The Government Shutdown and the IRS! UPDATE: 1/8/2019

Hello again everyone! Since writing my prior article concerning the effect on the IRS resulting from the ‘government shutdown’ (BTW, you can read that article by clicking here) the IRS late yesterday (Monday, January 7th) has finally announced that they will begin processing tax returns on January 28th (a Monday). Hence that will be the start of ‘Tax Season’.

As usual, the filing deadline will be April 15th (a Monday) for most people. Taxpayers in Maine, Massachusetts and the District of Columbia will be the exception with the filing deadline to be April 17th due to local holidays.

The IRS plans to release details on it operational plans in the coming days, but did report that a significant portion of its furloughed employees will be recalled.

Finally, the Treasury Department and the Office of Management and Budget (OMB) have agreed that the IRS can issue tax refunds during a prolonged government shutdown. However, as a reminder, the IRS cannot issue refunds to those claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) before mid-February.

Stay Tuned!


Bruce @

Solid Tax Solutions (SolidTaxSolutions.com)

(845) 344-1040

☛We are open year round: Government shutdown or no Government shutdown!☚

____________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).


The Government Shutdown and the IRS!

So, now that Christmas is over and Santa Claus has made all of his visits you may be wondering if the government shutdown will affect the IRS.

Well, as you know the government is officially on shutdown–or actually on a partial shutdown. There are a number of functions which are relatively unaffected, such as the court system, for one reason or another, but most departments have contingency plans. Most IRS employees are considered nonessential and are going on furlough. That may be good news for someone anticipating an audit, but not if you have a question for the IRS.

How serious the shutdown is for the IRS will depend on the length of time it continues. Much more than a week and plans will change. Here are some of the functions still staffed under the short-term contingency plan:

  • Completion and testing of the upcoming Filing Year programs
  • Electronic returns processed systemically up to the point of refunds
  • Processing paper tax returns through batching
  • Processing remittances
  • Processing disaster relief transcripts
  • Continuing IRS’s computer and accounting operations to prevent data loss
  • Protection of statute expiration, bankruptcy, liens and seizure cases
  • Upcoming tax year forms design and printing
  • Maintain criminal law enforcement and undercover operations

Some examples of functions that are non-excepted activities and will be on hold:

  • Service center processing after the point of batching (e.g., data transcription, error resolution)
  • Issuing refunds
  • Processing non-disaster relief transcripts, income verification express service/return and income verification services
  • Processing amended tax returns
  • Most Headquarters and administrative functions not related to the safety of life and protection of property
  • All audit functions, examination of returns, and processing of non-electronic tax returns that do not include remittances
  • Non-automated collections
  • Legal counsel
  • Taxpayer services such as responding to taxpayer questions (call sites) (during Non-Filing Season)
  • Information systems functions (except as necessary to prevent loss of data in process and revenue collections)
  • Planning, research, and training and development activities

So as you can see, certain basic functions will continue. But if you’re looking for answers to questions, you’ll probably have to look elsewhere. If the furlough approaches the start of the filing season, which is just past the middle of January, it’s likely the IRS will have a problem adhering to the above schedule. Rest assured, it’s highly unlikely the filing deadlines will be extended.

Bruce @

Solid Tax Solutions (SolidTaxSolutions.com)

(845) 344-1040

☛We are open year round: Government shutdown or no Government shutdown!☚

____________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).


MERRY CHRISTMAS and HAPPY HOLIDAYS!

To our Tax Nook family……….

At this time of year we (Solid Tax Solutions and I) would like to extend a heart felt and warm Merry Christmas wish to those who celebrate Christmas and to your family.

To those of you who don’t celebrate Christmas, we (Solid Tax Solutions and I) would like to extend a very warm wish of Holiday Greetings to you and your loved ones.

I would also like to extend a little warmth to you with Christmas music for you to enjoy and share with your family, loved ones and friends——–> Relaxing Christmas Music for You!

Love and Peace

Bruce (Your Host at the Tax Nook)

Solid Tax Solutions

SolidTaxSolutions.com

(845) 344-1040

__________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).


The IRS Gives Insight into Entertainment Expenses (Hint: Can You Say Bye-Bye?)

Hello everyone! Over the past several months I have been heavily asked questions by various business people about how the new tax laws (officially named the Tax Cuts and Jobs Act) will effect their businesses and specifically about business entertainment and its deductibility for taxes.

So, I thought that it would be helpful to address how business entertaining will be handled, for tax purposes, in tax years 2018 and beyond (or until Congress makes changes to the ‘new’ tax law effecting business entertaining).

