Tax Reform Allows Bigger Vehicle Deductions

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars. The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation. For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls “luxury automobile limits.” Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that: old law, 19 years. New law, six years. Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means any vehicle that costs $50,000 or less is not penalized by the luxury vehicle limits when you’re using MACRS depreciation.

Under the new law, the annual limits are

• Year 1: $10,000
• Year 2: $16,000
• Year 3: $9,600
• Year 4 and each succeeding year: $5,760

What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian luxury limit of roughly $15,000. Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing - only SUVs, crossovers, and pickup trucks qualify.

But the big deal is that because of the higher, more realistic luxury auto limits, there’s far less need to buy the bigger, heavier SUV or crossover vehicle. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle depreciation deductions in the first three years.

No matter what vehicle you drive for business, you MUST keep a mileage log to determine the percentage of business to personal use.

Have questions about tax reform? Give us a call at (610) 863-8347 today for a free consultation!

Tax Reform Destroys Entertainment Deductions

Tax Reform Destroys Entertainment Deductions for Businesses

First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent. 

And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.

For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, provided you passed some tax law tests on business discussion and associated entertainment.

Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has, as its mission, the generation of business income or other specific business benefit. 

The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:

• Business meals with clients or prospects
• Golf
• Skiing
• Tickets to sports games—football, baseball, basketball, soccer, etc.
• Disneyland

Entertainment That Survived Tax Reform

As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.

Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.

That’s the bad news. The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct:

• entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
• expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
• expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
• expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
• expenses for goods, services, and facilities you or your business makes available to the general public;
• expenses for entertainment goods, services, and facilities that you sell to customers; and
• expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

1. Renting your home to your corporation.

2. Taking your employees on an employee party trip.

3. Partying with your employees.

4. Making your vacation home a deductible entertainment facility.

5. Creating an employee entertainment facility.

6. Deducting the entertainment facility, because facility use creates compensation to users.

If you would like our help implementing any of the strategies above, please don’t hesitate to contact us at (610)863-8347 for a free consultation.

Tax Reform Provides New 20% Deduction

The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.

Rejoice if you operate your business as a sole proprietorship, partnership, or
S corporation, because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.

You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.

When can you as a business owner qualify for this new 20 percent tax deduction with almost no complications?

To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of

• $315,000 or less if married filing a joint return, or
• $157,500 or less if filing as a single taxpayer.

Example: You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).

If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.

Some unfriendly rules apply to what Section 199A calls a specified service trade or business, such as operating as a law or accounting firm. But if the doctor, lawyer, actor, or accountant has defined taxable income less than the thresholds above, he or she qualifies for the full 20 percent deduction on his or her qualified business income.

In other words, if you are a lawyer with the same facts as in the example above, you would qualify for the $30,000 deduction.

Once you are above the thresholds and phaseouts ($50,000 single, $100,000 married filing jointly), you can qualify for the Section 199A deduction only when

• you are not in the out-of-favor group (accountant, doctor, lawyer, etc.), and
• your qualified business pays W-2 wages and/or has property.

Phaseout for New 20% Deduction

If your pass-through business is an in-favor business and it qualifies for tax reform’s new 20 percent tax deduction on qualified business income, you benefit at all times, including being above, below, or in the expanded wage and property phase-in range.

On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the out-of-favor group and you benefit only when you are in or below the phaseout range.

Once your taxable income exceeds the threshold amounts above, you arrive in one of the four possible categories below:

1. Phase-in range for a non-specified service trade or business
2. Phaseout range for a specified service trade or business
3. Above the phase-in range for an in-favor non-specified service trade or business
4. Above the phaseout range for an out-of-favor specified service trade or business

If your taxable income is going to be above the threshold amounts that trigger the phase-in or phaseout issues, contact us so we can spend some time on your tax planning.

How the 20% Deduction Works for a Specified Service Provider

As discussed above, the 20 percent tax deduction under new 2018 tax code Section 199A is a very nice tax break for business owners, except for owners with high income who also fall into the out-of-favor group.

In general, the out-of-favor group includes lawyers, doctors, accountants, tax professionals, consultants, athletes, authors, securities traders, actors, singers, musicians, entertainers, and others.

Getting just a little more technical, the out-of-favor “specified service trade or business” group includes any trade or business

• involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
• where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or 
• that involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities (Sections 475(c)(2) and 475(e)(2), respectively).

Notably, engineers and architects who had previously been in the out-of-favor professionals group somehow escaped the group with passage of this new law.

When you are a member of the out-of-favor group, your Section 199A deduction on your out-of-favor business is zero when you have taxable income of more than

• $415,000 if married filing a joint return, or
• $207,500 filing as a single taxpayer.

