Small Business Tax

2017 Tax Cuts & Jobs Act (TCJA)

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On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). TCJA is the largest tax overhaul since the 1986 Tax Reform Act and it will affect almost every individual and business in the United States. Generally, the new law goes into effect in 2018, with many of the provisions relating to individuals expiring at the end of 2025.

I’m writing to give you a brief rundown of what’s in the new law and how it might affect you.

Overview of TCJA Changes Affecting Individuals

The following is a brief overview of TCJA’s key changes (and non-changes) affecting individuals.

Tax Rates and Brackets. TCJA provides seven tax brackets, with most rates being two to three points lower than the ones under present law (the top rate goes from 39.6 percent to 37 percent). The top rate kicks in at $600,000 of taxable income for joint filers, $300,000 for married taxpayers filing separately, and $500,000 for all other individual taxpayers.

Observation: While applicable rates at any given level of income generally go down by two to three points, some go up. For example, the rate for single individuals with taxable income between $200,000 and $416,700 goes from 33 percent to 35 percent.

Capital Gain Rates and Net Investment Income Tax. Tax rates on capital gains and the 3.8 percent net investment income tax (NIIT) are unchanged by TCJA.

Personal Exemptions and Standard Deduction. TCJA repeals the personal exemption deductions, but nearly doubles the standard deduction amounts to $24,000 for joint filers and surviving spouses, $18,000 for heads of household, and $12,000 for single individuals and married filing separately (additional amounts for the elderly and blind are retained).

Observation: The fact that the standard deduction has nearly doubled may create the misleading impression that you’ll reap a large tax benefit from the change. But, because the increase in the standard deduction was coupled with the repeal of the deduction for personal exemption ($4,150, per exemption in 2018), the actual benefit is fairly modest. For example, the overall amount of income that is exempt from tax will increase by $2,700 for joint filers – a nice increase, but nowhere near double the $13,000 standard deduction under prior law.

Because the standard deduction is generally claimed only when its amount exceeds available itemized deductions, the increases will not benefit you if you itemize (the repeal of personal exemptions, by contrast, will affect you whether you itemize or not).

Exemption for Dependents and Child Tax Credit. As part of the repeal of personal exemption deductions, TCJA repealed exemptions for dependents. To compensate, TCJA increases the child tax credit to $2,000 ($1,400 is refundable), up from $1,000 (fully refundable) under present law. The modified adjusted gross income threshold where the credit phases out is $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000, respectively). The maximum age for a child eligible for the credit remains 16 (at the end of the tax year).

TCJA also provides a $500 nonrefundable tax credit for dependent children over age 16 and all other dependents. Most families with non-child dependents will lose some ground here, as the $500 credit will generally be less valuable than the $4,150 exemption deduction it replaces.

Other Tax Breaks for Families Unchanged. The child and dependent care expenses credit, the adoption credit, and the exclusions for dependent care assistance and adoption assistance under employer plans are all unchanged by TCJA.

Passthrough Tax Break. TCJA creates a new 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. The deduction, which is available to both itemizers and nonitemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $157,500 ($315,000 for joint filers) are simpler and more permissive than the ones that apply above those thresholds.

Example: In 2018, Joe receives a salary of $100,000 from his job at XYZ Corporation and $50,000 of qualified business income from a side business that he runs as a sole proprietorship. Joe has no other items of income or loss. Joe’s deduction for qualified business income in 2018 is $10,000 (20 percent of $50,000).

Observation: The effective marginal tax rate on qualified business income for individuals in the top 37-percent tax bracket who are able to fully apply the new deduction will be 29.6 percent – fully 10 points lower than the top rate under current law.

Deduction for State and Local Taxes (SALT). TCJA imposes a $10,000 limit on the deduction for state and local taxes, which can be used for both property taxes and income taxes (or sales taxes in lieu of income taxes) and repeals the deduction for foreign property taxes. There is no limit on the amount of the SALT deduction under present law.

Mortgage Interest Deduction. TJCA reduces to $750,000 (from $1 million) the limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered. TCJA also repeals the deduction for interest on home equity loans.

Deduction for Medical Expenses. An early version of the tax overhaul passed by the House would have repealed the deduction for unreimbursed medical expenses. TCJA retains that deduction and enhances it for 2017 and 2018 by lowering the adjusted gross income (AGI) floor for claiming the deduction from 10 percent to 7.5 percent for all taxpayers.

Deduction for Casualty and Theft Losses. TCJA repeals the deduction for casualty and theft losses, except for losses incurred in presidentially declared disaster areas.