Take note, that if you would like to learn more about the new tax law (or would like a refresher) I have written five articles giving a more in-depth look at the new tax law. You can read Part 1 here.

So, the rules surrounding business meals and entertainment have been complex for some time. It’s not so much what’s deductible and what isn’t, it’s the record keeping associated with the meals that is challenged most often by the IRS. You can only deduct 50% of the cost of most business meals and, in the past, entertainment. (There are some limited exceptions to the 50% rule for business meals).

The Tax Cuts and Jobs Act (TCJA), passed in 2017, generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation. Entertainment has been defined to be any activity which is of a type generally considered to constitute entertainment, amusement, or recreation such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, or sporting events. The term “entertainment” may include an activity, the cost of which is claimed as a business expense by the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing food and beverages, a hotel suite, or an automobile to a business customer or the customer’s family. The term “entertainment” does not include activities which, although satisfying personal, living, or family needs of an individual, are clearly not regarded as constituting entertainment, such as (a) supper money provided by an employer to an employee working overtime, (b) a hotel room maintained by an employer for lodging of employees while in business travel status, or (c) an automobile used in the active conduct of trade or business even though also used for routine personal purposes such as commuting to and from work (but other rules apply in this situation).

Unfortunately, the TCJA didn’t specifically address the deductibility of expenditures for business meals. It seemed clear that meals out-of-town on a business trip or at a business convention were still deducible (subject to the 50% rule). But the question of whether or not taking a client to lunch was still deductible was unanswered because that can be construed as entertainment. The IRS has just issued some guidance, in the form of Notice 2018-76 (which you can read right here) in explaining its position on the issue. The notice also announced the IRS intends to publish proposed regulations which will discuss the deductibility of certain business meals. Until the proposed regulations are effective, taxpayers may rely on Notice 2018-76 for guidance.

Under prior law, entertainment expenses such as a ball game, theater tickets, etc. would be deductible only if the taxpayer could show the item was directly related to the active conduct of the taxpayer’s trade or business (“directly related” exception) or in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that the item was associated with the active conduct of the taxpayer’s trade or business (“business discussion” exception).
Example–The directly related exception applies if you take a client out to lunch or dinner and discuss business during the meal. However, the IRS does make a distinction between a meal at a restaurant and a meal at a facility that wouldn’t be conducive to a business discussion. For example, having dinner at a pub with entertainment. (But that might qualify under the second exception).

Example–The business discussion exception applies if you have a bona fide business meeting and thereafter take the client for a quiet business meal. For example, you drop in on a client to show him new services your company offers. You’re discussing business from three in the afternoon to five. You take the client out for a business meal, but don’t discuss any business at dinner.

The new law doesn’t change the definition of entertainment. The IRS has noted that the legislative history of the TCJA clarifies that taxpayers generally may continue to generally deduct 50 percent of the food and beverage expenses associated with their trade or business. The IRS intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance in Notice 2018-76.

Taxpayers may deduct 50 percent of an otherwise allowable business meal if:

  1. The expense is an ordinary and necessary expense, paid or incurred during the taxable year in carrying on a trade or business;
  2. The expenses is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

Notice 2018-76 also says that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Requirements 1, 2, 3, and 4 above are not totally new. But, because of the overall new restrictions on entertainment, they may get closer scrutiny. The third item, requiring the taxpayer or an employee to be present is unlikely to cause a problem. But, you should be aware that you can’t just tell a customer to take his or her spouse with them to a local restaurant and put it on your tab and still get a 50 percent deduction.
Example–Bob invites Michael and Joseph, both customers of Bob’s company to a round of golf. After the game Bob buys lunch for the three of them at the golf club. The cost of the round of golf including any associated fees is entertainment and not deductible. The cost of lunch for the three, assuming all the other requirements are met, is deductible, subject to the 50 percent rule.

Example–Cindy invites Peter and Paul, both vendors for Cindy’s company to a football game. The company maintains a suite at the stadium and food and drinks are part of the cost of the suite. Since the food and drinks are not separately stated, none of the expense is deductible. If the food and drinks were separately billed, they would be 50% deductible.

While the notice answers some of the big questions, there are many nuances that it doesn’t. Many may be addressed in forthcoming regulations. The fact that entertainment is no longer deductible will affect trips on the company aircraft, deductions at country clubs, etc. The IRS may concentrate on finding any such disguised deductions when auditing 2018 and later year returns. Heavier scrutiny of meals could also be an expected consequence.

———–>Give Solid Tax Solutions (SolidTaxSolutions.com) a call at (845) 344-1040 to discuss the new tax rules and how it will affect you.

