Year-End Tax Planning for Businesses

There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2018. Here are a few of them:

DEFERRING INCOME

Businesses using the cash method of accounting can defer income into 2019 by delaying end-of-year invoices, so payment is not received until 2019. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2019.

PURCHASE NEW BUSINESS EQUIPMENT

Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2018 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $1 million for the first $2.5 million of property placed in service by December 31, 2018. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.5 million threshold and eliminated above amounts exceeding $3.5 million.

Caution: The new law removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after December 31, 2017.

Tax reform legislation also expanded the definition of Section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property after the date when the property was first placed in service (see below). These changes apply to property placed in service in taxable years beginning after December 31, 2017.

1. Qualified improvement property, which means any improvement to a building’s interior. However, improvements do not qualify if they are attributable to:

  • the enlargement of the building,
  • any elevator or escalator or
  • the internal structural framework of the building.

2. Roofs, HVAC, fire protection systems, alarm systems and security systems.

Bonus Depreciation. Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.

Qualified Property

Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

Please contact the office if you have any questions regarding qualified property.

If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here’s a simplified explanation:

Conventions. The tax rules for depreciation include “conventions” or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.

    1. The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as “placed in service” (or “disposed of”) at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.

Example: You buy a $70,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.

    1. The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
    2. The mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.

If you’re planning on buying equipment for your business, call the office and speak with a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.

OTHER YEAR-END MOVES TO TAKE ADVANTAGE OF

Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees with average annual wages of $50,000 indexed for inflation (e.g., $52,400 in 2017) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).

Business Energy Investment Tax Credits. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2022, and businesses that want to take advantage of these tax credits can still do so. Business energy credits include geothermal electric, large wind (expires 2020), and solar energy systems used to generate electricity, to heat or cool (or to provide hot water for use in) a structure, or to provide solar process heat. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible; however, passive solar and solar pool-heating systems excluded are excluded. Utilities are allowed to use the credits as well.

Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.

Qualified Business Income Deduction. Under the Tax Cuts and Jobs Act non-corporations) may be entitled to a deduction of up to 20 percent of their qualified business income (QBI) from a qualified trade or business for tax years 2018 through 2025. To take advantage of the deduction, taxable income must be under $157,500 ($315,000 for joint returns).

The QBI is complex, and tax planning strategies can directly affect the amount of deduction, i.e., increase or reduce the dollar amount. As such it is especially important to speak with a tax professional before year’s end to determine the best way to maximize the deduction.

Depreciation Limitations on Luxury, Passenger Automobiles and Heavy Vehicles

The new law changed depreciation limits for luxury passenger vehicles placed in service after December 31, 2017. If the taxpayer doesn’t claim bonus depreciation, the maximum allowable depreciation deduction is $10,000 for the first year.

For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,000.

Under tax reform, heavy vehicles including pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. As such, heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well.

Note: Deductions are based on a percentage of business use; i.e., a business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.

Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2018. Call today if you need help setting up a retirement plan.

Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.

CALL A TAX PROFESSIONAL FIRST

These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2018. If you’d like more information, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.

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Year-End Tax Planning for Individuals



Once again, tax planning for the year ahead presents a number of challenges, this year, primarily due to tax laws changes brought about the passage of the Tax Cuts and Jobs Act of 2018. These changes include the nearly doubling of the standard deduction, elimination of personal exemptions, and numerous itemized deductions reduced or eliminated. Let’s take a closer look.

GENERAL TAX PLANNING

General tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning. For example, taxpayers might consider using one or more of the following:

  • Selling any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
  • If you anticipate an increase in taxable income this year, in 2018, and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2019 tax return in 2020. Don’t hesitate to call the office if you have any questions about this.
  • Prepaying deductible expenses this year using a credit card. Examples of deductible expenses include charitable contributions and medical expenses. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid. Likewise with checks. For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2018 tax return.
  • If your company grants stock options, then you may want to exercise the option or sell stock acquired by exercise of an option this year. Use this strategy if you think your tax bracket will be higher in 2019. Generally, exercising this option is a taxable event; sale of the stock is almost always a taxable event.
  • If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

ACCELERATING INCOME AND DEDUCTIONS

Accelerating income and deductions are two strategies that are commonly used to help taxpayers minimize their tax liability. Most taxpayers anticipate increased earnings from year to year, whether it’s from a job or investments, so this strategy works well. On the flip side, however, if you anticipate a lower income next year or know you will have significant medical bills, you might want to consider deferring income and expenses to the following year.

