Posts Tagged ‘Tax Services’

The Deep Dive: Changes to Fringe Benefit Rules for Employers

Brandon CanganyBrandon Cangany, CPA
Senior, Tax Services
bcangany@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax reform and how they might affect you or your business.  Click here for last week’s column.

Business Deduction is Denied for Entertainment Expenses – The Tax Cuts and Jobs Act eliminates the 50% deduction for business-related entertainment expenses for amounts paid or incurred after December 31, 2017. Under the new law, no deduction is allowed for: (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues for any club organized for business, pleasure, recreation or other social purposes, or (3) a facility used in connection with any of the above items.

However, the restrictions on deducting entertainment expenses don’t apply to nine types of expenses listed in Code Sec. 274(e), including the following:

  • Expenses for goods, services and facilities that are treated as compensation to an employee on the employer’s income tax return and as wages of the employee for withholding purposes.
  • Expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
  • Expenses for recreational, social or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly-compensated employees.

As a result of the tax law change, Sponsel CPA Group recommends that taxpayers set up an “entertainment” account (separate from their meals account) within their general ledger in order to capture the now non-deductible entertainment expenses.

Business Deduction is Limited for Employer Provided Meals – The new law provides that the 50% limit on the deductibility of business meals is expanded, for amounts paid or incurred after December 31, 2017, to meals provided through an in-house cafeteria or otherwise on the premises of the employer. Under prior law, these expenses were 100% deductible by the taxpayer. For tax years beginning after December 31, 2025, the new law will disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility.

Business Deduction is Denied for the Cost of Providing Qualified Transportation Benefits – The new law provides that no deduction is allowed, for amounts paid or incurred after December 31, 2017, for the expense of a qualified transportation fringe benefit (e.g., parking and mass transit), but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

If you have any questions about tax reform changes, please call Brandon Cangany at (317) 613-7899 or email bcangany@sponselcpagroup.com.

Deductability of Prepaid Real Estate Taxes Under New Law

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

Under the recently passed tax law, individual taxpayers are limited to a maximum of $10,000 for the amount of combined state and local income tax, property tax and sales tax (if elected) claimed as an itemized deduction for tax years beginning after December 31, 2017.

As a result of these changes, many taxpayers have asked if they can prepay their 2018 real estate property taxes before December 31, 2017, in order to claim the amount as an itemized deduction on their 2017 federal individual income tax return.

In response, yesterday the IRS has issued an advisory: click here to read it.

In general, the IRS states that a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 if the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.

Please be aware of one important caveat: Individual taxpayers who will pay alternative minimum tax (AMT) on their 2017 federal individual income tax return will most likely receive no benefit by prepaying their 2018 real estate taxes in 2017.

If you have any questions about real estate deductions, please call Nick Hopkins at (317) 608-6695 or email nhopkins@sponselcpagroup.com.

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.

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.

Are Property Losses from Hurricanes Deductible?

Jennifer McNettBy Jennifer McNett, CPA
Manager, Tax Services Group

As residents in Texas, Florida and Puerto Rico recover from a trio of deadly hurricanes and the humanitarian crisis has started to ease, people’s thoughts have started to turn to practical matters. One question that has come up amongst those who own property in those regions is on the deductibility of losses due to hurricanes.

Hopefully, they carried property insurance, including a hurricane policy, to guard against damage from natural disasters. There are still bound to be some property losses that are unreimbursed, due to deductibles or because they fall outside the specific terms of an insurance policy. Is there any tax relief available for these losses?

The short answer is yes – but don’t expect it to be a simple process, or receive a huge amount of relief. Here is an overview.

In general, the federal tax code is not very generous when it comes to deductions for damages from disasters such as hurricanes, also known as casualty losses. In order to have a chance of recovering those unreimbursed losses through tax deductions, one usually must have low adjusted gross income (AGI), poor insurance coverage and be able to document the loss.

For personal use property, the loss is measured by the lesser of the adjusted-basis of the property or the economic loss. The adjusted-basis is usually the purchase price or value upon acquisition, adjusted by any subsequent capital improvements. The economic loss is calculated by the change in the property value immediately before and after the event.

From the lesser of those two values, we subtract the insurance payment or other reimbursement/mitigation. For personal use property losses, the IRS makes two reductions: first a flat $100, then a further 10 percent of the owner’s AGI. If there is still a loss after these reductions, it can be reported as an itemized deduction on the taxpayer’s federal return. Itemized deductions can also be limited depending on income, and on most state tax returns, including Indiana, federal itemized deductions are not allowed.

As an example, let us say Martha sustained $5,000 of post-insurance losses from a hurricane and has an AGI of $40,000. The IRS reductions of $100 and 10% of her AGI ($4,000) leaves her with a net casualty loss deduction of $900.

With for-profit business property, the casualty loss is similarly determined by computing the difference in fair market value immediately before and after the event. However, each identifiable property is treated separately, and the loss is not subject to the $100 or 10% of AGI reductions. For example, damages to a building, landscaping or vehicles parked there would be viewed and computed separately. Obviously, this makes the process more complex for businesses.

Inventory losses from hurricanes are not generally reported as casualty losses, but are deducted as a cost of goods sold expense under the general provisions relating to inventories.

The biggest challenge in claiming casualty loss tax deductions is being able to determine and document the pre-event value of the property and its diminishment as a result of the hurricane or other disaster. Usually a qualified appraiser is necessary who has knowledge of the region and type of property. In certain cases, the cost of repairs can be used to document the decline in value, but you are still required to start your calculation with the value before the loss.

The IRS and state taxing authorities do often give further concessions to taxpayers when the loss occurs in a federally declared disaster area – which is usually the case with severe hurricanes like Harvey, Irma and Maria. The primary concession is to allow the owner to obtain economic relief sooner than normal by permitting them to report the loss on the tax return for the year in which the loss occurred, or on an amended return for the immediately preceding tax year. In other words, if you are able to document a casualty loss from the 2017 hurricanes, you could file an amendment to your 2016 return right away.

If you want more information about casualty losses, you can visit the IRS webpage on that topic, or contact Jennifer McNett in our Tax Services department at (317) 608-6699 or email jmcnett@sponselcpagroup.com.

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