Expensing Assets Under the Tax Cuts and Jobs Act

Because of the Tax Cuts and Jobs Act (TCJA), taxpayers can now deduct 100% of the cost of most new or used tangible property, other than buildings, acquired and placed in service after Sept 27, 2017. The new law also made Section 179 expensing more favorable by allowing taxpayers to immediately deduct the entire cost of qualified property on an asset-by asset basis up to a maximum of $520,000 annually. This limit is reduced by one dollar for every dollar that the costs of all section 179 property exceeds $2,070,00 for assets placed in service beginning in 2018.

The Act also consolidates various leasehold improvement categories into one category – qualified improvement property. Qualified improvement property consists of improvements made to the interior of nonresidential real property after the building was placed into service. Qualified improvement property is also eligible for Section 179 expensing.

Should you take 100% bonus depreciation or select Section 179 expensing? It depends! Here are several considerations to keep in mind when deciding between Section 179 expensing and 100% bonus depreciation:

  • Neither bonus depreciation nor Section 179 expensing affect Alternative Minimum Tax (AMT).
  • Bonus depreciation must be elected out of by asset class; Section 179 expensing is elected on an asset by asset basis.
  • Section 179 expensing is limited to taxable income; bonus depreciation is not limited by taxable income.
  • Bonus depreciation can create a Net Operating Loss (NOL), which can be carried back and possibly generate a refund from a prior tax year.
  • Section 179 expensing can control taxable income to maximize the new 20% Qualified Business Income (QBI) deduction or limit the new $500,000 business loss limitation.

Selecting between 100% bonus depreciation and Section 179 expensing will not only affect your taxes in the current year but also in a future year when the asset is sold. Contact us to discuss how this can impact you!

4th Quarter 2018 Due Dates

October 1:

  • Businesses: Deadline for establishing a new SIMPLE retirement plan for 2018; Deadline to provide written notice to employees related to Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) plans that begin on January 1, 2019

October 15:

  • Individuals: 2017 return due (Form 1040) if on extension
  • Calendar-year C corporations: 2017 return due (Form 1120) if on extension

October 31:

  • Employers: File Form 941 for 3rd quarter 2018

During November:

  • Employers: Request Form W-4s from employees whose withholding allowances will be different in 2019

December 17:

  • Calendar-year C Corporations: 4th installment of 2018 estimated tax due

Tax Cuts and Jobs Act Update

Changes to Qualified Tuition Plans:
Qualified tuition plans, commonly known as 529 plans, are a popular way to ease the financial burden of paying for college. Before the Tax Cuts and Jobs Act, earnings in a 529 plan could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. With the passage of the Tax Cuts and Jobs Act, 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Another change came as a result of the 2015 Protecting Americans From Tax Hikes (PATH) Act, which addresses refunds of tuition or other qualified education expenses. If a student withdraws from a class, there is often a refund issued by the institution. As long as the beneficiary recontributes the refund to 529 plan within 60 days, the refund is nontaxable! To discuss these two changes or the overall benefits of 529 plans, give us a call.

Changes to the Meals & Entertainment Deduction:
The Tax Cuts and Jobs Act of 2017 has made many important business tax changes, but one significant change relates to the deductibility of meals and entertainment. Prior to 2018, a business engagement at a local sports venue involving the cost of admission, food, or beverage was eligible for a 50% deduction. With the passage of the Tax Cuts and Jobs Act, entertainment expenses are now entirely nondeductible, regardless of the nature of the meeting. The Tax Cuts and Jobs Act also limits the deductibility of business meals provided for the convenience of the employer to 50%, which had been 100% deductible by the employer. Given these changes, businesses should consider any internal adjustments they need to make for tracking and reporting these costs. If you need guidance on the proper treatment of meals and entertainment expenditures, don’t hesitate to contact us for help!

Examples of Common Types of Meals & Entertainment Expenditures (Before & After the Act)
meals and expenditures after tax cuts and jobs act

Outsourcing Payroll? Payroll Taxes are Still YOUR Responsibility!

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Padgett has long encouraged clients to use reputable vendors, particularly when it comes to payroll. However, did you know that YOU are ultimately responsible for the payment of withheld taxes, even if you use a payroll service provider? Although outsourcing payroll to a third party can help ensure that filing deadlines and deposit requirements are met and greatly streamline business operations, it's your ultimate responsibility to pay these taxes, even if the failure to pay is entirely due to the payroll service provider's negligence or fraud.

Best Business Practices:

  1. Don’t change the address on file with the IRS to that of the payroll service provider. Changing the address may prevent your being informed a problem in time to do anything about it.
  2. Ask the payroll service provider if they have a fiduciary bond. This could protect you in the event of default. Padgett Payroll offers this.
  3. Ensure that your service provider is using the Electronic Federal Tax Payment System (EFTPS) as Padgett Payroll does. Payment history is tracked and can be viewed on-line, allowing you to easily confirm payments. A red flag should go up the first time a payroll service provider misses or makes a late payment. Once you have an EFTPS account, you’ll also be able to make tax payments that your payroll service provider typically doesn’t make for you (e.g., estimated tax payments).
  4. If you’re not using Padgett Payroll Service as your outsourced provider, ensure that your provider is listed as having passed the IRS Assurance Testing System (ATS) and/or Business Acceptance Testing (BATS) requirements.

Outsourcing your complete payroll needs can save you time, help you run your business better, and protect you from payroll tax penalties. We suggest you consider a payroll service, such as Padgett Payroll Services, that’s designed specifically for small businesses like yours. For additional information, please contact our office for an appointment. We will be happy to discuss your options.

Are Your Earnings Subject to Self-Employment Tax?