Preserve the Deduction with an S Corporation
 
Will your business operation create the 20 percent tax deduction for you?

If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.

As mentioned above, to qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).

If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you pay W-2 wages or have property.

Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.

Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets

1. $10,871 on his self-employment taxes, and
2. $17,500 on his newfound 20 percent deduction under new tax code Section 199A.

Have questions about tax reform? Give us a call at (610) 863-8347  for a free consultation.

Last Chance to Claim your 2014 Refund

Do you still need to file your 2014 tax return? 

In order to collect your 2014 tax refund, you must file your tax return by this year's tax deadline of April 17, 2018. After that date, if your 2014 return results in a refund, you will not receive the refund, but are still required to file your tax return.

Remember, there is no late filing penalty for filing a late return if you are due a refund.

Please note that if you haven't filed your 2015 and 2016 returns, the IRS may hold your 2014 refund until those returns are filed. In addition, the IRS may use the refund to offset prior Federal tax liabilities, outstanding child support, and state tax liabilities.

Don't be like many of our clients who have lost out on tax refunds!
We Can Help!

Call (610) 863-8347 for an appointment today!

Why Direct Deposit?

5 Reasons to Choose Direct Deposit

It's Fast!
The quickest way to get your refund is to electronically file your tax return and use direct deposit. We have seen refunds directly deposited within 2 weeks of electronically filing.

It's Secure!
Since refunds go right into your bank account, there is no risk of lost or stolen paper checks. The direct deposit transfer system is the same one that is used for 98% of all Social Security and Veterans Affairs benefits that are deposited into millions of accounts each month.

It's Convenient!
No waiting for that check to arrive and then, taking it to the bank.

It's Easy!
Bring your bank information with you when you come for your tax preparation. The best way to ensure that the correct information is entered is for you to bring your checkbook with you.

It's Versatile!
You can split your refund into several financial accounts including checking, savings, health, education, and certain retirement accounts.

* You should deposit the refund into an account with your own name on it. The IRS limits the number of refund directly deposited into a single account to three and will send a paper check if you exceed the limit.

Rental Property as a Business

Rental Property as a Business Yields Big Benefits

If your rental property activity meets the definition of a trade or business activity, then your rentals produce the best possible tax benefits. In general, you report your rental properties on Schedule E of your tax return. When your activity rises to the level of a business, you continue to report the rentals on Schedule E, but with the business classification, you qualify for four big benefits:

1. Tax-favored Section 1231 treatment
2. Business use of an office in your home
3. Business (vs. investment) treatment of meetings, seminars, and conventions; and
4. Section 179 treatment of your business-use assets.

Section 1231

The two big tax benefits of Section 1231 treatment are that you can use Section 1231 losses as ordinary losses to offset ordinary income, and you use the Section 1231 gains as long-term capital gains.

This gives you the best of both worlds: ordinary losses and long-term capital gains.

Home Office

You can claim the home-office deduction only for trade or business activities, not for investment activities. When your rental property activity meets the definition of a trade or business activity, you get this terrific deduction to offset your income.

Meetings, Seminars, and Conventions

Tax law grants no deduction for travel or other costs of attending a convention, seminar, or similar meeting unless the activity relates to the taxpayer’s trade or business.

Thus, if your rental property is an investment, kiss goodbye those deductions for rental property conventions, seminars, and similar meetings.

Section 179 Expensing

With respect to rental properties and Section 179 expensing, you need to pay attention to the following two rules, which can impact your expensing.

You may not claim Section 179 expensing on most assets used for residential rental properties. To qualify for Section 179 expensing, you must purchase and place the Section 179 property in use in the active conduct of your business.

Have questions? Give us a call at (610) 863-8347 today for a free consultation!

Lock Down Vehicle Deductions with a Home Office

The IRS gives you two possible strategies for turning otherwise personal mileage into business mileage:

1. Going to a temporary work location
2. Establishing an office in the home as a principal office

The temporary work location strategy contains some real unknowns, such as what is technically considered a temporary work location and whether the work performed at that location is for one year or less.

These unknowns make it difficult or impossible to use your facts and circumstances to produce your desired business-mileage results. The easy solution is the office in the home as a principal office.

The first reason this type of home office is an easy solution is that the rules are crystal clear, making compliance easy. The second reason is that with this office you know that all trips from home for this trade or business are business trips, including the trip from your home to your regular office outside the home.


Have questions? Give us a call at (610) 863-8347 today for a free consultation!

Tax Reform and Rental Real Estate

Two scary words in tax reform are “fairness” and “simplification”. In most cases, this combination raises your taxes and makes the law more complex.

As you likely know, tax reform has occurred again, and it brings its share of good and bad news. But for your rental real estate loss deductions, the good news is that the reform does not alter the beneficial strategies here.