Observation: The new law does, however, provide enhanced relief for victims in federally declared disaster areas in 2016 and 2017.

Deduction for Charitable Contributions. TCJA retains the charitable contribution deduction and increases the maximum contribution percentage limit from 50 percent of a taxpayer’s contribution base to 60 percent for cash contributions to public charities.

Deduction for Certain Miscellaneous Expenses. TCJA repeals the deduction for any miscellaneous itemized deductions subject to 2-percent of AGI floor.

Repeal of Alimony Deduction. TCJA repeals the deduction for alimony paid and also the corresponding inclusion in income by the recipient, effective for tax years beginning in 2019. Alimony paid under separation agreements entered into prior to 2019 will generally be grandfathered under the old rules.

Education-Related Tax Breaks Preserved. TCJA retains deductions for student loan interest and educator expenses, and also exclusions for graduate student tuition waivers and employer educational assistance programs.

Alternative Minimum Tax. TCJA increases alternative minimum tax (AMT) exemption amounts by 27 percent, and sharply increases the income level where the exemption is phased out. Combined with the effects of other TCJA changes, many individuals who are currently subject AMT in 2017, will not be in 2018 and beyond.

Expanded Uses for 529 Plan Distributions. TCJA allows up to $10,000 in aggregate 529 distributions per year to be used for elementary and secondary school tuition. Under present law, 529 distributions can only be used for higher education expenses.

Repeal of Individual Healthcare Mandate. TCJA repeals the tax penalty on individuals who fail to carry health insurance enacted as part of the Affordable Care Act (ACA).

Estate and Gift Tax Exclusion. TCJA permanently doubles the basic exclusion amount for estate and gift tax purposes from $5.6 to $11.2 million. A provision fully repealing the estate tax beginning in 2025 was passed by the House, but didn’t make it into TCJA, so the estate tax will remain in effect with the higher exclusion amount.

Concluding Thoughts

As you can see, the provisions in the TCJA are quite extensive and also quite complicated.

Going forward, we can discuss how these changes will impact your tax situation through additional tax planning outside of the filing season, and what kind of strategies we can considering adopting to ensure that you get the best possible outcomes under the new rules.

Contact Stephen Scott, CPA at info@scottcpa.com.
or call 314-984-9829 Ext. 11

Identity Theft & Taxes

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The 2015 tax filing season seems to be riddled with tax scams and identify theft. The IRS has used the term “rampant” to describe the situation when I spoke with them. I’ve seen two situations occur recently.

1) Falsely Filed Tax Returns:
I have spoken with many other CPAs, the IRS, and clients; and we’ve seen a lot of this going on.  Taxpayers have had their Social Security Numbers stolen and tax returns falsely filed on their behalf, many times with another, unrelated person, male or female. The IRS is sending out notices in some instances asking if you filed the tax return.  Be sure to respond to this notice in a timely manner so the return does not get processed.  One taxpayer actually received a refund at their home mailing address when he had not yet filed a return himself yet…we’re still scratching our heads trying to figure that one out.

2) Message from Fake IRS Agents: We’ve heard a lot about these messages and it has been in the news recently in St Louis.  I’ve received one of these calls myself.  They typically say that your account has been audited and you owe some balance.  They don’t appear to have your Social Security Number, just your phone number, name and address. They are tracking who they call and will only speak with you if they have your name and phone number in their database. In my case it was an obvious call from India.  I recorded a call with the would-be-scammer and will post the conversation shortly.  Don’t fall for their tactics, and, if you’re not sure if its real call your CPA and ask for assistance.

IRS Identity Theft Page:  https://www.irs.gov/uac/Taxpayer-Guide-to-Identity-Theft

– Steve Scott

Tax Record Keeping Tips

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During the summer or fall you’re probably not thinking much about taxes but you should.  Their are probably expenses you paid this year that will effect your taxes.  Don’t wait until January or February to start thinking about your tax records. Make it easier on yourself (and on your CPA) by keeping the proper records so you have them available for preparation of your tax return.

It’s good practice to keep all tax records organized and save them for your tax preparer and in case you need to support any deductions or credits at a later date.

Here are a few some common sense tips for tax recordkeeping:

Save Your Tax Returns:
Include copies of your filed tax returns with your tax records.  You may need information in them to help prepare future tax returns, and you will need them if you need to amend a tax return. You might also need copies if you apply for a home loan or refinance.