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Self-employed persons are subject to a special tax to fund social security benefits under the Self- Employment Contributions Act. All self-employed persons, regardless of age, must file Schedule SE to compute the tax. For sole proprietors, SE tax is assessed on net earnings from self-employment, which is defined as gross income less allowable deductions from a taxpayer’s trade or business.

Trade or Business Requirement. To be engaged in a trade or business generally requires your continuous and regular involvement in the activity and the intent of making a profit. Thus, earned income received from an isolated or sporadic activity that differs from your regular trade or business is generally not subject to SE tax because it does not rise to the level of a trade or business. If your side work is in the same line as your regular job, you probably have income subject to SE tax. Side work does not necessarily need to be in the same line of work to constitute a trade or business. All facts and circumstances should be carefully reviewed considering the potential risks of taking a position contrary to that of the IRS.

Physical Presence No Longer Required!

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In the recent U.S. Supreme Court case South Dakota v. Wayfair, the court determined that the mere “economic presence” in a state can be used to establish nexus for sales tax, even when the vendor has no physical presence. This decision overturned the long-standing law under the famous case of Quill Corp. v. North Dakota stating that “the physical presence rule of Quill is unsound and incorrect.” Economic presence can be met by surpassing an established threshold such as a certain number of transactions or an amount of sales in that state. Each state will have the ability to set their own thresholds and it may take some states longer to respond to this court ruling than others. Contact us to determine if your business will be impacted.

Postcard-Size Form 1040

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The Internal Revenue Service and the Treasury Department unveiled a draft version of the postcard-size Form 1040 that was promised from last year’s tax reform effort. For the 2019 tax season, the shorter Form 1040 will replace current Forms 1040, 1040A and 1040EZ so that all 150 million taxpayers can use the same form. The new form uses a “building block” approach, in which the tax return is reduced to a simple form and supplemented with additional schedules if needed. Taxpayers with straightforward tax situations will only need to file this new 1040 with no additional schedules.

Padgett was represented by Roger Harris, COO, on a call with the IRS Commissioner as he explained the new form and solicited feedback. The IRS plans to continue working with the professional tax community to finalize the streamlined Form 1040 over the summer. Stay tuned as we update you on this new tax filing opportunity!

Simplifying the Tax Code Causes More Complexities!

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While the Tax Cuts and Jobs Act (TCJA) sought to simplify the tax code, it also brought new complexity. For example, a new deduction provides substantial tax savings to people with “qualified business income” (QBI) from their pass-through business but calculating the deduction and limitations is complicated.

Generally, the QBI deduction is 20% of qualified income from a partnership, S corporation, or sole proprietorship. QBI, in a nutshell, is the net amount of income, gain, deduction, and loss with respect to your trade or business. Although we have a framework for the QBI calculation, we still await IRS guidance and clarification. This deduction will benefit many business owners, while phase-in and phase-out rules will reduce or eliminate the deduction for some taxpayers.

Complexities surrounding the new law can be daunting. Give us a call, and we can help you determine the impact that this deduction or other parts of the TCJA may have on your tax situation

3rd Quarter 2018 Due Dates

due_dates

July 31:

  • Employers. File Form 941 for 2nd quarter 2018. File Form 5500 or 5500-EZ for calendar-year 2017 if you maintain an employee benefit plan, or file Form 5558 to request an extension.

September 17:

  • Individuals. 3rd installment of 2018 estimated tax due.
  • Calendar-year C Corporations. 3rd installment of 2018 estimated tax due.
  • S Corporations. Calendar-year 2017 return due (Form 1120S) if on extension.
  • Partnerships. Calendar-year 2017 return due (Form 1065) if on extension.

Tax Deductible Vacations?

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Although technology has revolutionized the way we do business, there are still situations where it’s necessary for a face-to-face meeting with staff, management, or customers. With a little planning for the current vacation season, you can mix some leisure time in with your business travel and still get a tax deduction.

Deductible Travel Expenses — If your trip within the U.S. was primarily for business and, while at your business destination, you extended your stay for a vacation, made a side trip, or had other personal activities, you can deduct only your business-related travel expenses.

It’s important to keep records such as receipts, canceled checks, or bills, to support your expenses and be able to prove the number of days spent on business. The following is a list of expenses you may be able deduct depending on the facts and circumstances:

  • 50% of the cost of meals
  • Travel by air, rail, and bus fares
  • Baggage charges
  • Hotel expenses
  • Expenses of operating and maintaining a car
  • Local transportation costs for taxi fares or other transportation to and from the airport
  • Cleaning and laundry expenses
  • Computer rental fees
  • Telephone or fax expenses
  • Tips on eligible expenses

However, these same types of expenses aren’t deductible for non-business days. Personal entertainment costs on the trip, such as a sightseeing tour, aren’t deductible, regardless of the day on which they fall. Cost deductions for a spouse accompanying you on a business trip are allowed only if your spouse is a bona fide employee. Merely having your spouse-employee perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. Your spouse’s presence must be necessary to your business pursuits – not just helpful.

Travel Outside the U.S. — Travel outside the U.S. has its own set of unique rules and record keeping requirements. When documenting your business trips outside the U.S., your trip will fall into one of three categories:

  • Travel Entirely for Business,
  • Travel Primarily for Business, and
  • Travel Primarily for Vacation.

The factors which determine the category your trip falls into are related to the number of business days versus total days away. If your trip is less than one week, don’t count the day you leave the U.S. but count the day you return to the U.S. On the other hand, if your trip is more than one week, count both the day you leave the U.S. and the day you return. If your trip wasn’t entirely for business, you must allocate travel expenses on a day-to-day basis between days you did and didn’t conduct business.

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