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!