Tax Reform: What It Means for You

Nick HopkinsBy Nick Hopkins, CPA, CFP®
Partner, Director of Tax Services

Now that the debate is over and the votes have been taken, tax reform is the new reality. President Trump is expected to sign the “Tax Cuts and Jobs Act” in the coming days, bringing the most sweeping changes to the U.S. tax code in three decades.

The Act in its entirety is a whopping 1,097 pages long, which will take some time to digest all of the details of the bill. However, below is a summary of some of the key changes for both individual taxpayers and business owners.

FOR INDIVIDUAL TAXPAYERS:

  • Tax Rates — There will now be seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly.
  • Standard Deduction — The standard deduction is increased to $24,000 for joint filers, $18,000 for head of household and $12,000 for singles or married taxpayers filing separately. The expected result is fewer people will be itemizing deductions.
  • Exemptions — Starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
  • Child and Family Tax Credit — The child and family tax credit doubles to $2,000, and increases the refundable portion to $1,400. This means that some lower-income families could receive a refund check even if they pay no federal income tax.
  • State and Local Taxes — State and local income and property tax itemized deductions are limited to a total of $10,000.
  • Mortgage InterestMortgage interest on a principle or second home is deductible up to $750,000, down from $1 million starting with loans taken out in 2018. Home Equity Loan (HELOC) interest is no longer deductible after December 31, 2017, no matter when the debt was incurred.
  • Miscellaneous Itemized Deductions — There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This included such deductions as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses.
  • Medical Expenses — Medical expenses are deductible after they exceed 7.5% of adjusted income (down from 10%) for 2017 and 2018.
  • Health Care “Individual Mandate — The Affordable Care Act (“Obamacare”) tax penalty for people who fail to purchase minimum essential health coverage is abolished starting in 2019.
  • Estate and Gift Tax Exemption — The estate and gift tax exemption is increased to $11.2 million ($22.4 million for married couples).
  • Alimony — Alimony payments are no longer deductible by the payer, nor includable by the recipient for divorce decrees issued after December 31, 2018.
  • Individual Alternative Minimum Tax (AMT) Exemption — The individual Alternative Minimum Tax is retained, but the exemption increased to $109,400 for joint filers, $54,700 for married couples filing separately and $70,300 for singles. It is phased out for taxpayers with income above $1 million for joint filers, $500,000 for everyone else.

FOR BUSINESSES:

  • Pass-Through Deduction — The Act establishes a 20 percent deduction of qualified business income from certain pass-through businesses (i.e. partnerships, S-Corporations, LLC’s, or sole proprietorships). Specific services, such as health, law and professional services, are generally excluded. However, joint filers with taxable income below $315,000 (deduction phased-out fully at $415,000) and other files with taxable income below $157,500 (deduction phased-out fully at $207,500) can claim the deduction on income from service industries. Additionally, for taxpayers with taxable income more than the above thresholds, a limitation on the amount of the deduction is phased in based on either wages paid or wages paid plus a capital element.
  • Corporate Tax Rates Reduced — The graduated corporate tax rates of 15%, 25%, 34% and 35% are replaced with a single flat rate of 21%.
  • Corporate Alternative Minimum Tax — For tax years beginning after Dec. 31, 2017, the corporate Alternative Minimum Tax is repealed.
  • Increased Section 179 Expensing — Code Sec. 179 expensing, which allows a taxpayer to deduct the cost of qualifying property, is increased to a maximum of $1 million, and the phase-out threshold is increased to $2.5 million.
  • 100% Expensing of Qualified Business Assets — A 100% depreciation expensing of qualifying business assets acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The additional first-year depreciation deduction is allowed for both new and used property. This provision replaces the previous 50% bonus depreciation available for qualified new property.
  • Limits on Deduction of Business Interest — For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entities, which requires the determination to be made at the entity level. The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships. An exemption for these new rules applies for taxpayers with average annual gross receipts of under $25 million for a three-year tax period ending with the prior tax year.
  • Modification of Net Operating Loss Deduction — The net operating loss (NOL) deduction is modified with the repeal of the two-year carryback and special carryback provisions, though the two-year carryback still applies in the case of certain farming losses. For losses arising after Dec. 31, 2017, the deduction is limited to 80% of taxable income. Carryovers to other years are adjusted to take account of this limitation, and NOLs can be carried forward indefinitely (with some exceptions, notably for insurance companies).
  • DPAD — The Domestic Production Activities Deduction (DPAD) is repealed.
  • Like-Kind Exchange Treatment Limited — The rule allowing the deferral of gain on Like-Kind Exchanges is modified to allow them only with respect to real property that is not held primarily for sale. It can still apply to exchanges of personal property if the taxpayer has disposed of the relinquished property or acquired the replacement property by Dec. 31, 2017.
  • Cash Method of Accounting — Expanded use of the Cash Method of accounting for taxpayers that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. The exceptions from the required use of the accrual method for qualified personal service corporations and taxpayers other than C corporations are retained. Accordingly, qualified personal service corporations, partnerships without C corporation partners, S Corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income.