Bruce

___________________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Can the IRS Take Your Home and Sell It When an Offer-In-Compromise is in Effect???

In a somewhat recent court case on appeal —>United States v. Brabant-Scribner, No. 17-2825 (8th Cir. Aug. 17, 2018) the Eighth Circuit affirmed the decision of the district court allowing the sale of taxpayer’s home and affirmatively determining that an offer in compromise request filed by the taxpayer has no impact on the ability of the court to grant the request by the IRS to sell the home or on the IRS’ ability to sell the home once the court granted its approval. In reaching this conclusion the Eighth Circuit analyzed the exemptions to levy in Internal Revenue Code section 6334 and the relief those provisions do and do not provide.

The taxpayer, in this case, owes the IRS over $500,000. The opinion does not discuss the actions by the taxpayer to pay or resolve her liability prior to the action by the IRS to sell her house. I imagine that the IRS considered her a “won’t pay” taxpayer. Before seeking to sell her home, the IRS had seized and sold her boat and levied on her bank accounts.

The 1998 Restructuring and Reform Act added Internal Revenue Code section 6334(e)(1)(A) to require that prior to seizing a taxpayer’s principal residence the IRS must obtain the approval of a federal district court judge or magistrate in writing. Before the passage of this provision, the IRS could seize a taxpayer’s home with the same amount of prior approval needed to seize any other asset owned by the taxpayer. No approval was necessary to seize any asset of the taxpayer. Prior to 1998 collection due process did not exist. Prior to 1998 the 10 deadly sins did not exist one of which calls for the dismissal of an IRS employee who makes an inappropriate seizure. So, the landscape regarding seizures, and especially personal residence seizures, changed dramatically after 1998. However, the amount of litigation regarding seizure of personal residences is low and the Brabant-Scribner case offers a window on one aspect of this process.

As the IRS initiated the process of seizing her personal residence by obtaining the appropriate court approval, the taxpayer filed an offer in compromise. She filed an effective tax administration offer of $1,000 but the amount and sincerity of her offer do not really matter to the legal outcome of this case. The timing and the amount of the offer may have influenced the thinking of the judges and made them more inclined to dismiss her argument but her possibly bad faith effort to stop the approval and execution of the sale should not have affected the outcome here.

To convince the court to allow the sale of a personal residence, the IRS must show compliance with all legal and procedural requirements, show that the debt remains unpaid and show that “no reasonable alternative” for collection of the debt exists. The taxpayer argued that her offer was a reasonable alternative. However, the court spends three paragraphs explaining that an offer does not matter in this situation. The relevant language in the applicable regulation is “reasonable alternative for collection of the taxpayer’s debt.” The court explains that the word “for” holds the key to the outcome.

“For” refers to an alternative to the sale of the personal residence such as an installment agreement or the offer of funds from another source to satisfy the debt. An offer in compromise is not an alternative for collection but an alternative “to” collection.

Having determined that the words of the Treasury Regulation point toward a resolution other than an offer as providing the necessary alternative, the court looks at the remainder of the Treasury Regulation for further support of its conclusion. It points to the provision in Treasury Regulation 301.6334-1(d)(2) which provides that the taxpayer has a right to object after the IRS makes its initial showing and “will be granted a hearing to rebut the Government’s prima facie case if the taxpayer … rais[es] a genuine issue of material fact demonstrating … other assets from which the liability can be satisfied.” This regulation, like the one providing an alternative “for” collection, looks not to relief from payment of the liability but a source for making payment. It does not provide the offer in compromise as a basis for relief. Based on this the court concludes that “nothing requires the district court to ensure that the IRS has fully considered a taxpayer’s compromise offer before approving a levy on a taxpayer’s home.”

Since the IRS properly made its case for seizing and selling the home and the taxpayer did not rebut that case, the Eighth Circuit affirms the decision of the district court to approve the sale. The decision provides clear guidance for district courts faced with the request by the IRS to seize and sell a personal residence. Personal residence seizures by the IRS remain rare at this point. Taxpayers faced with such a seizure, almost always taxpayers the IRS characterizes as “won’t pay” taxpayers, will find it difficult to stop the seizure and sale based on this decision. I do not think this decision will motivate the IRS to increase the number of personal residence seizures but it will make it a little easier to accomplish when it decides to go this route.

If you are having problems with the IRS, Solid Tax Solutions can help you.

We are only a ☎ phone call away at ☛ (845) 344-1040.

