Do you have an accurate estimate of how long you’ll likely live after you exit? Do you feel comfortable predicting how the markets will do far into the future? If not, contact us today. We work to help business owners find out what they have so that they can take steps to turn it into what they need.