Don’t Miss Out on the 20% Qualified Business Deduction for Rental Activities!

The Tax Cuts and Jobs Act (TCJA) allows for certain businesses to take a deduction equal to 20% of their income! This is applicable to rental real estate activities as long as you meet certain conditions or prove the activity rises to the IRS’s definition of a trade or business. To help rental real estate owners determine if their rental activity qualifies for this deduction, the IRS has issued proposed regulations with a safe harbor. To qualify, you must meet the following conditions:

  • Separate books/financial reports are maintained for each rental activity,
  • 250 hours or more of "rental services" are performed per year for the activity, and
  • The taxpayer maintains detailed records, including time reports regarding hours of all services performed, description of all services performed, dates on which such services are performed and who performed the services.

The Service provided some examples of “rental services” that would count towards the 250 hours. These include advertising to rent, negotiating and executing leases, verifying tenant applications, collecting rent, performing daily operation and maintenance, managing the real estate, purchasing materials, and supervising employees and independent contractors.

If you own rental properties, don’t miss out on this deduction. Contact us to determine if you qualify.

Benefits of a Power of Attorney

Only Certified Public Accountants (CPAs), enrolled agents (EAs) and attorneys may represent you in front of the IRS. In order for the IRS to discuss your tax issues with your tax preparer, a completed Form 2848, Power of Attorney and Declaration of Representative, must be on file to give the preparer power of attorney (POA). Checking the box on your tax return to let the IRS speak to the person who prepared the return gives limited authority to discuss IRS questions that arise in the processing of that return and this authorization automatically expires on the due date of the return for the following year.

Having a POA form on file with the IRS means both you and the preparer will be notified of any issues on your returns. This can be helpful if you travel, given IRS notices are usually time-sensitive. Also, if the notice concerns a mismatch of income your tax preparer may be able to resolve it easily, saving you work and anxiety. Lastly, a POA will remain in effect until either party revokes it. Therefore, if you have changed preparers, you should revoke your POA with your previous tax preparer and create a new one with your current preparer. For your convenience, tax preparers are now routinely asking clients to sign the POA form when they prepare a return. Contact us to learn more about the benefits of this form.

Limit on Deduction of Business Interest Expense

A provision of the Tax Cuts and Jobs Act (TCJA) places a limitation on the amount of business interest expense which can be deducted beginning in 2018. In general, there is an exception to the limitation of business interest expense for most businesses which have annual gross receipts of less than $25 million over the prior three years. For those businesses which are subject to the limitation, their allowed business interest deduction may be capped. The calculation of the limitation considers the businesses’ interest income, adjusted taxable income and financing options.

In addition to the exception for businesses which have less than $25 million in annual gross receipts, there are also exceptions to the interest expense limitation for many service-based businesses.

Please contact us for more details if you feel that your business may be affected by the business interest expense limitation.

The 2019 Tax Filing Season Will Be Like No Other!

As if the Tax Cuts and Jobs Act (TCJA) wasn’t enough to make the 2019 tax filing season complicated, add a government shutdown to the mix and we are in for an unprecedented filing season!

What can you expect when filing your 2018 tax return? For starters, there might be a possible filing delay. Although the filing season officially begins on January 28th, not all the tax forms and schedules have been finalized for changes related to the TCJA. The partial government shutdown could delay the IRS in finalizing these forms, which means some may not be able to file right away. State taxing authorities will also face similar issues finalizing their forms.

Secondly, taxpayers will see a new Form 1040 for 2018. The new form is condensed, making it easier for simple filings, but not exactly as small as the “postcard-sized” originally promised, given the six new schedules. We expect individuals with somewhat complex filings to face challenges navigating the new forms.

The TCJA lowered tax rates, so the amount of federal tax withheld from paychecks decreased in 2018. That, coupled with the elimination of personal exemptions and limitations on certain itemized deductions, could result in smaller refunds, and some may even owe! However, with the higher standard deductions, larger child tax credits, and the new 20% qualified business income (QBI) deduction, others may see a boost in their refunds.

Lastly, after the dust settles on this first year under the new tax law, many will benefit from tax planning in 2019 and beyond. For some, it may be as simple as adjusting payroll withholdings or estimated tax payments to prevent owing penalties and interest next year. For others, especially those who are eligible for the new 20% QBI deduction, tax planning may be more complicated and time sensitive. Give us a call to schedule a meeting on how you can be better prepared under the new tax law.

