New Tax Blogs
With so many changes to the U.S. Tax Code, newly created Opportunity Zones received less attention as a tax-advantaged investment strategy than other provisions in the Tax Cuts and Job Acts. With the potential to defer Federal taxes on any recent capital gains through 2026, reduce that tax payment by up to 15% and possibly pay zero taxes on potential profits on an investment held for 10 years, we think this lesser-known tax savings strategy is worth a closer look.
What are Opportunity Zones? Essentially, they have designated areas in economically-distressed communities to spur on growth through private dollars as opposed to tax dollars. Localities that qualify must be nominated by the state and certified by the Secretary of the U.S. Treasury via his delegation of authority to the IRS. According to the IRS, the first set of Opportunity Zones, covering parts of 18 states, were designated in April of 2018. Today, Opportunity Zones can be found in parts of all 50 states, the District of Columbia and five U.S. territories. You need not live, work or have a business in an Opportunity Zone in order to invest, simply an established Qualified Opportunity Fund (QOF).
What’s a QOF? A QOF is an investment vehicle set up either through a partnership or corporation for investing in eligible property. A limited liability company (LLC) that chooses to be treated either as a partnership or corporation for federal tax purposes can also set up a QOF. If you have questions specific to setting up a QOF for your business, we can provide you with more detailed answers.
What happens after a QOF is established and an investment is made? According to the IRS, investors can then defer tax on any prior gains invested in the QOF until the earliest date on which the investment in a QOF is sold or exchanged, or on December 31st, 2026. If the QOF investment is held for more than 5 years, there is a 10% exclusion of the deferred gain. If held over 7 years, the 10% grows to 15%. If the investor holds the investment for at least 10 years, he or she is eligible for an increase in basis of the QOF investment equal to its fair market value on the date the QOF investment is sold or exchanged.
At Tax Saving Professionals, we have assisted thousands of clients with tax-advantaged investment strategies over the past 18 years and would be honored to help you keep more of your money in your pocket. Give us a call at (772) 257-7888 or click on our contact form today.
If you’re feeling frazzled about taxes, you wouldn’t be the first person to feel the pressure. Even Albert Einstein admitted, “The hardest thing in the world to understand is the income tax.” Add to that the myriad of changes in the tax code that took effect for 2018, and the hardest thing in the world just got harder. In response, we’ve compiled a list of year-end tax tips that could prove useful when the 2018 tax filing season begins on January 29th, 2019. After all, it’s your money. We’ll help you keep it.
1.) Do some number crunching. Tax reform has nearly doubled the standard deduction -$12,000 for single filers and $24,000 for married couples filing jointly. That means fewer people will choose to itemize. If you are, however, close to the standard deduction, bundling itemized deductions could help you surpass the standard deduction every other year. If your itemized deductions are under the threshold, you could choose to accelerate some payments or shift some deductions from next year to this year to benefit on your 2018 income tax returns. You could also opt to wait until January to make payments or donate to charity to take advantage of itemized deductions in 2019. In both scenarios, bundling itemized deductions should be approached as a “long-term” strategy. If you’re not sure what to do, a tax professional can be of assistance.
2.) Defer income. Income is taxed in the year it is received. If you are a business owner, consultant or freelancer, you could delay billings until late December to ensure payments in January. Yes, you will be taxed in 2019, but, if it would be helpful to reduce your bottom line this year, it might be worth the effort. Whether you are self-employed or employed, you can also defer income by taking capital gains next year instead of 2018. Got a year-end bonus coming? Some companies will issue bonus payments in January to help employees avoid a year-end tax hit. Check to see if that’s an option for you.
3.) Harvest a loss. If you anticipate a large net capital gain this year, you might want to sell off some stocks or mutual funds to generate losses before the end of 2018. Commonly referred to as “tax loss harvesting,” losses offset gains dollar for dollar. With that said, you should not let the lure of possible tax savings damage your overall investment strategy. Take a good hard look or consult with a financial expert to determine if taking a loss is beneficial or detrimental to your long-term financial plans.
