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.

Early Withdrawal of a 401(k) in Divorce

401(k)s can provide a nice nest egg for retirement, and – subject to some tax rules and requirements – you can also dip into them if the unexpected occurs, such as a divorce. Employers typically create 401(k) retirement plans as employee benefits, and some employers match contributions made by their employees. These assets are groups of investments managed by professionals or sometimes even the employees themselves. They grow tax-free until withdrawal, and – at least to some extent – they're marital property.

Marital Asset

Contributions to your 401(k), both by you and by your employer, are marital property if they're made during your marriage. The same applies to interest and growth if it accrues between the date of your wedding and the time of your divorce. Contributions and growth pre-dating your wedding are yours and yours alone.
Therefore, if you're facing divorce and you take an early withdrawal, you face an additional problem besides the usual taxation and penalties. Your spouse is entitled to a portion of what you take out unless you spend it for the family's benefit. If you use the money for your own personal reasons, you must compensate your spouse for her share of the asset in the division of property as part of the divorce process.

Borrowing Vs. Withdrawal

Withdrawals from your 401(k) before age 59 1/2 are subject to a 10 percent early withdrawal penalty, and you'll have to include the withdrawal as income on your tax return. If the withdrawal occurs prior to your divorce, the owner – you – takes the full brunt of taxation and penalties. Another option might be to borrow against your 401(k) instead. Under federal law, you can take up to $50,000 and 50 percent of your vested balance, but you'll have to pay the loan back with interest over a five-year period. Otherwise, the early withdrawal penalty and taxes will still come due. There is an exception to this limit; if the account's balance is less than $10,000, you can borrow up to the full $10,000.
You'll also owe them if you change jobs before you pay off the loan. If you give any of the borrowed funds to your spouse pre-divorce, you'll have to include it in negotiations regarding overall property division.

Division in Divorce

It's usually better to wait until your divorce is final to break up your 401(k). Withdrawals made pursuant to a divorce decree or marital settlement agreement are penalty-free and sometimes tax-free. Your final decree typically orders a qualified domestic relations order – familiarly known as a QDRO – that directs your plan administrator to roll over your spouse's portion into an IRA in her name or to make a cash payment to her from your 401(k) balance. Provided you make such a withdrawal pursuant to a QDRO, you won't owe any taxes or penalties. If your spouse takes the cash, she can do so without paying the 10 percent penalty, but she'll have to pay taxes on the money as income. She can't transfer it to another 401(k) in her name unless she also works for your employer.

Things To Consider

Some plan administrators will not approve an early withdrawal without spousal consent if the plan owner is married. If you think your spouse might withdraw from her own 401(k) plan before your divorce is final, and if her plan allows it without your agreement, you might be able to take steps to prevent it. Your attorney may be able to freeze the account pending the divorce. At the very least and if she's successful, you should receive your share of the withdrawal's value in other assets or compensation at the time of your divorce.

Inflation adjustments and 2019 tax tab;es

The IRS on Thursday issued the 2019 annual inflation adjustments for many tax provisions as well as the 2019 tax rate tables for individuals and estates and trusts (Rev. Proc. 2018-57). These adjusted amounts will be used to prepare tax year 2019 returns in 2020.

Many amounts are increasing for inflation in 2019. The standard deduction will increase to $24,400 for married individuals filing joint returns or surviving spouses, $18,350 for heads of household, and $12,200 for unmarried individuals (other than surviving spouses) and married individuals filing separate returns.

The maximum amount of the earned income tax credit (for taxpayers with three or more children) is increasing to $6,557 (from $6,431 in 2018).

The maximum amount of the adoption credit will go up to $14,080 in 2019. That is also the maximum amount that will be excludable from an employee’s gross income for qualified amounts paid or expenses incurred by an employer under an adoption-assistance program.

The 2019 exemption amounts for the alternative minimum tax will be $111,700 for married individuals filing joint returns and surviving spouses, $71,700 for unmarried individuals (other than surviving spouses), $55,850 for married individuals filing separate returns, and $25,000 for estates and trusts.

The Sec. 179 amount for tax years beginning in 2019 will be $1,020,000 with a phaseout threshold of $2,550,000.

