Sunday, January 20, 2019

Domestic Production Activities Deduction expires

The domestic production activities deduction (DPAD) was one of those to be eliminated by the new tax law. The DPAD expired on Dec. 31, 2017 as the TCJA became effective on Jan. 1, 2018.

Tuesday, January 15, 2019

Half of IRS employees will be recalled during tax Season

Half of IRS employees to be recalled during tax season

Under an updated contingency plan covering the upcoming filing season, the IRS will recall 57% of its workforce to handle tax season duties, the agency reported Tuesday.
Temporary funding for the IRS for fiscal year 2019 expired at midnight on Dec. 21. Since then, the IRS has been operating under a contingency plan that furloughed 88% of its workforce, and only 9,946 were considered “excepted/exempt” and allowed to continue working. Under the new plan, 46,052 IRS employees will be considered “excepted/exempt” and will return to work.
The new plan will allow the IRS to process paper and electronic returns and issue refunds to taxpayers. The IRS had previously announced that tax season will start on Jan. 28 and that it would be issuing refunds during the government shutdown.
The IRS will also be opening its call sites and responding to taxpayer questions.
All IRS audit and examination functions and nonautomated collections will continue to be put on hold during the shutdown.
For prior coverage of IRS operations during the partial government shutdown, see “Government Shutdown Would Halt Many IRS Operations.

Wednesday, January 09, 2019

Start of Tax Season

The IRS announced on Monday evening that it is prepared to start processing 2018 tax returns on Jan. 28 and that it will pay tax refunds despite the partial shutdown of the federal government. The agency has been operating under a contingency plan that has furloughed 88% of the IRS’s workforce. It says it will recall “a significant portion” of its furloughed staff for tax season. The agency also says it will issue an updated contingency plan in the next few days.
Under the IRS’s original contingency plan, which officially ran through Dec. 31, the agency would process electronic returns (and paper returns up to a certain point) but would not issue refunds. However, the IRS believes it has statutory authority to issue refunds under 31 U.S.C. Section 1324.
The IRS is shut down because it is one of the government agencies that did not have its budget funded through fiscal year 2019. The agency’s funding ran out at midnight Dec. 21, and since then it has been operating under a contingency plan that allows for preparation for filing season and a limited number of other activities.

Monday, January 07, 2019

2019 Sales Tax

Sales tax wonks will remember 2018 as the year the Supreme Court of the United States overruled the physical presence rule that for decades kept states from taxing remote sales. The court’s decision in South Dakota v. Wayfair, Inc. (June 21, 2018) allows states to require a remote seller with “economic and virtual contacts” in the state (economic nexus) to collect and remit sales tax, even if it has no physical presence in the state.
This is huge, and it will take months if not years for the full ramifications of the decision to play out.

Fallout from Wayfair

As of the end of 2018, more than 30 states and Washington, D.C. have adopted economic nexus policies, including two giants, California and Texas. Fallout from the Wayfair decision is sure to continue in 2019.
Several states have already filed economic nexus legislation for consideration in 2019, including Arkansas, Missouri, and Virginia. Meanwhile, sales tax simplification measures are under consideration in Texas because the Lone Star State has more than 1,500 local taxing jurisdictions.
Although the Wayfair case was triggered by an economic nexus law, the decision doesn’t prevent states from pursuing remote sales tax revenue via different routes; all it does is put an end to the physical presence rule. Thus, states could pursue a variety of remote seller sales tax laws in 2019, including affiliate nexus, click-through nexus, or cookie or software nexus.
Furthermore, more states will likely require marketplace facilitators to collect and remit sales tax on behalf of their third-party sellers. What will this mean for businesses that sell through multiple channels? There’s a good chance we’ll find out in 2019.

An act of Congress?

Will the rapid growth of economic nexus and other remote seller sales tax laws inspire Congress to take up the issue? Perhaps. It could never agree to expand state tax authority to remote sales, but it might come together to limit it. A handful of bills seeking to do just that have already been introduced.

There’s more to sales tax than remote sales

States’ newfound freedom to tax remote sales isn’t the only sales tax news making headlines. Expect to see the following in 2019:
  • More states apply economic nexus to other taxes. Texas is already looking at how economic nexus affects franchise tax. Expect other states to move in that direction.
  • More taxes on streaming services. As more people stream their entertainment, more states will look to tax those services.
  • More taxes on sins. Some states will change the way they tax products like alcohol and tobacco; others could start to tax newly legal products such as marijuana.
  • More product taxability changes. In 2019, more states may exempt certain products like tampons because they’re essential. Others may subject products like soda to a higher rate because they pose a health risk. And some states may exempt newish products and services simply because they’ve never been taxed before.
Rate changes: There are sure to be many.