Accelerating Income

If you anticipate being in a higher tax bracket next year, accelerating income into 2018 is a good idea, especially for taxpayers whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).

Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due. On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2018, depending on your situation. Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child tax credits, higher education tax credits, and deductions for student loan interest are examples of these types of tax benefits.

Examples of other strategies a taxpayer might take include:

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2019, by year-end. This does not apply to mortgage escrow accounts.
  • Pay 2019 tuition in 2018 to take full advantage of the American Opportunity Tax Credit, an above-the-line credit worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
  • Try to bunch medical expenses. For example, you might pay medical bills in whichever year they would do you the most tax good. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). For example, to deduct medical and dental expenses these amounts must exceed 7.5 percent of AGI. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

    Note: The 7.5 percent threshold is only in effect for tax years 2017 and 2018. In 2019, it reverts to 10 percent AGI.

ADDITIONAL MEDICARE TAX

Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2018 tax return next April.

High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.

If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax (NIIT) as well (more about the NIIT below).

ALTERNATE MINIMUM TAX

The alternative minimum tax (AMT) applies to high-income taxpayers that take advantage of deductions and credits to reduce their taxable income. The AMT ensures that those taxpayers pay at least a minimum amount of tax and was made permanent under the American Taxpayer Relief Act (ATRA) of 2012.

Although the AMT remained under the TCJA exemption amounts increased significantly. As such, the AMT is not expected to affect as many taxpayers. Furthermore, the phaseout threshold increases to $500,000 ($1 million for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.

Note: AMT exemption amounts for 2018 are as follows:

  • $70,300 for single and head of household filers,
  • $109,400 for married people filing jointly and for qualifying widows or widowers,
  • $54,700 for married people filing separately.

CHARITABLE CONTRIBUTIONS

Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.

Keep in mind that a written record of your charitable contributions–including travel expenses such as mileage–is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a canceled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.

Taxpayers age 70 ½ or older can reduce income tax owed on required minimum distributions (RMDs) from IRA accounts by donating them to a charitable organization(s) instead.

INVESTMENT GAINS AND LOSSES

This year, and in the coming years, investment decisions are often more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2018 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.

Caution: Fluctuations in the stock market are commonplace; don’t assume that a down market means investment losses as your cost basis may be low if you’ve held the stock for a long time.

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are taxed as ordinary income (i.e., the rate is the same as your tax bracket).

In 2018 tax rates on capital gains and dividends remain the same as 2017 rates (0%, 15%, and a top rate of 20%); however, due to tax reform, threshold amounts do not correspond to the new tax bracket structure as in prior years:

  • 0% – Maximum capital gains tax rate for taxpayers with income up to $38,600 for single filers, $77,200 for married filing jointly.
  • 15% – Maximum capital gains tax rate for taxpayers with income above $38,600 for single filers, $77,200 for married filing jointly.
  • 20% – Maximum capital gains tax rate for taxpayers with income above $425,800 for single filers, $479,000 for married filing jointly.

Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000. As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.

Wash Sale Rule. After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.

Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

NET INVESTMENT INCOME TAX (NIIT)

The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.

Please call if you need assistance with any of your long-term tax planning goals.

MUTUAL FUND INVESTMENTS

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Example: You invest $20,000 in a mutual fund in 2018. You opt for automatic reinvestment of dividends, and in late December of 2018, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.

Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.

The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.

Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date. To find out a fund’s ex-dividend date, call the fund directly.

Please call if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.

YEAR-END GIVING TO REDUCE YOUR POTENTIAL ESTATE TAX

The federal gift and estate tax exemption is currently set at $11.18 million but is projected to increase to $11.4 million in 2019. ATRA set the maximum estate tax rate set at 40 percent.

Gift Tax. Sound estate planning often begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.

Gifts to a donee are exempt from the gift tax for amounts up to $15,000 a year per donee in 2018 and are expected to remain the same in 2019.

Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2018, you must make your gift by December 31.

Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $30,000 ($15,000 each). Though what’s given may come from either you or your spouse or both of you, both of you must consent to such “split gifts.”

Gifts of “future interests,” assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.

Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, don’t hesitate to call the office for assistance.

Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.

You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings and built-in gain on sale.

Gift tax returns for 2018 are due the same date as your income tax return (April 15, 2019). Returns are required for gifts over $15,000 (including husband-wife split gifts totaling more than $15,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $15,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.” Please call the office if you’re considering making a gift of property whose value isn’t unquestionably less than $15,000.