These are significant changes that will create new opportunities and challenges for everyone, whether individuals or businesses, looking to minimize their tax burden. Consult with your trusted tax advisor to create a strategy going forward with all the variables that come with tax reform in mind.

If you have any questions about the new tax outlook, please call Nick Hopkins at (317) 608-6695 or email nhopkins@sponselcpagroup.com.

Valuation Analyst Credentials

Amber HooverBy Amber Hoover, CPA/ABV
Senior Analyst, Valuation and Litigation Services 

When you need a valuation of a business, the first step is also the most important: hiring an expert.

Using an in-house accountant or relying on the do-it-yourself method can often make an uncertain situation into an even worse one. It’s important to find someone who has experience and knowledge in valuation so you can arrive at a result that is not only fair, but legally justified.

The Internal Revenue Service (IRS) and the U.S. legal system both have guidelines for what constitutes a “qualified” valuation expert. These guidelines describe the experience, training and continuing education necessary to earn this designation.

There are a number of credentials available that denote valuation expertise, which have undergone some changes in recent years. These include:

Organization Certification Membership
 
American Institute of Certified Public Accountants (AICPA) Accredited in Business Valuation (ABV) Certified Public Accountants (CPA)s
 
American Society of Appraisers (ASA) Accredited Senior Appraiser (ASA)

Accredited Member (AM)

CPAs and Non-CPAs
 
National Association of Certified Valuators and Analysts (NACVA) Certified Valuation Analyst (CVA)

Accredited in Business Appraisal Review (ABAR)

CPAs and Other Credential Holders
 
Institute of Business Appraisers (IBA) Certified Business Appraiser (CBA)

Master Certified Business Appraiser (MCBA)

*

*Credential holders must comply with the same recertification requirements as NACVA’s credential holders.

In 2008 the NACVA acquired the assets of the Institute of Business Appraisers, but that organization was subsequently dissolved. The CBA and MCBA credentials are no longer available to obtain, but current holders of these credentials must still comply with NACVA’s recertification requirements.

Valuation analysists who have been credentialed through these organizations have been through training that provides the knowledge and skills needed for valuing a business and the required standards to follow. Continuing education requirements allow members to keep current on trends and issues in the valuation world.

When you’re considering an engagement with a valuation analyst, don’t be afraid to inquire about their credentials and experience with various types of businesses. An analyst who has expertise in one particular type of valuation may not necessarily be the person best suited for your needs.

If you are unsure what type of valuation expertise you require, please call Amber Hoover at (317) 613-7844 or email ahoover@sponselcpagroup.com.

Holiday closures

The offices of Sponsel CPA Group will be closed on Monday, Dec. 25 and Monday, Jan. 1 in celebration of the holidays and to give our team much-deserved time with their families. We thank you for an outstanding 2017, and look forward to serving you in 2018!

Tips to Maximize Tax Benefits of Charitable Giving

Lindsey AndersonBy Lindsey Anderson, CPA
Manager, Tax Services Group

Year-end is an ideal time to give to charity, both for the spirit of the holiday season and the ability to include those deductions on this year’s return. Here are some tips on how to maximize the tax benefits of your charitable donations:

Donate Highly Appreciated Stock Instead of Contributing Cash

When it comes to charitable giving, the IRS allows you to take a tax deduction for the fair market value of donated stock held for more than one year, even though you may have paid substantially less for the stock originally. By donating the stock directly to the charity, you will avoid capital gain tax that would have been owed if you had sold the stock directly.

Depending on your tax bracket, this strategy could result in up to an extra 23.8% tax savings on the gain. The charity will usually sell the stock as soon as they receive it to use the proceeds for their mission purposes. You save money by avoiding taxes on the gain and by receiving a charitable deduction for the fair market value of the donated stock.

When selecting this strategy, it is important to choose investments with significant unrealized gains – the higher the better.

Fund a Donor Advised Fund

Long gone are the days when you had to be part of the ultra-wealthy in order to create a charitable legacy through funding and running a Private Family Foundation. Maintaining a Private Foundation does still have its benefits — such as retaining control and involving family members in charitable giving — but it can be a costly endeavor.

A more cost-efficient strategy has arrived in the charitable world known as a donor-advised fund. These individual accounts are maintained by a qualified Charitable Foundation set up through your investment advisor. (Think Schwab Foundation or Fidelity Charitable Fund.)

Taxpayers can receive the same tax benefits of receiving an up-front deduction when funding their donor-advised account, but this method allows the money to stay in the account until ready to advise on its disbursement to the applicable charities. Donor-advised funds are an excellent strategy for tax savings in a year in which you enjoy significant taxable income, such as proceeds from the sale of a business.

Time Major Donations for When Income Is High

Most charitable contributions may be deducted up to 50% of adjusted gross income. Contributions to certain private foundations, veterans’ organizations, fraternal societies and cemetery organizations are limited to 30% of adjusted gross income.  With that being said, timing charitable contributions when income is high will help save tax dollars. If you were to sell your business for a large gain, time your charitable contribution to occur in the same tax year as the gain from sale to maximize your contribution.