Save Your Records:
The IRS requires you to save records to support income and deductions reported on your tax returns.  You should keep the basic tax records for at least 3 years which may include W-2, K-1 Forms, 1099 Forms, applicable credit card receipts, bank statements, cancelled checks & other proofs of payment, and mileage logs.

Homes & Investment Property:
You should save records related to the purchase of your home and any major improvements that would increase your basis.  These records can be important if you convert your primary residence to a rental property, or when you later sell your home.  You should save these records for at least 3 years after selling the property.

Business Owners:
You should keep all records that support your total receipts and those that support your expenses and asset purchases.  These records would include bank deposit slips, receipts, and invoices.  You should also save business credit card receipts, sales slips, canceled checks, account statements and petty cash slips.  Keeping a good set of books and accounting files will always make your job much easier and reduce the risk of reporting incorrect figures on your tax returns.

Employees:
If you have a business with employees, you should save all employment-related records  for at least four years after the tax return was filed, or tax was paid, whichever is later.

Record Format:
The IRS does not require a particular method to keep records, but your CPA can help you keep yours organized.  In any case, develop some type of consistent record keeping system for your business or tax returns.  This will more easily help you file more accurate tax returns and support tax filings if the IRS asks you for more information.

We can help. If you are filing individual or small business tax returns and have questions about accounting, tax, or general record keeping, please contact us by calling 314-984-9829 or emailing Steve Scott at info@scottcpa.com.

 

 

Missouri Use Tax – Requirements for Businesses

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Overview

The State of Missouri imposes a use tax on Missouri businesses and individuals for the privilege of storing, using, or consuming tangible personal property in Missouri. While Missouri has imposed the use tax since the late 1950s, many purchasers are not aware of their responsibilities to report transactions and remit the appropriate tax.  The purpose of this letter is to make you aware of your responsibilities and help you avoid noncompliance penalties.

If an out-of-state seller does not collect Missouri sales or use tax on a sale to a Missouri purchaser, the purchaser has a responsibility to file a Missouri Consumer’s Use Tax Return and remit any tax due directly to the Missouri Department of Revenue.  The amount of use tax due to Missouri is reduced by any sales or use tax paid to another state on the items purchased.

How this Affects Your Business

If you have purchased any tangible personal property from out-of-state and no sales or use tax was paid on the purchase, you may be liable for Missouri use tax.  Common examples of purchases on which use tax may be due include:

Purchases from Internet sellers or catalogs

Purchases from out-of-state suppliers that were shipped directly to you from outside Missouri

Items you purchased from outside Missouri that you brought into the state

Goods imported from other countries

Missouri law provides an exception from filing a Consumer’s Use Tax Return if your total un-taxed purchases are less than $2,000 during a calendar year.  Once your annual purchases on which tax has not been paid equals or exceeds $2,000, you must file a Consumer’s Use Tax Return and pay tax on your total taxable purchases, including the first $2,000 in taxable purchases.

The Missouri Department of Revenue has recently implemented new tools to help identify businesses and individuals that are not complying with Missouri’s use tax laws.  This can be complicated and confusing so if you believe you may have a Missouri use tax filing responsibility for 2012, please let us know.  We can help you determine whether your purchases qualify for any exemptions (such as manufacturing machinery and equipment) and prepare and file the return if necessary.

Business Use of Your Car

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Many small business owners, self employed individuals, and employees working for others use their automobile for business purposes. If you use your car entirely for that purpose then you may generally deduct the entire cost of operation, subject to some limits. If you use your car both for personal and business purposes, you may deduct on the costs associated with business use only. Below is some helpful information related to auto expenses:

1) Two Methods: You may generally figure the amount of your deductible car expense using one of two methods: 1) The Standard Mileage Rate Method, or 2) The Actual Expense Method. If you qualify to use both methods you may want to figure your deduction both ways to see which gives you the larger deduction.

2) Standard Mileage Rate: 58 cents per mile for the 2019 tax year, up 3.5 cents from 2018. To use the standard mileage rate method you must own or lease the car and you must not have claimed a depreciation deduction using the Modified Cost Recovery System (MACRS) on the car in an earlier year or any first year additional bonus deprecation. Also, you must not have claimed a Section 179 deduction on the car.

a) Cars you Own: To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then in later years you can choose to use the standard mileage rate or actual expenses.

b) Leased Cars: You must use the standard mileage rate method for the entire lease period, including renewals.

3) Actual Expense Method: To use the actual expense method, you must determine what it actually costs to operate the car for the business portion of the car’s use. These costs include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation or lease payments that are attributable to the business miles driven.