NEW TAX RATE STRUCTURE FOR THE KIDDIE TAX

Under the TCJA, the kiddie tax rules have changed. For tax years 2018 through 2025, unearned income exceeding $2,100 is taxed at the rates paid by trusts and estates. For ordinary income (amounts over $12,501), the maximum rate is 37 percent. For long-term capital gains and qualified dividends, the maximum rate is 20 percent.

OTHER YEAR-END MOVES

Maximize Retirement Plan Contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.

If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,500 for 2018), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don’t apply.

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.

Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.

In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the amount of excess over 7.5 percent of AGI). For amounts withdrawn at age 65 or later that are not used for medical bills, the HSA functions much like an IRA.

To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2018, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,350 for single coverage or $2,700 for a family.

529 Education Plans. Maximize contributions to 529 plans, which starting in 2018, can be used for elementary and secondary school tuition as well as college or vocational school.

SUMMARY

These are just a few of the steps you might take. Please contact the office for assistance with implementing these and other year-end planning strategies that might be suitable for your particular situation.

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Five Things to Know Before Starting a Business

Starting a new business is an exciting, but busy time with so much to be done and so little time to do it. Also, if you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That’s where a tax professional can help.

1. Business Structure

The first decision you will need to make is determining which business structure you will use. The most common types are a sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.

2. Employer Identification Number (EIN) 

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The IRS issues EINS to employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.

Note: Even if you already have an EIN as a sole proprietor, for example, if you start a new business with a different business entity you will need to apply for a new EIN.

The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks, and you can apply for one EIN per day. There is no cost to apply.

3. State Withholding, Unemployment, Sales, and other Business Taxes

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable). Business taxes include income tax, self-employment tax, employment tax, and excise tax. Generally, the types of tax your business pays depends on the type of business structure. Keep in mind that you may also need to make estimated tax payments.

4. Payroll Record Keeping

Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn’t handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee’s employment application as well as the following:

  • Form W-4, Employee’s Withholding Allowance Certificate. Completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and Social Security number.
  • Form I-9 Employment. Eligibility Verification. Completed by the employer, to verify that employees are legally permitted to work in the U.S.

5. Employee Healthcare

As an employer with employees, you may have certain healthcare requirements you need to comply with as well. If so, you should know about the Small Business Health Care Tax Credit, which helps small businesses (fewer than 25 employees who work full-time, or a combination of full-time and part-time) pay for health care coverage they offer their employees. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

If you need help setting up or completing any tax-related paperwork needed for your business, don’t hesitate to call.

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Avoiding An Unexpected Tax Bill

Tax withholding can be complicated, and with the passage of the Tax Cuts and Jobs Act (TCJA) legislation, it’s even more so since a number of tax provisions have changed. As such, it’s important to make sure the right amount of tax is withheld for your particular tax situation.

Many taxpayers have already adjusted their withholding, but for those with more complicated tax situations who have been putting it off, it’s not too late. You should be aware, however, that the longer you wait, the fewer pay periods there are to withhold the necessary federal tax. In other words, more tax will have to be withheld from each remaining paycheck.

Let’s take a look at which taxpayers would benefit from a “paycheck checkup” right now to avoid an unexpected tax bill next year.

TAXPAYERS RECEIVING LARGE REFUNDS

Taxpayers who typically adjust their tax withholding so that they receive a large refund at tax time could be affected by tax law changes in the TCJA including reduced tax rates and significantly different tax brackets, as well as the removal of personal exemptions and doubling of the standard deduction. Adjusting tax withholding now will help taxpayers make sure the amount withheld is best for their particular tax situation–and avoid an unpleasant tax surprise next year.

HIGH INCOME TAXPAYERS WITH COMPLEX RETURNS

High-income taxpayers often find that itemizing instead of taking the standard deduction is more beneficial, but with the passage of tax reform legislation, that might no longer be the case. Taxpayers affected by any of the following tax changes should check and adjust their withholding as soon as possible:

  • Changes to tax rates and brackets.
  • Expansion of the child tax credit.
  • The standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles.
  • A $10,000 cap on deductions for state and local property, sales and income taxes.
  • New limits on deductions for some mortgage interest and home equity debt.
  • Higher limits on the percent of income a taxpayer can deduct as charitable contributions.
  • No deductions for miscellaneous expenses including investment expenses and unreimbursed employee expenses such as travel, meals, entertainment and uniforms.

