Category Archives: IRS

The (potential) 20% Deduction Business Owners Should Understand

Last December, one of the biggest (real news) headlines was the drastic tax reform working its way through the legislative process. The Tax Cuts and Jobs Act (TCJA) was officially signed into law by President Trump on December 22, 2017 and it represents the most comprehensive tax reform in decades.

The more dramatic changes have been well publicized, but as with much of the Internal Revenue Code, some of the logistics are hard to comprehend. Arguably the most reformative of these changes is the Section 199A Deduction for Qualified Business Income. The Qualified Business Income Deduction (QBID) exemplifies congresses intent to organically aid in the growth of business. Staying consistent with the right’s traditional nod to trickle-down economic theories, the current administration is betting that increased liquidity via tax savings will be reinvested in capital assets and hiring.

QBID is a “below the line” deduction on Form 1040 that is available to sole proprietors and recipients of pass-through income (i.e. from S-Corporations and Partnerships). It is likely that part of the initiative behind QBID was to even the playing field for businesses not operating as C-Corporations. Under the TCJA, C-Corporations now enjoy a flat 21% tax rate; with individual rates being as high as 37%, a business operating as a C-Corp could otherwise have advantages over S-Corps or Partnerships whose owner(s) reside in the top tax bracket. It seems to this author that the extension of the corporate tax break to small business owners not only fit the republican economic agenda, but it also is likely to have helped proponents of the bill increase public support amongst business owners.

To narrow the gap in tax rates between large corporations and small businesses, congress decided to allow individuals a deduction on their personal tax returns equivalent to 20% of QBI (qualified business income). Assume for purposes of an illustration that the only item on a single filer’s tax return is $150,000 of business income and that they take the standard deduction. In 2018 this nets to $138,000 of taxable income and $27,410 of tax. Now consider all things the same, except the $150,000 of business income is qualified within the confines of QBID. In the later scenario, the taxpayer’s taxable income nets to $110,400, with tax of $20,786 and a net tax savings of $6,624 because of the new deduction.

As with most tax breaks in the Internal Revenue Code, there are however caveats, and they are complicated. There is an income threshold for example: single filers with taxable income above $157,500 (or $315,000 for joint filers) will need to consider their employees’wages and the company’s depreciable assets into their QBID calculation, as their deduction will be limited by one of these two factors.

Further, a taxpayer is subject to a complete phase-out of the deduction if he or she works in one of the few service industries specified by congress “where the principal asset is the reputation or skill of one or more of its employees.” Services in the fields of health, law, accounting and consulting are a few that fall into this category. If the AGI of a professional in one of these fields exceeds $207,500 (or $415,000 if they file joint) then the QBID escapes them entirely.

There was in fact a bit of “fake news” surrounding the legislation in regards to how the Tax Cuts and Jobs Act was going to “simplify” the tax code. For some taxpayers, it probably did, the increased standard deduction will mean that many taxpayers will no longer need to itemize deductions. For other taxpayers however, specifically those who own a business, the tax environment got more complicated. The word “potential” is the best way to describe the QBID. Taxpayers whose income typically falls near the thresholds are going to have to be meticulous in how they structure things both at the entity level and on their personal returns to maximize the potential QBID. Diligent tax preparers are working with their clients to navigate the regulations and some interesting strategies are being passed around the CPA community. In the end it is going to come down to effective tax planning. Far too often taxpayers inadvertently omit deductions they would otherwise be entitled to had they planned properly. The QBID has potential to save a lot of people a lot of money, they just need to do their homework.

John Massey is a Senior Accountant at Perry, Fitts, Boulette & Fitton CPAs. He helps individuals and businesses with tax planning preparation and works on compiled and reviewed financial statements for businesses. He can be reached at 207-873-1603.

Business Owners: On Your Mark, Get Set, Go!

The start of the New Year marks the beginning of the IRS  informational reporting season that will keep most business owner’s heads spinning. None are overbearing or difficult unless, of course, you don’t get them right the first time. Failure to correctly file W-2 and 1099 forms could get 2017 off to a not-so-happy start.

Wage reporting statements:

W-2 forms must be furnished to employees and filed with the Social Security Administration no later than January 31, 2017. It is possible to request a 30 day extension by submitting Form 8809. If errors are made with the initial filing, W-2c forms can be used to correct them. My advice is to work with your tax professional to make sure that you get them right the first time.

The IRS list the most common mistakes such as omitting decimal points and cents, using a font that is too small or large, (12-point Courier font is recommend), and incorrectly checking the “Retirement plan” box.

My experience suggests that a more careful look into the numbers that make up taxable wages will save you both time and money. Here are our top suggestions to correctly file W-2 forms:

    • Incorporated businesses filing form 1120S are required to include fringe benefits into > 2% shareholder’s taxable income. Fringes include: health insurance, HSA plans, and personal use of company owned vehicles. You should contact your payroll provider to make sure they have the information needed.
    • Employee business expense reimbursements made under an accountable plan are generally not required to be included on form W-2. Payments made as part of a non-accountable plan must be reported as taxable wages. Be sure to communicate any reimbursement plans to your payroll and tax providers as the substantiation requirement are very strict.
    • Employers Earned Income Credit notice. All employers must notify employees who have no income tax withheld that they may be able to claim an income tax refund as a result of the Earned Income Credit (EIC)

Penalties for failure to correctly file W-2 forms by the due date can range from $50 to $260 per W-2.

Informational returns:

Warning, this is not for the faint of heart! There are over 30 informational returns that a business might be required to be file including payments for: interest, dividends and rents. Reporting is also required for payments to: foreign persons, crew members of fishing boats, and attorneys.