4) Mileage Logs and Documentation: The law requires that you substantiate your expenses by adequate records or by other sufficient evidence. A mileage diary is an excellent way to document mileage and expenses.

In summary, just remember there are two different methods to claiming automobile expenses for tax purposes, the Standard Mileage Method and the Actual Expense Method. Be sure you understand the methods so you can track the proper information for during the year.  It’s very important that you document mileage daily and save your receipts throughout the year.

For additional information see IRS Publication 463 – Travel, Entertainment, Gift, and Car Expenses for more information. If you need assistance from a professional to discuss your specific situation, contact Stephen or Taylor Scott by sending an email to info@scottcpa.com or calling us at 314-984-9829.

Small Businesses Using Payroll Service Companies

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Outsourcing payroll duties to third-party service providers can streamline business operations and save on internal employee and software costs, but employers should be aware that employers are ultimately responsible for paying federal tax liabilities, not the payroll service.

In recent years there have been prosecutions of individuals and companies who, acting under the guise of a payroll service provider, have stolen funds intended for payment of employment taxes.  It is important that employers who outsource payroll are aware of the following three tips:

1. Employer Responsibility:
The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though
you forward the tax payments to the third party to make the tax deposits, you, the employer, are the responsible party.

If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.

2. Correspondence:
If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.

3. EFTPS:
Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments.  Visit www.eftps.gov to create an EFTPS account for your business.

As a small business owner or manager, it’s important to stay in tune with all aspects of your business whether you outsource certain functions or perform them in-house.  Mistakes can happen.  Be sure to stay on top of any payroll related tax notices, and ensure your payroll provider takes prompt action and follows through to final resolution.  Additionally, any payroll IRS or state payroll tax issues need to be documented properly in your files in case you need this documentation again at a later date, should the problem “re-appear”.  You can also work with your CPA to help you navigate these payroll issues to ensure they are handled appropriately.

How to Keep Good Tax Records

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You may not be thinking about your tax return right now, but summer is a great time to start planning for next year. Organized records not only make preparing your return easier, but may also remind you of relevant transactions, help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.
Here are a few things the IRS wants you to know about recordkeeping.

1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It’s a good idea to have a designated place for tax documents and receipts.

2. Individual taxpayers should usually keep the following records supporting
items on their tax returns for at least three years:

  • Bills
  • Credit card and other receipts
  • Invoices
  • Mileage logs
  • Canceled, imaged or substitute checks or any other
    proof of payment
  • Any other records to support deductions or credits you
    claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

  • A home purchase or improvement
  • Stocks and other investments
  • Individual Retirement Arrangement transactions
  • Rental property records

3. If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

  • Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
  • Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices, Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
  • Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

These publications are available at www.IRS.gov.

Resources:
Publication 552 – Record Keeping for Individuals
Publication 583 – Starting a Business and Keeping Records
Publication 463 – Travel, Enterrainment, Gift and Car Expenses

Contact Stephen Scott at info@scottcpa.com  if you have individual or business tax needs in the St Louis area.

Have you Received an IRS or State Tax Notice?

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Every year the Internal Revenue Service and the Missouri Department of Revenue send millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are nine things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.

  1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
  2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
  3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
  4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
  5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
  6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response. (many times it will take longer…don’t panic)
  7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
  8. It’s important that you keep copies of any correspondence with your records.
  9. If you don’t feel comfortable handling this on your own contact your tax preparer.  A tax preparer can complete the proper Power of Attorney forms so that they may communicate directly with the IRS, Missouri Department of Revenue, and other state taxing agency on your behalf to resolve the issue. 

If you need tax assistance contact Stephen Scott by sending an email to info@scottcpa.com

 

Early Distributions from Retirement Plans Facts

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IRS Tax Tip 2011-42

Some taxpayers may have needed to take an early distribution from their retirement plan last year. The IRS wants individuals who took an early distribution to know that there can be a tax impact to tapping your retirement fund.  Here are ten facts about early distributions.

  1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
  2. Early distributions are usually subject to an additional 10 percent tax.
  3. Early distributions must also be reported to the IRS.
  4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
  5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
  6. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
  7. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
  8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
  9. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.
  10. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Capital Gains and Losses – Ten Tax Tips

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Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

  1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
  2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
  3. You must report all capital gains.
  4. You may deduct capital losses only on investment property, not on property held for personal use.
  5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
  6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
  7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
  8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
  9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
  10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

IRS Tax Tip 2011-35