Tuesday, January 01, 2019

Happy New Year!

Happy New Year!!!  Hoping each of us has a great 2019!!!

Friday, December 28, 2018

Qualified Business Income Deduction (QBI) aka Section 199A deduction

Following the passage of the Tax Cuts and Jobs Act, you may be wondering how the new qualified business income (QBI) deduction affects your taxes. There are many variables that can mean a big write-off, a modest one, or none at all.
Let's take this example: An S corporation owner who runs a successful home remodeling business in a suburb of New York City wants to know what the new federal tax law does for him. He's got 25 employees and takes a salary of $200,000. The business has revenue of $10 million, and he personally expects his taxable income along with his spouse's to be about $400,000 in 2018. The answer is that the Act will entitle him to a significant personal deduction on his 2018 Form 1040 based on the S corporation income that's passed through to him.

The new Section 199A deduction

When the Act lowered the tax rate on C corporations to a flat 21 percent (down from graduated rates as high as 35 percent) starting in 2018, Congress tried to create a way to lower the tax rate on owners of pass-through businesses--sole proprietorships, partnerships, limited liability companies, and S corporations. What it came up with was the Section 199A deduction (named after the code section that governs it). The deduction can be as much as 20 percent of qualified business income, or QBI. (It can't be more than an individual's taxable income minus capital gains.) Thus, for a business owner in the top tax bracket who can qualify for the deduction, instead of paying 37 percent on QBI, the effective tax rate after the deduction becomes 29.6 percent.

Your taxable income 

The deduction is pretty simple for some business owners, but very complicated for others; it all depends on taxable income. For owners with taxable income in 2018 of no more than $315,000 on a joint return, or $157,500 on another return, the deduction is 20 percent of QBI effectively connected with a U.S. trade or business. (To this can be added 20 percent of certain dividends from real estate investment trusts and income from publicly traded partnerships.)
QBI means the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Capital gains and losses, certain dividends, and interest income on reserves and working capital are not qualified items. Reasonable wages to S corporation owners and guaranteed payments to partners and LLC members for services performed for the business aren't taken into account.
For owners such as the home remodeler in the example with taxable income greater than these thresholds, special limitations come into play. The amount of the deduction for them is limited by various factors:
  • W-2 wages, including reasonable compensation to S corporation owners, which are taxable compensation plus elective deferrals to 401(k) and similar plans
  • Unadjusted basis immediately after acquisition (UBIA) of qualified tangible property (essentially the original cost of equipment and realty) that's still in use by the business and hasn't reached the end of its recovery period for depreciation purposes
And for owners who are in a specified service trade or business, which is explained next, there's an additional limitation.

Specified service trades or businesses

For those operating in certain fields called specified service trades or businesses (SSTB) with taxable income over the threshold amount, the deduction is further curtailed by another limitation. The amount of QBI, W-2 wages, and UBIA that can be taken into account are reduced proportionately by excess taxable income, meaning taxable income over the threshold amount. But the excess taxable income that can be used is limited to $100,000 on a joint return or $50,000 for other filers. So once taxable income is $415,000 for a joint filer or $207,500 for any other filer, no QBI deduction can be claimed by an owner of an SSTB.
Businesses that fall in the SSTB category include those providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees. In proposed regulations, the IRS has clarified when the reputation or skill of one or more employees will be treated as being its own category of an SSTB, and it's favorable to taxpayers. This will only be treated as an SSTB if the person receives payment for endorsing products or services, for allowing the use of his or her image, voice, or other symbol associated with the individual's identity, or for appearing at an event or in the media. The proposed regulations give the example of a restaurant owner who endorses a line of cookware. The fees for the endorsements result in cookware activity being treated as an SSTB, but it doesn't make the restaurant an SSTB.

More on deductions

When an individual owns more than one pass-through business, the deduction is figured separately for each one and the totals are added together to become one entry on Form 1040. However, proposed regulations allow businesses to be aggregated in some situations to optimize the QBI deduction. If there's a loss for the year so that no QBI deduction can be claimed, the loss is carried forward and will reduce the QBI deduction for the following year. Again, the QBI deduction is not a business deduction, so it won't reduce self-employment tax for self-employed owners. It's a personal deduction that can be claimed whether the owner itemizes or uses the standard deduction.

