As always, should you have any questions or concerns regarding your tax situation please feel free to call.
Mileage rates for travel are now set for 2019. The standard business mileage rate increases by 3.5 cents to 58 cents per mile. The medical and moving mileage rates also increase by 2 cents to 20 cents per mile. Charitable mileage rates remain unchanged at 14 cents per mile.
Remember to properly document your mileage to receive full credit for your miles driven.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
A new deduction is available to businesses with qualified business income (QBI). While that's great news, new deductions (especially ones with lots of rules) can bring anxiety and confusion. Never fear! Ensuring you receive a maximum deduction will come down to providing the proper information. Here is some knowledge to help you cut through the confusion:
What is the QBI deduction?
In short, it's a 20 percent deduction against ordinary income, taken on your personal tax return, that reduces qualified business income earned for most pass-through businesses (sole proprietorships, partnerships and S-corporations). It's not an itemized deduction, so you can take it in addition to the standard deduction. To qualify without limitations, your total taxable income needs to be below $157,500 ($315,000 for married couples) for 2018. If your income exceeds the threshold, it gets complicated.
What you need to know:
As the year winds down, business owners can be thankful for the gift of perspective (among other things, we hope). Assuming you created a budget for the calendar year, you should now be able to accurately assess that budget by comparing its estimates to actual results. Your objective is to determine whether your budget was reasonable, and, if not, how to adjust it to be more accurate for 2019.
Identify notable changes
Your estimates, like those of many companies, probably start with historical financial statements. From there, you may simply apply an expected growth rate to annual revenues and let it flow through the remaining income statement and balance sheet items. For some businesses, this simplified approach works well. But future performance can’t always be expected to mirror historical results.
For example, suppose you renegotiated a contract with a major supplier during the year. The new contract may have affected direct costs and profit margins. So, what was reasonable at the beginning of the year may be less so now and require adjustments when you draft your 2019 budget.
Often, a business can’t maintain its current growth rate indefinitely without investing in additional assets or incurring further fixed costs. As you compare your 2018 estimates to actuals, and look at 2019, consider whether your company is planning to:
Rent additional space
External and internal factors — such as regulatory changes, product obsolescence, and in-process research and development — also may require specialized adjustments to your 2019 budget to keep it reasonable.
Find the best way to track
The most analytical way to gauge reasonableness is to generate year-end financials and then compare the results to what was previously budgeted. Are you on track to meet those estimates? If not, identify the causes and factor them into a revised budget for next year.
If you discover that your actuals are significantly different from your estimates — and if this takes you by surprise — you should consider producing interim financials next year. Some businesses feel overwhelmed trying to prepare a complete set of financials every month. So, you might opt for short-term cash reports, which highlight the sources and uses of cash during the period. These cash forecasts can serve as an early warning system for “budget killers,” such as unexpected increases in direct costs or delinquent accounts.
Alternatively, many companies create 12-month rolling budgets — which typically mirror historical financial statements — and update them monthly to reflect the latest market conditions.
Do it all
The budgeting process is rarely easy, but it’s incredibly important. And that process doesn’t end when you create the budget; checking it regularly and performing a year-end assessment are key. We can help you not only generate a workable budget, but also identify the best ways to monitor your financials throughout the year.
The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.
Gifts to customers
When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”
Gifts to employees
Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”
These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.
Gifts that give back
If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.
The Tax Cuts and Jobs Act (TCJA) didn’t change the federal tax credit for “increasing research activities,” but several TCJA provisions have an indirect impact on the credit. As a result, the research credit may be available to some businesses for the first time.
What types of expenses qualify for the Research Credit?
Qualified research expenses (QREs) eligible for the research expense credit are amounts the taxpayer, or a startup company, pays or incurs during the tax year for in-house and contract research expenses while carrying on a trade or business. QREs have to be eligible for treatment as research and experimental expenses, undertaken to discover information that is technological in nature, intended to develop a new or improved business component, and elements in a process of experimentation. Expenses do not qualify as QREs if they are for research conducted outside the U.S.; research in the social sciences, arts, or humanities; and research to the extent funded by any grant, contract, or otherwise by another person.
Previously, corporations subject to alternative minimum tax (AMT) couldn’t offset the research credit against their AMT liability, which erased the benefits of the credit (although they could carry unused research credits forward for up to 20 years and use them in non-AMT years). By eliminating corporate AMT for tax years beginning after 2017, the TCJA removed this obstacle.