It is especially important for those with high incomes and complex returns to review withholding because these taxpayers are often affected by more of these changes than people with simpler returns. This is also true if they also make quarterly estimated tax payments to cover other sources of income or are subject to the self-employment tax or alternative minimum tax.

TAXPAYERS WITH DEPENDENTS

In addition to expanding the Child Tax Credit, the TCJA added a new tax credit for parents or other qualifying relatives supporting a dependent age 17 or older at the end of 2018. This new tax credit – Credit for Other Dependents – is a non-refundable credit of up to $500 per qualifying person. This change, along with others, can affect a family’s tax situation in 2018 and it’s important to check and adjusted withholding amounts if necessary to prevent an unexpected tax bill and even penalties next year at tax time.

Tip: Families with qualifying children under the age of 17 should first review their eligibility for the expanded Child Tax Credit, which is larger. Taxpayers should also note that both credits begin to phase out at $400,000 of modified adjusted gross income for joint filers and $200,000 for other taxpayers.

TAXPAYERS WORKING IN THE SHARING ECONOMY

Because the U.S. tax system operates on a pay-as-you-go basis, taxes must be paid on income as it is received rather than at the end of the year. Generally, people who are part of the sharing economy and who do not have an employer need to make sure they pay their taxes either through withholding from other jobs they may have or by making quarterly estimated tax payments to cover their tax obligations.

TAXPAYERS OWING ESTIMATED TAXES

Underpayment of taxes is a common scenario with more than 10 million taxpayers facing a penalty for underpayment of estimated tax last year alone. Tax is typically withheld for most people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits. However, with numerous changes to the tax system due to tax reform many taxpayers may need to adjust withholding on their paychecks or the amount of their estimated tax payments to help prevent penalties.

While most income is subject to tax withholding, some income from self-employment or rental activities is not. Furthermore, individuals, including sole proprietors, partners, and S corporation shareholders, may need to make estimated tax payments unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions). As a reminder, in the U.S. taxes are required to be paid as income is earned or received during the year.

RETIREES WITH PENSION AND ANNUITY INCOME

The TCJA also changed the way tax is calculated for retirees, many of whom have income from pensions and annuities. As such, retirees who receive a monthly pension or annuity check may need to raise or lower the amount of tax they pay during the year. Retirees should treat their pension similar to income from a job. Pension recipients that need to change their withholding can do so by filling out Form W-4P and submitting it to their payor. Retirees should submit Forms W-4P to their payors as soon as they can to give payors enough time to apply any changes to withholding to as many payments as possible this year.

Note: Because it is already November, some retirees may be unable to cover their expected tax liability through withholding, and could instead make estimated or additional tax payments directly to the IRS. Please call if you need more information about this option.

QUESTIONS ABOUT WITHHOLDING?

If you have any questions about Form W-4 or need to make adjustments to your withholding, don’t hesitate to contact the office and speak to a tax professional you can trust.

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Small Employer Health Reimbursement Arrangmentments

Small employer HRAs or QSEHRAs (Qualified Small Employer Health Reimbursement Arrangements) allow small businesses without group health plans to set aside money, tax-free, for employees to use toward medical expenses–including the cost of buying health insurance. Here’s what you need to know about QSEHRAs.

BACKGROUND

Included in the 21st Century Cures Act enacted by Congress on December 13, 2016, was a provision for QSEHRAs, which permit an eligible employer to provide a qualified small employer health reimbursement arrangement (QSEHRA), which is not a group health plan and thus is not subject to the requirements that apply to group health plans. QSEHRAs must meet several criteria such as:

  • the arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;
  • the arrangement generally is provided on the same terms to all eligible employees of the employer;
  • the arrangement provides, after the employee provides proof of coverage, for the payment or reimbursement of medical expenses incurred by the employee or the employee’s family members; and
  • the amount of the payments and reimbursements for any year do not exceed $4,950 for employee-only arrangements or $10,000 for arrangements that provide for payments and reimbursements of expenses of family members. These amounts are adjusted for inflation annually for tax years after 2016. For 2018, the maximum dollar amount for employee-only arrangements is $5,050 ($4,950 in 2017). The maximum dollar amount for arrangements that provide for payments and reimbursements for expenses of family members is $10,250 ($10,050 in 2017).

WHICH EMPLOYERS QUALIFY?