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Four States Sue the IRS Regarding the Cap on the State and Local Tax Deduction (SALT)

Well, well, well, four states are not taking the new (2018) cap on state and local taxes lying down.

New York, Connecticut, Maryland and New Jersey have filed a lawsuit against the IRS, the Department of the Treasury, and the United States of America seeking injunctive relief to invalidate the new $10,000 cap on the federal tax deduction for state and local taxes (SALT).

The lawsuit argues that the SALT deduction is essential to prevent the federal tax power from interfering with the states’ sovereign authority to make their own choices about whether and how much to invest in their own residents businesses, infrastructure and more. They note that the SALT deduction has been available since 1861.

The states make three claims of unconstitutionality that the SALT cap violates the 10th Amendment (states’ rights), that it violates the 16th Amendment (federal power to tax incomes) and that it violates Article I, Section 8 (Congress’s power to tax).

For more on the effect of the new $10,000 cap take a look at one of my prior articles here.

Just in case you are curious and would like to read the lawsuit 😂 you can take a look at it right here.

If you need help with your SALT (or other tax items), don’t be shy,  just reach out to us (Solid Tax Solutions) at
(845) 344-1040 ☛ year round.

$$$

_____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

How Might the Recent Supreme Court Ruling on Sales Tax Affect You?

In a 1992 landmark decision (Quill Corp. vs. North Dakota) the Supreme Court said that a seller had to have a physical presence in a state before that state could require it to collect sales tax. For example, ABC, Inc. a New York corporation, not having offices elsewhere sells through a catalog delivered by mail. A customer in Maine orders snow shoes. Under that decision ABC, Inc. would not have to charge sales tax on the snow shoes. If ABC, Inc. opened a manufacturing plant with one employee, or stored inventory in Maine, that state could require it to collect sales tax.

But, in 1992 online sales barely existed. Now, they account for a substantial, and fast growing, segment of the overall market. Many states have devised ways to capture some of those lost sales and have devised a number of ways to create a “connection” between an out-of-state seller and the state. One of the most popular is the “click-through nexus law”. Basically, if a buyer clicks on an ad on a website maintained in the state where the sale is made. There’s usually a threshold on such sales. For example, the rule doesn’t apply until sales in the state top $10,000. There are other approaches that are not as popular. Finally some states have not yet addressed the issue.

In the current case decided by the U.S. Supreme Court, South Dakota vs. Wayfair, Inc., South Dakota enacted a law in 2016 that required out-of-state retailers that deliver more than $100,000 in goods or services or make 200 or more transactions annually in the state to collect and remit sales tax. The law was written in such a way to enhance its chances for surviving a court battle that did, indeed, come to pass. The Court found a number of faults with the 1992 Quill decision and noted the changes created by the internet since then. The Court found that the 2016 South Dakota law was valid, noting that the safe harbor threshold for activity did not unduly burden businesses.

So, what does this all mean? Look for most states to enact laws to tax out-of-state sellers using a safe harbor threshold similar to that in use by South Dakota. Using the same threshold would make challenging the state law impossible. A lower threshold could leave the state vulnerable. States with dissimilar approaches currently may change their laws. It’s possible Congress could enact legislation to avoid a multitude of different laws. That seems unlikely given the current state of Congress. If you sell via the internet and your sales could reach the thresholds mentioned above, you would be wise to start adapting your systems to track sales by state and, if appropriate, by local jurisdiction.

Do you think the recent Supreme Court ruling is fair?

___________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

 

Are You Thinking About Putting Your Kids on The Payroll?

Should I Put My Kids on the Payroll or Not Really?

Will it make sense to put your children on the payroll for a summer or part-time job? While there are certainly tax implications, there are business and personal issues to consider too. Before digging into the details, I’d like to discuss some general issues with you. First, is the child going to get paid? If they are going to occasionally help you out in your home office, doing some filing, stuffing envelopes, etc. and the work is minimal, you might want to bypass the formalities and just put something extra in his or her allowance. Paying a salary, withholding, etc. can be a nuisance if you have no other employees. On the other hand, adding him or her to an existing payroll is usually easy.

Second, can the child do the work? Let’s say that you are a heavy equipment contractor doing business as a corporation and the state law requires any one working in a dangerous industry to be at least 17. Your son is only 15 and, since you use a bookkeeping service for all your paperwork, the only job is in the field. Or you claim your 10-year old daughter who works in your auto body shop. If you are audited, the IRS will be quick to investigate family members on the payroll. If it’s clearly not possible the child could have performed the work as claimed, the IRS will simply disallow the payments. And the IRS could interview current or former employees to check your story.