Now that the corporate AMT is gone, unused research credits from prior tax years can be offset against a corporation’s regular tax liability and may even generate a refund (subject to certain restrictions). Therefore, it is a good idea for corporations to review their research activities in recent years and amend prior returns if necessary to ensure the corporation claims all the research credits that they are entitled to.
The TCJA didn’t eliminate individual AMT, but it did increase individuals’ exemption amounts and exemption phaseout thresholds. As a result, fewer owners of sole proprietorships and pass-through businesses are subject to AMT, allowing more of them to reap the benefits of the research credit as well.
More to consider
By reducing corporate and individual tax rates, the TCJA will also increase research credits for many businesses. Why? Because a portion of the tax code that prevents double tax benefits requires businesses to reduce their deductible research expenses by the amount of the credit.
To avoid this result (which increases taxable income), businesses can elect to eliminate the double benefit by reducing the credit by an amount calculated at the highest corporate rate. The highest corporate rate has been reduced from 35% to 21% with the TCJA, so with this election, a higher percentage of the research credit remains.
Keep in mind that the TCJA didn’t affect certain research credit benefits for smaller businesses. Pass-through businesses can still claim research credits against AMT if their average gross receipts are $50 million or less. Qualifying start-ups without taxable income can also still claim research credits against a maximum of $250,000 in payroll taxes.
Do your research
If your company engages in qualified research activities, now is a good time to revisit the credit to be sure you’re taking full advantage of its benefits.
Tax Act Tuesday: How did the Tax Cuts and Jobs Act (TCJA) impact depreciation of automobiles used in a business?
When it comes to an automobile used in your business, special limitations apply which may result in it taking longer for you to depreciate a car than it would other business property. If you are using the actual expense method in calculating the depreciation allowance, an automobile is treated as an asset with a 5-year recovery period. Under the regular depreciation tables, the cost of an automobile is actually depreciated over a 6-year span according to the following percentages: Year 1 - 20%, Year 2 - 32%, Year 3 - 19.2%, Years 4 and 5 - 11.52%, and Year 6 - 5.76%. Six years are involved because depreciation is deemed to start in the middle of Year 1 and end in the middle of Year 6. (These percentages are not available for cars used 50% or less for business purposes. For those, straight-line depreciation is required.)
However, under additional limitations applicable to cars, you are limited to specified depreciation ceilings, under “luxury automobile” rules. These ceilings operate to extend depreciation beyond the sixth year for cars costing more than what the total depreciation allowance would be over the six years. You cannot avoid these limitations via an election to “expense” the car (a Section 179 election). With these limitations applying, it may take longer than the regular six years to depreciate the entire cost of the car, if it is not disposed of sooner.
Prior to the Tax Cuts and Jobs Act, the annual depreciation limit amounts for a passenger automobile were:
The Tax Cuts and Jobs Act increased the base limitation amounts for depreciation allowed on passenger automobiles and also changed how the index for inflation adjustments will be handled for future years. For passenger automobiles placed in service during 2018, the annual depreciation limits will be:
What about Bonus Depreciation?
While the election to expense under Section 179 does not impact the limitations above, the same is not true of bonus depreciation. The TCJA modified Code Section 168(k) to extend the additional (bonus) first-year depreciation deduction for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2027.
Under the TCJA, a 100% bonus first-year deduction of the adjusted basis is generally allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023 (for certain property with longer production periods, the end date is increased by one year). Used passenger automobiles will be eligible for bonus depreciation under the expanded bonus rules, and thus eligible for the increase as well. In later years, the first-year bonus depreciation deduction phases down, as follows:
In the case of a passenger automobile, for qualified property acquired and placed in service after September 27, 2017, the first-year depreciation allowed under Code Section 280F is increased by $8,000. The depreciation limits for passenger automobiles acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2018, for which the Code Section 168(k) bonus first year depreciation deduction applies, are:
SUVs and Other Large Vehicles
Because of the restrictions for cars, you may be better off tax-wise (if not gasoline mileage-wise) if you buy a sport utility vehicle (SUV) instead of a car. That's because the regular annual depreciation and expensing caps for passenger automobiles don't apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. You may also be eligible to elect to expense (see above) up to $25,000 of the cost of the SUV and then depreciate the remainder of the cost. These tax benefits are subject to adjustment for non-business use (and the more-than-50% business use rule discussed below). Even better, if you haven’t elected out of bonus depreciation on 5 year property, you may be able to expense the entire cost of the vehicle in the first year.