The qualified business income threshold under Sec. 199A(e)(2) is increasing to $321,400 for married individuals filing joint returns, $160,725 for married individuals filing separate returns, and $160,700 for single individuals and heads of household (from $315,000 for joint returns and $157,500 for other taxpayers in 2018).

The Sec. 911 foreign earned income exclusion amount is increasing to $105,900 in 2019.

The basic exclusion amount for determining the unified credit against the estate tax will be $11,400,000 for decedents dying in calendar year 2019, up from $11,180,00 in 2018. The annual gift tax exclusion amount remains at $15,000, but the gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen will increase to $155,000 (from $152,000 in 2018).

Various penalty amounts for failure to file tax and information returns or furnish payee statements are also adjusted for inflation for 2019.

—Thanks for this timely information from Alistair M. Nevius, J.D., (

Wednesday, October 31, 2018

Net Operating Loss under Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) brings significant changes to the tax code and offers new challenges for tax advisors. Those same challenges offer a number of benefits for taxpayers, especially business filers. However, it is best to temper a client’s expectations, as not every change introduced by the TCJA will benefit them.
Net Operating Losses (NOLs) are one of the changes that many may be disappointed to learn lessens a powerful benefit from the prior tax code. Let’s take a closer look at the changes that will have the greatest impact on tax planning for any client with a current or anticipated net operating loss for the upcoming tax year.

Change in NOL Calculation

Starting with tax years beginning after Dec. 31, 2017, IRC Sec. 172 limits NOLs by the changing how they are calculated.
IRC Sec. 172 (a)(1) and (2) state the current year NOL is: “…an amount equal to the lesser of the aggregate of …[Net Operating Loss] carryovers to such a year, plus …[NOL] carrybacks to such a year, or 80% of taxable income….”
NOLs are now less beneficial going forward, and for the current year, it would be best to advise any clients anticipating a net operating loss of this change soon to avoid any surprises at filing time.
On the other hand, a current-year deduction will now be more valuable for the same client than in years past; this offers a good planning opportunity for any tax advisor.
Also of note, this change will make it necessary to separately track any prior NOL a client has from any NOLs generated for future tax years. While many practitioners likely have already done so, this change will increase advisors’ bookkeeping responsibilities and can’t be overlooked.

Elimination of Two-Year Carryback

Another significant change is the elimination of the two-year carryback for NOLs, with exceptions for farming losses and non-life insurance companies. IRC Sec. 172 (b)(1)(A) states: “…except as otherwise provided … a net operating loss for any taxable year … shall not be a net operating loss carryback for any taxable year preceding the taxable year of such a loss, and shall be a net operating loss carryover to each taxable year following the taxable year of the loss.”
In other words, the TCJA has eliminated the carryback. For any clients depending on a carryback to provide a refund, it will be critical to advise them that this strategy is disallowed going forward. Note that the IRC makes no mention of the 20-year carryforward limitation, and does offset part of the loss of the two-year carryback.
Corporation XYZ, a calendar-year tax-filer, has an NOL of $45,490 in 2018. It has no other carryovers. XYZ’s only choice is to carry the NOL forward. In 2019, XYZ Corporation has taxable income of $50,000. XYZ's 2019 NOL deduction is limited to $40,000 ($50,000 × 80%). The remaining $5,490 is not deducted, but can be carried forward indefinitely.

Changes to Farming Losses and QBI Deduction

These are not the only changes to NOLs. Two of the most prominent involve farming losses and the new qualified business income (QBI) deduction introduce by IRC Sec. 199A.
Both IRC Sec. 172 (b)(1)(B) and (C) follow on from paragraph (A) and state that the losses of both farms and insurance companies (with the exception of life-insurance companies) may still utilize the two-year carryback to the extent of taxable income attributable to those activities. Both of these activity types are also limited to a carryforward of 20 years for any NOLs generated.
For non-corporate taxpayers, the 20 percent deduction of qualified business income deduction introduced by 199A is disallowed by IRC Sec. 172(d)(8) with regard to the calculation of any net operating losses.
The TCJA introduced many changes to the IRC, and while Sec. 172 is a small part, the changes mentioned above should serve to prepare tax advisors for just one part of what may be a challenging tax season.
Thanks to Mike D’Avolio, CPA, JD, is a senior tax analyst with Intuit ProConnect for this inforamtion