In general, rental properties are passive activities subject to the dreaded passive-loss rules. IRS regulations contain six non-rental exceptions to the definition of rentals. In most cases, the non-rental exceptions are businesses for tax purposes. To deduct losses of any of the six exceptions, you simply need to materially participate in the activity.

Feel free to contact us to discuss these strategies and how they may provide you big deductions. Give us a call at (610) 863-8347 today for a free consultation!

Organizing Your Tax Documents

Creating Order Out of Chaos

As important tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips.

1. Keep it all in one place. It seems obvious, but how often have you found yourself going through piles of paper looking for that elusive 1099 or 1095 form, business expenses, stock sales report, or charitable deduction receipt? If you only do one thing, this is it!

2. Time to sort. Now that everything is all together, best practice is to sort your information into the same categories used in your tax return as shown below:

• Income: wages (W-2s), alimony, interest income (1099-INT), dividend income (1099-DIV), business income (1099-MISC, K-1s), winnings (W-2G/1099G), Social Security, investments (1099-B), IRA/pension distributions (1099-R)
• Income Adjustments: student loan interest, tuition & fees deductions, alimony paid, educator expenses, moving expenses, IRA contributions, HSA/MSA contributions
• Itemized Deductions: taxes paid, medical/dental expenses, charitable contributions, interest expense (1098), investor/other expenses, gambling losses, casualty/theft losses, unreimbursed employee expenses
• Credit Information: child & dependent care expense, adoption expenses, education expenses, other credit-related expense

*For education credits, it is wise to acquire a transcript from the college that will detail all of the expenses paid, which is likely more than is on your 1098-T.

• Business/Rental: income, expenses, bookkeeping information, etc. 

*Real Estate Agents: Call our office for a special organizer for your income and expenses! 

3. "Not sure" pile. There may be things you receive that you are not certain about needing for tax filing purposes. These items should be gathered in one place and brought in with all of your tax information.

4. Sum it up. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer or it could be a simple recap you create. This summary could also keep your fee down as we won't have to organize and summarize each category for your return. 

5. Is something missing? Pull out last year’s tax return or the organizer we mailed to you and create a list of things you needed last year. Use this as a checklist against this year’s information. While this process will not identify new items, it will help identify missing items that qualified in prior years.

6. Finalize required documentation. Certain deductions require substantiation and/or logs to qualify your expense. Common areas that require this are business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, meals and entertainment, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure the logs are complete and ready to go for tax filing.

It is very easy to overlook something given the lengthy list of taxable income items, deductions and credits. By following these tips you can greatly reduce that risk.

Need help organizing your information or want one of our special organizers, call (610) 863-8347 for your free consultation and/or organizer! 

Using your Child's IRA to Pay for College

If your child has earned income (maybe from working in your business), you may want to consider establishing an IRA for your child. The IRA funds can, in turn, be used to help pay your child’s college expenses. When your child withdraws money from an IRA, tax law imposes taxes on the withdrawals, but no 10 percent penalty applies when the money is used to pay for qualified higher education expenses.

The big hurdle to avoid is the kiddie tax. IRA withdrawals are subject to the kiddie tax rules. Under these rules, an under-age-24-student pays taxes on unearned income at the parents’ high tax rate when the child’s unearned income is more than $2,100 and the child’s earned income is not more than half of his or her support. This makes the kiddie tax a true destruction force when it comes to saving for college. Your children need your help to avoid the dreaded kiddie tax.

Most minor children do not earn enough to need the tax deduction that the traditional IRA offers. This makes the Roth IRA a great vehicle for the working child’s college planning because the withdrawals of contributions are free of both penalties and taxes when used for qualified higher education.

If you have children who fit this profile, make sure your children start making their Roth IRA contributions at a young age and earn a good rate of return on the investments.

The Roth IRA habitually proves superior for the child’s college funding when compared with the traditional IRA. With the traditional IRA, the child gets a deduction while in a low tax bracket but, because of the kiddie tax, pays taxes in the parents’ high tax bracket upon withdrawal for college. This is a bad deal.

Another point of consideration is that the IRA and other retirement assets of both the parents and the children are not counted as assets available for education on the FAFSA or CSS profile applications for financial aid.


Have a question about your child's IRA? Give us a call at (610) 863-8347 today!

New Tax Reform for 2018

Individual Tax Changes in New Tax Reform Legislation

Just before the holidays, Congress passed the "Tax Cuts and Jobs Act," a sweeping piece of tax reform legislation which was signed into law on December 22, 2017. This email provides a quick breakdown of some of the biggest changes upcoming for individual taxpayers for the year **2018**.