Sole Proprietorship or Another Type of Entity?

How you do business makes a difference here. Payments for the services of a child under age 18 who works for his or her parents in a trade or business are not subject to Social Security and Medicare taxes (FICA) if the business is a sole proprietorship or a partnership in which each partner is a parent of the child (i.e., you and your spouse are both members of an LLC and there are no other members). In addition, the payments are not subject to Federal Unemployment tax (FUTA) if the child is under 21. In any other situation, the payments are subject to FICA as well as FUTA.

For example, Kristy works for her father’s LLC that’s owned by her father and uncle. The ownership by the uncle means the partnership doesn’t qualify and her wages are subject to FICA and Medicare.

FICA taxes aren’t insignificant. There are two portions–the employer’s portion is 7.65% of his or her salary; the employee’s portion is a like amount. Since I am looking at a family situation, the total cost to the family is 15.3% of the salary. Half of that (the employer’s portion) is deductible. However, even if you’re in the 40% tax bracket (federal and state), the out-of-pocket cost will be a little over 9%. On $5,000 of salary that would be about $460. If you’re in a lower tax bracket your out-of-pocket would be higher because the deduction is worth less. If you have multiple businesses and at least one is operated as a sole proprietorship and your child is under 18, consider having the sole proprietorship employ the child, if possible.

Computing Your Tax Savings

Tax savings result from the switching of income from a high bracket (yours) to a low bracket (your child’s). While that’s true most of the time, it’s not unheard of for a business owner to sustain losses that put him or her in a low bracket, so it pays to check.

Even if your child is still your dependent, he or she can claim the standard deduction. That’s equal to $350 plus earned income, but not more than $12,000 (2018 amount). That means if he or she has no other income, the first $12,000 is not subject to tax. I’ve ignored state taxes on your child’s income in the discussion below. While the rules vary widely, state taxes are likely to be minimal.

The actual savings depends on your tax rate, your child’s rate, and the entity under which the business operates. I will give you a rundown on the different entities. In the discussion immediately below, I’ll assume the child’s only salary is from your business and it’s $5,000.

Regular Corporations: If you do business this way, the corporate tax rate is now (starting in 2018) a flat 21 percent on all income. The child will have income of $5,000, none of which will be taxable to him or her. The corporation gets a deduction for the $5,000, saving $1,050 in income taxes ($5,000 X 21%). Social Security and Medicare taxes will cost the corporation about $302 ($382.50 in FICA taxes [$5,000 X 7.65%] less the benefit of a tax deduction {$382.50 X 21%]). Your son or daughter will have $4,617.50 (net after their share of social security taxes) in their pocket; the corporation will be out-of-pocket only about $4,252 (Step 1: $5,000 + $382.50 (i.e., the employer’s portion of FICA taxes) = $5,382.50 Step 2: $5,382.50 X 21% (i.e., the ‘new’ corporate rate) = $1,130.33 Step 3: $5,382.50 – $1,130.33 = $4,252.17 (round this off to $4,252). So, the government has picked up about $748 of the amount you’ve given your child = 😎.

Partnerships and LLCs: Here the situation depends on the tax rates of the partners. I am going to assume the tax savings go to you alone. In this situation lets assume that you’re in the 24% bracket for federal purposes (FYI, the ‘new’ marginal tax rates starting in 2018 are: 10%, 12%, 22%, 24%, 32%, 35%, 37%); 5% for state. In partnerships and LLCs your share of the profits is subject to the self-employment tax (15.3%) up to the $128,700 (2018 amount) limit. There is no limit on Medicare taxes and there’s an additional 0.9% tax on individuals with higher income ($200,000/$250,000). Chances are you won’t break the limit, so the $5,000 you pay your child will reduce the partnership’s income and, therefore, your self-employment taxes by 15.3% of $5,000 or $765 as well as reducing your taxable income. In addition, you’ll pay $382.50 in social security taxes (7.65% X $5,000) on your child’s salary. Your marginal tax rate is 24% for federal plus 5% for state and about 12.8% for the self-employment tax (it’s 15.3%, but you get to deduct half of it on your personal return) or 41.8%. Thus, the $5,382.50 (salary plus employer’s share of social security taxes) will save you $2,250 in taxes. Your out-of-pocket cost will be $3,132.50. Your son or daughter will have $4,617.50 after social security taxes ($5,000 less $382.50). To find the total tax in other brackets you’re pretty safe in just adding your federal and state rates and then add 12.8% for the self-employment tax. In the top brackets the benefits are a bit more; in the lower brackets, less.