Any small employer from a startup to a nonprofit that doesn’t offer a group health plan is able to set up a QSEHRA as long as they meet certain rules (see below). Small employers are defined as an employer that is not an applicable large employer (ALE). An applicable large employer is defined as one that employs fewer than 50 full-time workers, including full-time equivalent employees, on average.

Tip: If a small employer currently offers a group health plan but wants to set up a QSEHRA, the group health plan must be canceled before the QSEHRA will start.

ARE THERE ANY OTHER RULES?

Yes. One of the most important rules is that in order for employees to participate in a QSEHRA, they must have health insurance that meets minimum essential coverage. That is, indemnity, short-term health insurance, and faith-based insurance plans (e.g., Liberty HealthShare) do not qualify. Health insurance plans purchased through the Marketplace meet this qualification. Employers may choose whether to reimburse employees for both medical expenses and health insurance premiums or just premiums.

Furthermore, while there are no minimum monthly contribution limits, there is an annual maximum contribution limit. For 2018, the limit is $420 per month for individuals and $854 per month for families.

Note: QSEHRAs are funded entirely by the employer. As such, employees are prohibited from making contributions.

WRITTEN NOTICE TO EMPLOYEES

Eligible employers are required to provide written notice to eligible employees at least 90 days before the beginning of a year for which the QSEHRA is provided. In the case of an employee who is not eligible to participate in the arrangement as of the beginning of the year, the written notice must be furnished on the date on which the employee is first eligible. The written notice must include:

  1. a statement of the amount that would be the eligible employee’s permitted benefit under the arrangement for the year;
  2. a statement that the eligible employee should provide that permitted benefit amount to any health insurance exchange to which the employee applies for advance payments of the premium tax credit; and
  3. a statement that if the eligible employee is not covered under minimum essential coverage for any month, the employee may be liable for an individual shared responsibility payment (eliminated for tax years starting in 2019) for that month and reimbursements under the arrangement may be includible in gross income.

QUESTIONS ABOUT QSEHRAS?

If you have any questions about QSEHRAs or are wondering whether your small business would benefit from a QSEHRA, don’t hesitate to call.

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Extension Deadline Looming for 2017 Tax Returns

Time is running short for taxpayers who requested an extra six months to file their 2017 tax return. As a reminder, Monday, October 15, 2018, is the extension deadline for most taxpayers. For taxpayers who have not yet filed, here are a few tips to keep in mind about the extension deadline and taxes:

1. Taxpayers can still e-file returns. Filing electronically is the easiest, safest and most accurate way to file taxes.

2. For taxpayers owed a refund, the fastest way to get it is to combine direct deposit and e-file.

3. Taxpayers who owe taxes should consider using IRS Direct Pay, a simple, quick and free way to pay from a checking or savings account using a computer or mobile device. There are also other online payment options. Please call the office if you need details about other payment options.

4. Members of the military and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.

5. Taxpayers should always keep a copy of tax returns for their records. Keeping copies of tax returns can help taxpayers prepare future tax returns or assist with amending a prior year’s return.

 

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Managing Cash Flow is Key to Business Succes

Cash flow is the lifeblood of every small business but many business owners underestimate just how vital managing cash flow is to their business’s success. In fact, a healthy cash flow is more important than your business’s ability to deliver its goods and services.

While that might seem counterintuitive, consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. If you fail to have enough cash to pay your suppliers, creditors, or employees, you are out of business.

WHAT IS CASH FLOW?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers but keep in mind that inflow only occurs when you make a cash sale or collect on receivables. It is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Note: A tax and accounting professional is the best person to help you learn how your cash flow statement works. He or she can prepare your cash flow statement and explain where the numbers come from. If you need help, don’t hesitate to call.

CASH FLOW VERSUS PROFIT

While they might seem similar, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

In theory, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

Example: If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

ANALYZING YOUR CASH FLOW

The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company’s short-term reputation as well as position it for long-term success.

The first step toward taking control of your company’s cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the most important components to examine are:

  • Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable balance sheet is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
  • Credit terms. Credit terms are the time limits you set for your customers’ promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
  • Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy – neither too strict nor too generous – is crucial for a healthy cash flow.
  • Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
  • Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable at some point in the near future – “near” meaning 30 to 90 days. Without payables and trade credit, you’d have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Make sure your business has adequate funds to cover day-to-day expenses.

If you need help analyzing and managing your cash flow more effectively, please call.

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