1st Quarter 2019 Due Dates

January 15:

  • Individuals: Fourth quarter 2018 estimated tax payments are due (final installment).

January 31:

  • Employers:
    • Give your employees their copies of Form W-2 for 2018. File Form W-3 with Copy A of all Forms W-2, regardless of whether you file these forms by paper or electronically. The SSA encourages all employers to e-file. Don’t e-file the same returns which were paper filed.
    • File Form 941 for 4th quarter 2018, or annual Form 944. File Form 940 for 2018.
    • File Form 1096 with Copy A of Forms 1099-MISC reporting non-employee compensation payments in Box 7 only.
    • As a part of the employer reporting requirements under the Affordable Care Act, you may need to give your employees copies of Form 1095-B (Health Insurance Coverage Statement) and/or Form 1095-C (Employee Statement) for 2018. If you’re unsure of your reporting requirements for these forms, please contact us.
  • Businesses: Distribute Form 1099 to recipients for 2018.

February 28:

  • Employers who paper file: File Form 1096 with Copy A of all Forms 1099, except for any 1099-MISC reporting non-employee compensation payments in Box 7. As a part of the reporting requirements under the Affordable Care Act, you may need to file Forms 1094-B, 1095-B, 1094-C, and 1095-C with the IRS. If you’re unsure of your reporting requirements for these forms, please contact us.
  • Large food or beverage establishments who paper file: File Form 8027 to report 2018 tip income, reported tips, and allocated tips.

March 15:

  • Calendar-Year S Corporations: 2018 Form 1120S due or file Form 7004 for an automatic six-month extension. Provide shareholders with copy of Schedule K-1.
  • Partnerships: 2018 Form 1065 due or file Form 7004 for automatic six-month extension. Provide partners with copy of Schedule K-1.
  • C Corporations & LLCs: File Form 2553 to choose to be treated as an S corporation beginning on January 1, 2019.

April 1:

  • Employers who e-file: E-file Form 1096 with Copy A of all Forms 1099, except any 1099-MISC reporting non-employee compensation payments in Box 7. As a part of the employer reporting requirements under the Affordable Care Act, you may need to e-file 2017 Forms 1094-B, 1095-B, 1094-C, and 1095-C. If you’re unsure of your reporting requirements for these forms, please contact us.
  • Large food/beverage establishments who e-file: E-file Form 8027 to report 2018 tip income, reported tips, and allocated tips.

Tax Cuts and Jobs Act

As we kick off the 2019 filing season under the Tax Cuts and Jobs Act (TCJA), it’s hard to say if you’ll see an increase or decrease in your taxes, or if your tax return will become simplified or more complex. But what we know for sure is, ALL taxpayers will be affected by the new legislation!

The TCJA has provided new opportunities for tax savings and tax planning for you and your business. Below is a brief summary of some provisions in the Act. In addition, the IRS has interpreted several provisions of the tax bill, which may provide answers to your questions. Unfortunately, we’re still awaiting interpretation and guidance on some of the more complicated areas of the new law and it’s unlikely we’ll get anymore direction from the IRS before tax season begins.

Tax Provisions Affecting Individuals for 2018

  • There are still seven tax brackets, but the tax rates are lowered to 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The standard deduction has almost doubled from the prior year to $12,000 for individuals and to $24,000 for married couples.
  • Personal and dependency exemptions are eliminated.
  • Child Tax Credit has increased to $2,000 and expands the refundable tax portion of the credit to $1,400.
  • Alternative Minimum Tax (AMT) exemption amount has been increased to $109,400 for married filling joint and surviving spouses and $70,300 for other filers.
  • Individual Healthcare Mandate penalty has been eliminated for individuals who fail to maintain minimum essential health care coverage, but only for years after 12/31/2018. The penalty is still applicable for 2018.
  • Earned Income Tax Credit is still available for low to middle-income wage earners, which can be over $6,000 for a family with three kids.
  • Taxpayers, who itemize, can deduct up to $10,000 in state and local income taxes, sales tax and real estate taxes.
  • Mortgage interest deduction is capped on new home loans of $750,000, and no longer includes home equity line of credit (HELOC) interest.
  • A deduction is allowed for qualified medical expenses in excess of 7.5% of adjusted gross income.