To maintain their lifestyles in retirement, many top execs would like to set aside more dollars annually than is allowed under a qualified plan, such as a 401(k). One way an employer can help them do so is by setting up a nonqualified deferred compensation (NQDC) plan.
NQDC plans are contracts that defer a certain amount of compensation to a future point in time, such as retirement. They don’t have to comply with the nondiscrimination rules or contribution limits that apply to qualified plans.
Because the promised compensation hasn’t been transferred to your executives, it’s not yet counted as earned income — and therefore it isn’t currently taxed. This reduces current taxes and allows the compensation to grow tax-deferred.
There’s a catch
Although NQDC plans aren’t subject to many of the qualified plan requirements, they are subject to Internal Revenue Code Sections 409A and 451 — which don’t apply to qualified plans.
Sec. 451 sets the parameters for income taxation of NQDC, and Sec. 409A imposes strict requirements on the timing and form of NQDC payments and of any subsequent change in their timing or form.
3 points to remember
Here are three specific compliance points to keep in mind:
An effective way
Penalties for noncompliance with NQDC plan rules are harsh for the recipient. They may include taxation of any vested benefits at the time of the deferral plus a 20% excise tax and a “bump-up” in the tax underpayment interest rate.
When the rules are followed, however, these plans allow executives to amass greater savings for later in life, while their employers continue to benefit from their leadership skills. Our firm can provide more information and help you design and implement the right NQDC plan.
Conduct an online search of the phrase "side hustle" and you will find websites with countless ideas on how you can make some money on the side. The ideas range from carpet cleaning to podcasting. What a lot of these sites fail to inform you, is the tax implications that come from the additional income. Here are five tips to help you stay on top of your side hustle taxes:
The IRS recently issued proposed regulations that further clarify the new Section 199A deduction, which allows for a 20% deduction against qualified business income for some business owners. This week, we will discuss new information the regulations provide regarding calculation of the deduction when a taxpayer owns multiple businesses.
The Tax Cuts and Jobs Act implied that the qualified business income deduction would need to be calculated on an entity by entity basis. However, taxpayers owning more than one business entity may be glad to hear that the recently released IRS proposed regulations allow taxpayers to aggregate those entities eligible for the Section 199A deduction. The IRS reasons that the aggregation rules will allow business owners to maximize their Section 199A deduction without the hassle and potential expense of shifting income, W-2 wages, qualified property, etc. between entities for the sole purpose of the deduction. This could become a great tax savings strategy for many taxpayers.
Who qualifies to aggregate?
First, in order to aggregate, the businesses must be majority owned (50% or more) by the same person or group of persons (directly or indirectly). Because the IRS mentions “group of persons,” this does not exclude non-majority owners from the aggregation benefits, but rather allows them to aggregate so long as the group of persons (who when combined are majority owners) all elect to aggregate. The entities also must be on the same tax year – hence you can’t combine a December 31 year end entity with a June 30 year end entity for the deduction. Also, none of the entities can be a specified service trade or business. See last week’s article to determine if your business could be defined as a specified service trade or business and subject to this limitation as well as others.
Finally, two of the following three factors must be met in order for the businesses to be considered part of a larger, integrated trade or business, and thus able to aggregate:
What if I lease property to my business?
Another item of importance to note is that regulations allow for aggregation of entities beyond a trade or business, if one of the entities is involved in the rental or licensing of tangible or intangible property to a related trade or business assuming they are under common control. This comes as a welcomed addition to the aggregation rules, benefiting those taxpayers who have separate entities set up from their primary business for the purpose of renting property to that business. Since many of the rental entities commonly do not pay wages or have qualifying property for the 199A deduction, the income from the rental activity would not be eligible and thus the potentially significant deduction would be lost for good. However, considering this piece, the rental income can now be aggregated with the other business income and thus eligible for a potential deduction.
Will an election be necessary?
There are however, rules and requirements set forth that need to be met in order for the entities to be aggregated. First, the IRS states that aggregation is permitted but is not required. Therefore, taxpayers have the option to do so, with the default being that the businesses will be assessed for the deduction individually, unless taxpayers make the specific election to aggregate. Once the election is made, individuals must consistently report the aggregated group in subsequent years.
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