Sole Proprietorships: The result would be similar to that for partnerships and LLCs, unless the child is under age 18. Then we don’t have to worry about social security taxes. In that case the tax benefits are a bit more.

S Corporations: The computation here is similar to partnerships and LLCs, above, but the child’s salary and social security taxes will only reduce your social security taxes if you reduce your salary by a like amount. Since that’s unlikely, I won’t use that assumption. Again assume the 24% bracket for federal purposes and 5% for state. The cost of paying your child is $5,000 plus the $382.50 in the employer’s portion of social security taxes or $5,382.50. The tax savings would be 29% of that or $1,561. Therefore, your out-of-pocket would be $3,821. Your son or daughter will have $4,617.50 after social security taxes ($5,000 less $382.50). The savings here are less. Why? Because there’s no saving from the self-employment tax, the overall tax rate is less. When the tax rate is less the government picks up less of the cost.

You can see from the situations above, the biggest savings occur if you’re doing business as a sole proprietorship, partnership, or LLC since the self-employment tax boosts your tax rate resulting in larger savings from the deduction.

Some Other Points

Clearly, I’ve made it simpler than in real life. Fortunately, your savings could be more. If you’re in the 37% bracket and your state taxes are 7%, the savings will be larger. The rest of the discussion assumes you’re doing business as anything but a C corporation.

There are additional, hidden savings. By paying your child, you reduce your own Adjusted Gross Income (AGI) in all but a C corporation (unless you reduce your salary). There are many tax benefits and limitations based on your AGI. For example, the child care credit is phased out for higher income individuals as are itemized deductions, the $25,000 allowance for rental real estate losses, etc. To the extent you can shift income to your children, you can reduce or avoid these phaseouts.

While the discussion above was aimed at a summer job for your child still in school, the approach can have benefits for older, working children. The benefits will be less because they’ll be paying taxes on the income if it’s about the standard deduction, but they can still be significant. For example, if you’re in the 37% bracket and can transfer income to your daughter in the 12% bracket by employing her part-time in the business, the 25 percentage point spread could save considerable tax dollars. Of course, as her and your brackets converge the savings become less.

By the Book

Will it work? The IRS has gone to court and won some and lost some. You can win if you’re careful. This is another one of those the devil is in the details. First, you’ve got to put the child on the payroll. If you’re a sole proprietorship or LLC without any employees you’ll have to start filing Form 941 (employment taxes) quarterly, filing state employment tax returns, and paying state unemployment insurance. You’ll probably need workers’ compensation insurance. If you don’t currently have employees, this may be more of a hassle than it’s worth. If you already have employees, adding your son or daughter shouldn’t cost much.

Don’t try to claim the child is an independent contractor. That’s often tough to do even when the worker is older, experienced and has some professional credentials. It’s highly unlikely to fly here.

Make sure the child is qualified to handle the job. The IRS is going to be skeptical. You’ll be on firmer ground if you’ve hired individuals close to your child’s age for the job in the past, or others in the industry have done so. If the job requires special skills, make sure the child has them and you can document that.

Pay the going salary. Don’t pay more than you would to an unrelated party who would have filled the job. If you never had anyone in that position, ask around. An excessive salary is sure to raise a red flag. And, although it seems obvious, give your child a check. Don’t pay him or her with a trip to a theme park, a new bike, etc. Even when you pay by check you may have to rebut the supposition that payments made to dependent children are in the nature of support and nondeductible.

The jobs the child does should be clearly work related. If you have a regular place of business (office, laundromat, motel, farm, etc.) that may be easy. If you work out of your house, that may be more difficult. Don’t give them jobs that aren’t work related but that would free you to work. For example, having your daughter do the laundry to free you up to spend time calling customers. It may be valuable to you, but payments for that service aren’t any more deductible than hiring a housekeeper.

Document everything. Keep a log of days and hours worked, what was done, etc. Do it on a daily basis. Reconstructing six months or a year later won’t work. This doesn’t have to be ultradetailed, but it should be specific.

What about your 27-year old daughter with her MBA? The same rules apply, although you don’t have to document her work as carefully. Make sure you can show a reasonable salary and that he or she performed actual work. The same applies to your father or mother. There’s often an advantage here to putting them on the payroll. You may not need to cover them with health insurance (they may be on Medicare) and they’re probably in a lower tax bracket. Make sure they can do the job, especially if there are physical requirements.

As always, check with your tax adviser at Solid Tax Solutions (845) 344-1040 (or visit us on the web at: SolidTaxSolutions.com) before committing.

So my friends, are you still considering putting your child (or children) on the payroll???