Tax Provisions Affecting Business Owners for 2018

  • Lowers the corporate tax rate to 21%, and the tax rate for Personal Service Corporations is also lowered to 21%.
  • Repeals Corporate Alternative Minimum Tax (AMT).
  • Allows sole proprietors and passthrough businesses a 20% deduction of its Qualified Business Income (QBI). Specified Service Trades and Businesses (SSTB) are not eligible for the deduction, if the taxpayer’s taxable income before the QBI deduction is over $415,000 if filing MFJ or over $207,500 if filing Single, HOH, or MFS.
  • Expands the limits on cash accounting and removal of some of the requirements to track inventory.
  • Allows businesses to fully expense qualified purchases for the 5 years after 2017.

‘Tis the Season of Gifting

Below are some things to consider before year-end that may help you maximize the benefits and minimize the burdens of the new tax law.

Withholdings
Use the IRS Withholding Calculator to help determine if you need to change your current withholdings before year-end to more closely match your expected tax obligations. The tax savings you anticipate might have already been given to you through your withholding. Take a few minutes to perform a paycheck checkup to protect yourself against an unexpected tax bill or penalty!

Managing Itemizing
The Tax Cuts and Jobs Act significantly increases the standard deduction, so many taxpayers may no longer be itemizing. Compare the itemized deductions to which you may be entitled to this year to the new standard deduction. If you won’t benefit from increasing itemized deductions because the standard deduction will be greater, consider bunching charitable contributions into every other year, setting up a donor-advised fund, or, if over 70-1/2 years old, making charitable contributions through IRA distributions. If you are taking the deduction this year, add to it by donating unused items to charitable organizations or by scheduling routine medical procedures and refilling medical prescriptions before year-end.

Reasonable Compensation
The rules surrounding the new 20% deduction for “qualified business income” from a partnership, sole proprietorship, or S corporation will create more IRS scrutiny of wages paid to shareholders of S corporations. Make sure as an S corporation owner, your salary meets the “reasonable compensation” standard – what you would pay someone else to do the job you do. If you have not taken a salary, you should do so by the end of the year.

Healthcare
As the 2019 Marketplace Open Enrollment period draws closer, remember that the Tax Cuts and Jobs Act eliminates the shared responsibility payment. Individuals failing to maintain minimum essential health care coverage will no longer be penalized for years after 12/31/18.

Alimony
For divorces and legal separations after 2018, alimony payments will no longer be deductible by the payer nor included as gross income by the recipient. If you are in the middle of a divorce and will be ordered to pay alimony, consider finalizing the divorce before the end of 2018. However, if you will be the recipient of alimony payments you may want to hold off finalizing the divorce until 2019.

We hope you found these tips helpful. It would be our pleasure to assist you in applying some of these strategies to your unique situation, so please make an appointment to stop by our office.

New Rules for Like-Kind Exchanges Under the Tax Cuts and Jobs Act

In the past, taxpayers have reaped the benefits of deferring gain on a sale by entering a like-kind exchange of personal property, such as vehicles including machinery and equipment (ie: farm machinery). The Tax Cuts and Jobs Act has eliminated this perk beginning January 1, 2018. Congress felt that taxpayers received the benefit of direct expensing through the use of 100% bonus depreciation and section 179 deductions, so they shouldn’t also be eligible to defer any gain or loss through a like-kind exchange. The new law applies to business property only and a gain deferral through a like-kind exchange is still allowed for real property. If you’re considering buying and selling real estate in the near future, contact us for help.

2019 Social Security Wage Base and Nanny Threshold

Social Security Wage Base: The maximum amount of wages subject to the 6.2% Social Security tax will rise from $128,400 to $132,900 in 2019. Medicare tax rates and wages bases will remain the same as 2018.

Nanny Tax Threshold: The maximum wages that can be earned by a household employee without being subject to Social Security or Medicare tax, often referred to as the “nanny tax”, will remain at $2,100, the same as it was in 2018. Amounts paid above this threshold to anyone who works in and/or around your home such as babysitters, housekeepers and yard workers, are subject to payroll tax.

IRS Makes Changes to Taxpayer Transcript Requests

Did you know the IRS will no longer fax copies of taxpayer’s transcripts to their tax preparers? In an effort to protect taxpayer information and prevent identity theft, beginning in January 2019, when taxpayers or third parties call the IRS with an individual or business transcript request, the transcript will be mailed to the taxpayer’s address of record. This change may cause delays in a tax professional’s ability to complete client tax returns, especially if the address on file is no longer accurate. We recommend taxpayers diligently keep relevant tax documents in a safe place to avoid needing to request transcripts. If you have concerns about your tax return records, please contact us for assistance.

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