1099 MISC Forms that report nonemployee compensation are required to be filed for all non-incorporated service providers, not considered to be employees, who have been paid more than $600.

Many business owners consider these filings as trivial and not worth the effort. Sound familiar? Please heed my warning, these informational returns are essential to the U.S. Treasury that failure to correctly file them can and carry penalties ranging from $50-260 per informational return. Small Business Owners do have the special privilege of having the penalty capped at $1,064,000 per year.

As you look to start 2017 on the right foot, I suggest that you take the time to meet with your tax professional and payroll provider to make sure that your informational returns are filed right the first time.

About the Author: Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

 

MARK YOUR CALENDARS FOR NEW TAX RETURN DUE DATES AND EXTENSIONS

Here at  Perry, Fitts, Boulette & Fitton CPAs, we’re already looking forward to next tax season! While we’ll try to enjoy the beautiful Maine summer weather, we’re always thinking of taxes. We have some good news and bad news. The good news is: partnership returns will be due March 15 rather than April 15. The bad news is: partnership returns will be due March 15 rather than April 15. So, on one hand, it will be easier to prepare your 1040 by April 15 because your K-1’s will (should) be ready. But on the other hand, we’ll all have to start gathering our information earlier to meet this new deadline. Note: the due date for an S Corporation remains March 15.

If you are an employer distributing W-2s or required to issue 1099s – these forms need to be filed with IRS/SSA by January 31 (the same day they are due to the taxpayer). They used to be due to IRS/SSA by February 28.

This new legislation made other changes to due dates and extension due dates.

If you have any questions, please call us for details. Enjoy your summer and rest assured we’ll be watching the tax news for any changes that pertain to you.

IT’S BETTER TO GIVE THAN TO RECEIVE

Since moving to the Mid-Coast area a few years ago, my wife and I have been called upon many times to help a number of local charities. We are very strong believers that it is our obligation to make our community stronger during our brief stay in this wonderful world so we choose to help where we can. We ask all readers to support their favorite local charities as they are the heartbeat of society, making a difference in all of our lives.

Two of our favorites include the Bath YMCA and Big Brothers Big Sisters. For over 150 years, the Bath YMCA has promoted healthy living and provided youth with a safe place to grow. BBBS has been creating nurturing relationships for children facing adversity since 1904. Clearly both organizations make a positive impact on the lives of youth in our area. What they also have in common is that they are both qualified charitable organizations defined under the IRS Code.

As most already know, donations to nonprofit groups like the YMCA and BBBS are tax deductible if you itemize deductions. By definition, a donation is voluntary and is made without getting, or expecting to get, anything in return. To be deductible, a donation must also meet other strict criteria as outlined in IRS Publication 526.

Most of you reading this column have a good handle on what is deductible. Donations to the annual appeal at church, the building fund at the hospital and expenses paid when you volunteer at the museum are all examples. What you cannot deduct are the cost of raffle tickets bought to benefit a charity, the value of your volunteer time, the value of your blood given at the local blood drive, political contributions or the cost of your girl scout cookies. (…sigh)

Donations can get a little sticky when goods or services are received as a result of the contribution. Take for example, the local fundraising silent auction that you pay $1,000 to stay a beach house. If the fair value of that stay is $1,000, you have not made a contribution and no deduction is allowed. If, however, you pay $1,500 for the same stay you could be entitled to a $500 deduction.

For those who think that there is a safe amount that can be deducted be warned, the IRS has many strict rules for deducting charitable contributions. The rule that impacts most people is the requirement that individual contributions of $250 or more be backed with a written acknowledgement from the qualified organization. The acknowledgement must be in your possession before you file your return, include a description of the gift and a statement as to whether you received any goods or services as a result of the contribution.

My wife and I firmly believe that we all have an obligation to give back. Giving back is the life blood for local charities, and the tax deduction feels good too. The next time you attend a charity auction, bid high and bid often.

WHAT DO SUPER BOWL SUNDAY AND TAX RETURNS HAVE IN COMMON?

Other than the time of year they occur, the one shining answer is Fantasy Football Leagues. The popularity of these leagues have forced the IRS and Certified Public Accountants all over the United States to begin asking the question: Are my winnings from these online leagues taxable?

What is Fantasy Football?

Fantasy Football is defined to work in such a way that, according to the NFL, “You decide what type of league you want to participate in, acquire a roster of players (either through a draft or through auto pick assignment), then set your lineup each week during the season and watch as touchdowns, field goals, yards gained, sacks, interceptions and much, much more generate fantasy points for or against your team. Whether you win or lose and climb or fall on the leader board all depends on how well you maximize the talent on your roster each week.”

How Does This Affect My Taxes?

Just like any other sort of income, a determination must be made as to the taxability of such income. Unfortunately, the IRS has not ruled specifically on the treatment of Fantasy Football winnings, but there are options that fall under the treatment of online game-playing tournaments (IRS Letter Ruling 200532025).

What Are The Options?

There are three methods defined by the above mentioned IRS letter ruling and they are as follows:

Option #1: The Gross Method: This method would require the league administrator to report total winnings for the year on a form 1099-MISC when the player wins more than $600.

Option #2: The Net Method: This method requires everything from the Gross Method, but then subtracts any entrance fees paid for the winning contests only, creating a net amount that would be reported on the 1099-MISC. if over $600.

Option #3: The Cumulative Net Method: Taking it one step further from the net method, this method allows all entrance fees to be deducted from the winnings, regardless of winning that contest. If this amount is still over the $600, it will be reported on form 1099-MISC.
What Should You Do Next?

If you feel that this applies to your Fantasy Football League activities, please give Jessica Marin, CPA a call at Perry, Fitts, Boulette & Fitton CPAs and we will help you determine the best way to report on your tax return.