A growing FAQ 

Because the QBI deduction is new, there will continue to be clarifications, forms and instructions, and other help in handling the new write-off. The IRS has a FAQ page on the Section 199A deduction. Business owners of pass-throughs need to work with their tax advisers to determine whether they qualify for the QBI deduction and what they can do, if anything, to maximize their tax savings.
Special thanks to Barbara Weltman, author of J.K.Lasser's Small Business Tax 2019 for much of this information.

Tuesday, December 18, 2018

Health Insurance in 2018?

Yes, it is required for 2018. Although it has not been signed into Law yet, the bill that Congress has been agreed upon does waive the penalty for not having health insurance starting in 2019 (a year from now). Oddly enough, the law would still technically require health insurance, but the penalty for not having not having it would be $0.

Friday, December 14, 2018

Florida's minimum wage in 2019

Florida's minimum wage is increasing to $8.46 an hour.  Tipped employees can be paid a minimum wage of $5.44 an hour  in accordance with the tip credit under Fair Labor Standards Act.

Friday, November 30, 2018

2018 Form 1040

The 2018 draft form, which has not yet been officially posted on the IRS website, uses the first page to gather information about the taxpayer and any dependents and for the taxpayer’s signature and jurat. The second page gathers information on the taxpayer’s income, deductions (including a new line for the Sec. 199A qualified business income deduction), credits, and taxes paid. Many of the items reported on the 1040 will be calculated on various new schedules, which have also not yet been officially posted. These schedules include:
  • Schedule 1, Additional Income and Adjustments to Income, includes items from lines 10 through 37 of the 2017 Form 1040, such as business income, alimony received, capital gains or losses, and adjustments including educator expenses and student loan interest expense.
  • Schedule 2, Tax, includes items from lines 44 through 47 of the 2017 Form 1040, such as the tax on a child’s unearned income (commonly called the kiddie tax), the alternative minimum tax, and any excess premium tax credit that must be repaid.
  • Schedule 3, Nonrefundable Credits, includes items from lines 48 through 55 of the 2017 Form 1040, such as the foreign tax credit, the credit for child and dependent child care, the education credit, and the residential energy credit.
  • Schedule 4, Other Taxes, includes items from 57 through 63 of the 2017 Form 1040, such as household employment taxes, the health care individual responsibility payment (the individual mandate), the net investment income tax, and the additional Medicare tax. It also includes a new line for reporting the Sec. 965 net tax liability installment from Form 965-A — a form that does not yet exist.
  • Schedule 5, Other Payments and Refundable Credits, includes items from lines 65 through 74 of the 2017 Form 1040, such as estimated tax payments, the net premium tax credit, and amounts paid with an extension request.
  • Schedule 6, Foreign Address and Third Party Designee, provides taxpayers who have a foreign address a place to list their country, province, and postal code (formerly these appeared on page 1 of the 1040) and provides all taxpayers with a place to list information for a third-party designee who can discuss the return with the IRS.
The draft Form 1040 and the new schedules also refer to various existing schedules, which presumably will continue to exist in updated form. These include Schedule A, Itemized Deductions, Schedule C, Profit or Loss From Business, Schedule D, Capital Gains and Losses, Schedule E, Supplemental Income and Loss, Schedule F, Profit or Loss From Farming, Schedule H, Household Employment Taxes, Schedule SE, Self-Employment Tax, and Schedule 8812, Child Tax Credit.
On the other hand, Schedule B, Interest and Ordinary Dividends, Schedule J, Income Averaging for Farmers and Fishermen, and Schedule R, Credit for the Elderly or the Disabled, are not mentioned on the new form and schedules. A line exists for reporting the earned income tax credit, although Schedule EIC itself is not mentioned.
Thanks to Sally Schriber for this write up

Friday, November 16, 2018

The Work Opportunity Credit

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.

WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2020. For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014 and before January 1, 2020. The PATH Act also added a new targeted group category to include qualified long-term unemployment recipients.

Targeted Groups

Employers can hire eligible employees from the following target groups for WOTC.

Pre-screening and Certification

An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.

Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.

Limitations on the Credits

The credit is limited to the amount of the business income tax liability or social security tax owed.

A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, General Business Credit, for more details.

For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.

Claiming the Credit

Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.

Taxable Employers

After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:

Tax-exempt Employers

Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who begin work on or after December 31, 2014, and before January 1, 2020.

After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.