____________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Stay Tuned!

Hi all! 👋 I just wanted to let you know that we haven’t forgotten about you. We are still here and I will be putting up a new article very soon.

Stay Tuned,

Bruce

_________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

Categories: General 'Thoughts'

The Tax Cuts and Jobs Act (TCJA) – Part 5

Hello again everyone and welcome to the fifth installment of our discussion about how the new Tax Cuts and Jobs Act can affect you. I hope that you find these articles enlightening.

To start off, if you haven’t read my introduction to the new law, please go to → Tax Cuts and Jobs Act–Part 1.

In this fifth installment I will be continue the discussion about items affecting individuals but with a business slant. There are a number of changes to the provisions applicable to business. Many are straight-forward, some are complex and will require regulations by the IRS to fully implement. I’ll start this discussion with some of the easier ones.

Immediate (Section 179) Expensing of Depreciable Assets

There are a number of ways of treating depreciable tangible personal property and certain other qualifying real property. Taxpayers can expense an asset with a cost of no more than $2,500 ($5,000 for certain taxpayers) under a safe harbor rule. That works well for small items such as laptops, calculators, small tools, etc. largely because it involves less paperwork and follows financial accounting rules. But there are some restrictions. For larger assets Section 179 allows an immediate deduction, but you must make an election to do so. In addition, there’s an income limitation. But it’s still simpler than taking annual depreciation.

Under prior law the Section 179 election was limited to $510,000 (adjusted for inflation) of assets in any one year and that amount was decreased for taxpayers who put more than $2,030,000 of tangible personal property in service during the year. There was a $25,000 restriction on SUVs (not adjusted for inflation) and for property used in connection with certain lodging facilities.

Increased Expensing Limits The new law increases the amount of property that can be expensed in any one year to $1 million and the investment limitation is increased to $2.5 million from $2 million. The higher $1 million limit on qualifying property means many small businesses won’t have to worry about depreciation of most assets. By combining the $2,500 safe harbor for lower-cost assets and the Section 179 option, over $1 million can be written off in any one year.

Tax TipTaxpayers doing business as a pass-through entity (S corporations, partnerships, etc.) may not want to use the full available amount. That’s because of the graduated rates for individuals where the pass-through income is taxed. Taking a large deduction in one year that drops your income into a low bracket only to push yourself into a high bracket in the following year will result in overall higher taxes. You do have some options and you don’t have to decide to depreciate or expense an asset until you file your return.

Qualified Real Property Definition The provision expands the definition of qualified real property eligible for expensing to include certain improvements to non-residential real property placed in service after the date such property was first placed in service. The improvements include roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems and security systems. This change not only allows a direct deduction for such improvements that are often encountered several times during the life of a building and that frequently generated controversy. Qualified improvement property continues to include certain leasehold improvement property, retail improvement property, and restaurant improvements and buildings. As under prior law, qualified improvement property is an improvement on the interior of a building. Modifications that enlarge the building do not qualify. The new law repeals the requirement that the improvement qualifies only if placed in service more than three years after the building is placed in service.

Property Used in Connection with Lodging The provision also expands the definition of Section 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with the furnishing of lodging. In the past longer-term lodging such as an apartment was distinguished from lodging such as a hotel, motel, inn, etc. Property used predominantly to furnish lodging or in connection with the furnishing of lodging generally includes beds and other furniture, refrigerators, ranges, and other equipment used in the living quarters of a lodging facility such as an apartment house, dormitory, or any other facility where sleeping accommodations are provided.

Sport Utility Vehicle Limitation The new law changes the rule with respect to the $25,000 limitation on sport utility vehicles such that this amount will be adjusted for inflation. The sport utility rule applies not only to the general definition of a sport utility vehicle but also a vehicle not subject to Section 280F and which is rated at not more than 14,000 pounds gross vehicle weight and has a seating capacity of less than 10 persons or truck with an interior cargo bed shorter than six feet.

 

Bonus Depreciation

Background For a number of years the law has contained a “bonus depreciation” provision, the intent of which has generally been to increase capital investment. Under normal rules, the first years’ depreciation is one-half of double the straight-line rate. The one-half is to account for the fact the property is in service for only a portion of the year. (Property placed in service in January gets 1/2 year of depreciation; so does property placed in service in December.) Bonus depreciation front loads the depreciation deduction even more. Under 50% bonus depreciation you can deduct half the asset’s value in the first year, plus you can take the regular depreciation on the other half. That was the rule in effect prior to the new law.