Consider Sending Your RMD Directly To Charity

A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA custodian payable to a qualified charity. If you are age 70½ or older, you can transfer up to $100,000 to charity tax-free each year, even if that is more than your required minimum distribution (RMD).

By sending funds directly to a qualified charity of your choice, you do not have to include the withdrawal in taxable income for the year. This is especially advantageous for those who must take their RMD but do not itemize their deductions, or have their itemized deductions phased out.

School Scholarship Granting Organizations

The state of Indiana allows for a very generous credit for donations made to a Qualified Scholarship Granting Organizations (SGOs). Qualified SGOs receive funding for scholarships from private, charitable donations. Each year, the Indiana Department of Revenue indicates the total amount of credits to be awarded. For fiscal year ending June 30, 2018, there are $12,500,000 in credits to be awarded by the Department of Education.

You should check on the remaining balance of available credits prior to donating to an SGO fund to ensure there are enough available for your donation. By donating to a SGO, you receive a charitable contribution for your donation on your Federal return as an itemized deduction. In addition, you receive 50% of your donation as an Indiana state tax credit to offset your state tax liability.

Indiana College Credit

Plan on supporting your favorite Indiana college or university? There’s also a credit for that! Indiana allows a credit of 50% of any donation made to an Indiana college or university, up to $200 per tax year. Tuition paid to a college or university is not a contribution and does not qualify for this credit.

Indiana Neighborhood Assistance Program

Indiana offers Neighborhood Assistance Program (NAP) tax credits annually for distribution by non-profit organizations. Organizations that focus on affordable housing, counseling, child-care, educational and emergency assistance, job training, medical care, recreational care, downtown rehabilitation and neighborhood commercial revitalization are typically granted NAP tax credits.

These credits allows the organization to incentive donations to their organization. By donating to an organization with an eligible NAP tax credits program, you receive a charitable contribution for your donation on your federal return as an itemized deduction in addition to an Indiana state tax credit in the amount of 50% of your donation amount.

Summary

A couple of warnings to keep in mind for all of these strategies. First, always make sure that you donate to qualified 501(c)(3) organizations; otherwise, your contribution will not be allowable as a tax deduction. Furthermore, the IRS has some stringent documentation rules that must be met depending on the type and value of your contribution.

Many taxpayers have lost out on large tax deductions because they didn’t obtain the proper documentation on the front end or realize that the charity was not actually a qualified organization with the IRS.

If you need assistance with your charitable giving plans, please call Lindsey Anderson in our Tax Services department at (317) 608-6699 or email landerson@sponselcpagroup.com.

A Simple Solution to Increased Productivity: Multiple Monitors

Chris EdwardsBy Chris Edwards
Manager, IT Services

One of the simplest and least expensive methods of increasing an information worker’s productivity is to provide them with more screen space in which to work. This seems like it would be obvious: if you have more workspace, you can do more work.

A study from the University of Utah, first published in 2003 and then updated in 2008, shows that an increase in virtual desk space increases productivity. But the productivity increases taper off after a total screen size of approximately 26 to 30 inches on the diagonal, or 2560 x 1440.

At the time that study was first reported, multiple monitors were uncommon and generally considered expensive. This is no longer true. Almost any computer can be fitted with a USB video card to allow another monitor at a cost of around $50, plus the cost of the second monitor you choose. It’s easy to find lower-end or refurbished models for under $100.

I would recommend you try to keep all the monitors about the same size, shape and height from the desktop. Horizontal or vertical alignment seems to help the eye keep more focused on the information.

Technically, you can provide this screen space with one single, larger monitor. Multiple monitors provide added bonuses, however, in the way they treat applications.

If you’ve been using the latest versions of Windows on multiple monitors, for example, you know how easy it is to drag a window into another screen and have it maximize, making things like comparing documents or referring to references easy. Windows does have a method of performing this action in a similar way on a single monitor, but it is not as intuitive or quick.

If your employees use laptops, a second screen can immensely improve productivity easily. Most laptops already provide the needed connection; you just need the additional monitor and a cable.

Additional monitors are even a viable option for workers who are often on the move. Portable USB monitors, powered via the cable directly from the laptop, can be found in 17-inch screen sizes for approximately $150 on Amazon, and can be easily transported for your workers who travel. They can be set up and broken down very easily.

As noted above, productivity gains do fall off after a certain amount of additional space. It becomes a case of too many things to pay attention to, or the specific tasks do not benefit from the additional room.

You should tailor the setup for the particular task at hand. If your worker needs to review multiple documents at the same time, perhaps two or more additional monitors will allow them to view all the documents simultaneously without printing them out and laying them across their desk. The degree of productivity improvement is highly dependent on the sort of tasks required of your staff.

If your organization hasn’t moved to multiple monitors for its information workers, it can be a great low-cost option to explore in the new year. It’s a good bet they’ll find it to be a very positive benefit to their workflow.

If you need to consult with an information technology expert about increasing worker productivity, please call Chris Edwards at (317) 613-7855 or email cedwards@sponselcpagroup.com.

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