• Standard Deduction Increase. For tax years beginning after December 31, 2017 and before January 1, 2026, the standard deduction increases to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers.  

• Personal Exemptions Eliminated. Personal Tax exemptions which previously were subtracted from a taxpayer's adjusted gross income to determine their taxable income are reduced to zero.

• Child Tax Credit Increased. The amount a taxpayer can claim as a per-qualifying-child tax credit doubles to $2,000 per child under the age of 17. Additionally, the phase out income levels increase to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers.)

• State and Local Tax Deduction Limited. An itemized deduction for taxes paid state and local taxing authorities and real estate taxes are limited to $10,000. 

• Mortgage and Home Equity Indebtedness Interest Deduction Limited. The deduction for interest on home equity indebtedness is effectively gone and the deduction for mortgage interest decreases to the interest paid on a mortgage up to $750,000. 

• Medical Expense Deduction Threshold Temporarily Reduced. The threshold for the deduction which allows for expenses paid during the tax year for the medical care of the taxpayer, or their spouse, and/or their dependent(s) which are not reimbursed by insurance or an employer is temporarily reduced from 10% to 7.5%. 

• Miscellaneous Itemized Deductions Eliminated. Previously, taxpayers could deduct certain miscellaneous itemized deductions if they exceeded, in aggregate, 2% of the taxpayer's adjusted gross income. The new tax bill removes these deductions. 

• Overall Limitation on Itemized Deductions Suspended. Higher-income taxpayers who itemize their deductions previously were subject to a limitation on those deductions, reducing the allowable amount by 3% for adjusted gross income exceeding the threshold. This limitation on itemized deductions will now be eliminated and higher itemized deductions can be deducted. 

These are just some of the highlights of the new tax bill. If you have any questions regarding this new legislation and how it will affect you, give us a call at (610)863-8347 for a free consultation.

Important Dates for 2018 Tax Filing Season

2018 Tax Filing Season Important Dates

Monday, January 29, 2018:  The IRS will begin accepting tax returns.

* NOTE: The IRS cannot issue a refund due to Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) until mid-February. The IRS expects the earliest these refunds to be available in taxpayer bank accounts is February 27, 2018.

Thursday, March 15, 2018: S Corporation and Partnership returns are due.

Tuesday, April 17, 2018: Individual (1040) and C Corporations returns are due.

We are accepting appointments now and look forward to seeing you!
Call (610) 863-8347 for an appointment today! 

Update: 2018 Health Insurance for S Corporation Owners

S corporations continue to enjoy good news in 2018 when it comes to health insurance, and this also applies to 2017 taxes.

You first have to thank the 21st Century Cures Act for:

• Reinstating and extending IRS Notice 2015-17 to eliminate the $100-a-day penalty 

• Creating the qualified small employer health reimbursement account (QSEHRA) that works well if there are employees in the corporation

The good news is, the old rules still apply as we write this, and we don’t expect any changes in 2018. Under these rules, the S corporation first establishes a health insurance plan for the owner in one of two ways:

• Choice 1. The S corporation makes the premium payments for the accident and health insurance policy covering the owner-employee who has more than 2 percent ownership (and his or her spouse or dependents, if applicable).

• Choice 2. The owner-employee makes the premium payments to the insurance company and furnishes proof of the premium payments to the S corporation, which in turn reimburses the owner-employee for the premium payments.

Step 1 —getting the cost of the insurance on the S corporation’s books.

In Step 2, the S corporation has to include the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare).

In Step 3, the owner-employee then claims the health insurance deduction on page 1 of Form 1040, providing he or she otherwise qualifies for the page 1 deduction.


Have questions about Health Insurance or Taxes for S Corporation Owners?

Give us a call at (610) 863-8347 today for a free consultation!

Stay tuned for more tax tips from Corvino and Verwys.

Buying a Business with a Co-owner

Buying a Business with Co-Owners? 

You Need a Buy-Sell Agreement!

If you are buying a business that will include more than one co-owner, you need a buy-sell agreement. You have multiple reasons to put a buy-sell agreement in place and not one reason not to have a buy-sell agreement.

A well-drafted agreement can do these valuable things for you:

•      Transform your business ownership interest into a more liquid asset
• Prevent unwanted ownership changes
• Save taxes and avoid hassles with the IRS

There are two types of buy-sell agreements: (1) cross-purchase agreements and (2) redemption agreements (sometimes called liquidation agreements).

When you enter into a cross-purchase agreement, it’s a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners when a triggering event occurs, such as death or disability.

When you enter into a redemption agreement, it’s a contract between the business entity itself and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity when a triggering event occurs.

If you are buying a business that will include more than one co-owner, give us a call at 

(610) 863-8347 today for a free consultation! 

Stay tuned for more tax tips from Corvino and Verwys.