New Law The new law allows 100% bonus depreciation rather than 50% on property placed in service after September 27, 2017 and before January 1, 2023. Bonus depreciation drops to 80% for property placed in service after December 31, 2022 and before January 1, 2024; 60% in the following year then 40% in the following year and 20% for property placed in service after December 31, 2025 and before January 1, 2027. No bonus depreciation is allowed for subsequent years. Property subject to a written binding contract for its acquisition entered into before September 28, 2017 does not qualify. The placed in service dates for property with a longer production period and noncommercial aircraft are extended by one year. Bonus depreciation applies to both new and used property. (Under prior law it only applied to new property.) Special rules apply to prevent abuse. They include:

  • the property can not have been used by the taxpayer before purchase,
  • the taxpayer must have acquired the property by purchase,
  • the property can’t have been acquired from a related party if loss would be barred under Sec. 267 of the Internal Revenue
    Code.

Qualified leasehold improvement, restaurant property and qualified retail property retains a 15-year depreciation life, but now can be depreciated using MACRS (a faster method) rather than straight-line depreciation and the bonus depreciation rules apply.

The 100-percent bonus depreciation rules do not apply to assets used in a trade or business where the property has had floor plan financing indebtedness.

Bonus depreciation can be taken on qualified film, theatrical productions, or television shows placed in service after September 27, 2017.

Luxury Auto Limits Under Sec. 280F depreciation deductions for vehicles are capped on an annual basis. Under the old law it could take nine years to depreciate a $30,000 auto. The new law changes the limits for vehicles placed in service after December 31, 2017 and for which 100-percent bonus depreciation is taken. The new amounts are:

$10,000 for the first year,
$16,000 for the second year,
$9,600 for the third year,
$5,760 for the fourth and subsequent years.

These amounts will be adjusted annually for inflation.

Farm Assets The new law shortens the recovery period from 7 to 5 years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business if the original use of the property commences with the taxpayer and is placed in service after December 31, 2017. The provision also repeals the required use of the 150-percent declining balance method for property used in a farming business (3-, 5-, 7-, and 10-year property only). The 150-percent method will continue to apply to 15- and 20-year property. A farming business electing out of the limitation on the deduction for interest (see later) must use the ADS method of depreciation any property with a recovery period of 10 years or more (e.g., single purpose agricultural or horticultural structures).

Computers Listed property is property of a type that could be used for recreational purposes such as autos, computers, cameras, audio equipment, etc. Computers used in an office environment aren’t included, but those used at home are. In order to secure a deduction for listed property special record keeping requirements apply. That generally means keeping a log. Cellphones were removed from this list a number of years ago. The new law removes this computers and peripheral equipment from the definition of listed property (and the stricter substantiation requirements) effective for property placed in service after December 31, 2017.

Tax TipBeing able to write off the full value of an asset in the first year will maximize cash flow for that year, but it could result in higher taxes down the road. You can elect out of the bonus depreciation for any class of asset for the year. If you do business as a pass-through entity (e.g., S corporation, LLC, partnership, etc.) the income or loss is passed through to the shareholders, partners, etc. and subject to the progressive tax rates. Moreover, you can generally no longer carry back losses to an earlier year. That means you could be getting a current deduction and saving taxes only to put yourself in a higher bracket in a subsequent year. There’s no easy rule of thumb–you’ve got to work through the numbers. You should be looking at making an election if you’re in a lower bracket and the depreciation deduction will be a substantial percentage of your before depreciation income.

Tax TipBuy or lease? It’s a frequent question when it comes to vehicles. Depreciation deductions are capped. Deductions for lease payments are restricted through the lease inclusion amount. But that restriction on lease payments appears to be less than those on depreciation under the old law. The new law may favor purchase and depreciation of an auto, at least for less expensive vehicles. While it’s a point for consideration, the IRS has yet to release the lease inclusion tables for 2018 and there are other factors to take into account when leasing a vehicle for business purposes.

Tax TipWhile the new law removes the stringent record keeping requirements for computers, the IRS can still challenge the business use of any property. You should be able to show that the computer is used regularly in your business. In many cases it’s obvious. Let’s say that you’re an independent salesperson on the road and take and place orders with your office using the computer. That probably won’t be questioned. On the other hand if you have a landscaping business and keep all your records using a paper ledger, you may want to be able to prove the business use in some way.

Solid Tax Solutions is available to help you with preparing your tax return as well as show you how the new tax laws will affect you.

Just give us a call at (845) 344-1040.

☛(845) 344-1040☚

_______________________________________________________________________________________________________________________________________

Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com.

Other Social Media Outlets: Facebook.com/SolidTaxSolutions.

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).