4.) Don’t throw money away. If you have a flexible spending account (FSA) for tax-free spending on qualified medical expenses, this “use it or lose it” account requires the money be spent before a designated deadline, usually at year’s end or during a grace period if your employer’s plan provides one. Regardless, whatever funds are left in your account post-deadline are lost. Check on your expiration date and make plans to see healthcare providers before year’s end and to buy prescription medicine you will need in 2019.
5.) Contribute to your future. Shifting funds into pre-tax retirement plans such as a 401 (k), 403 (b), deductible IRA, SIMPLE IRA or SEP lowers your adjusted gross income and taxable income so you pay less tax. You could also see a reduction in the amount of Social Security subject to tax or any net investment income tax.
6.) Donate to charity. It is better to give than receive, especially if you itemize. Gifts of cash under the new tax law, are now deductible up to 60% of adjusted gross income (up from 50%), while gifts of stock remain deductible up to 30% of income. With the doubling of the standard deduction, many taxpayers who have previously itemized may choose the standard deduction. If that’s the case with you, but you’d still like to support causes near and dear to your heart, check out our previous blog for charitable giving strategies.
7.) Choose a charitable rollover. If you are over 70-½, consider a trustee-to-trustee transfer of a portion or all of your required minimum distributions to a qualified not-for-profit organization. By making a qualified charitable rollover, you can get a tax benefit even if you don’t itemize. That’s what we call a win-win!
At Tax Savings Professionals, we have helped thousands of clients save on their taxes over the past 18 years and would be happy to answer any questions you may have. Give us a call at (772)257-7888 or click on our contact form today. Here’s to a Prosperous New Year.
The holidays are fast approaching! Time to deck the halls AND embrace the “season of giving!” And while giving for the sake of giving is a noble gesture, over the years many Americans have counted on tax-deductible charitable donations to help “shave” money off their tax bills.
While the charitable deduction was left unchanged in the 2017 Tax Cuts and Jobs Act, as of January 1st, 2018, the standard deduction has nearly doubled to $12,000 for single taxpayers and $24,000 for married couples filing jointly. Given this change, your ability to gain tax benefits from charitable contributions will depend on whether you have other deductions that can push you over the threshold of the standard deduction.
If that’s the case, gifts of cash are now deductible up to 60% of adjusted gross income (up from 50%), while gifts of stock remain deductible up to 30% of income.
If you are not able to justify itemization over the standard deduction, there are some strategies you may be able to utilize to satisfy your altruistic side while still making good fiscal sense.
BUNDLING or BUNCHING. Giving larger gifts “every other year” instead of annually to surpass the standard deduction threshold.
GIVING APPRECIATED INVESTMENTS. Donating items such as stock shares to deduct the investments full market value (within certain limits) without having to pay capital gains tax on the appreciation.
CONTRIBUTING THROUGH IRAs. Having direct asset contributions of up to $100,000 applied toward required yearly Individual Retirement Account distributions. Available to taxpayers 70-½ or older, these distributions will not be included in taxable income.
Just a few thoughts as we embrace this “season of giving.” A tax professional can offer more detailed advice and strategize based on your individual situation. If you choose to take part in the year-end charitable giving season, you may already have a cause that speaks to your soul. Perhaps it’s feeding the hungry, finding a cure, taking care of the environment, helping animals, building homes or something else. No matter your passion, you can find a wide range of top-rated charitable organizations at www.charitynavigator.org or www.charitywatch.org. Please remember you must make your giving decision by December 31st, 2018 to qualify for a tax deduction for the current calendar year.
At Tax Savings Professionals, we’ve worked with thousands of clients over the past 18 years and can answer questions you may regarding charitable giving and taxes as well as financial strategies. Wishing you a Happy Holiday Season and a Prosperous New Year, give us a call at (772)257-7888 or click on our contact form today.
If you are really thankful, what do you do? You Share! These are the words of philanthropist W. Clement Stone with which we – at Tax Savings Professionals – wholeheartedly agree!
To show our “thankfulness” this holiday season, we are holding a Thanksgiving Food Drive at our office during the month of November to help feed the hungry families in our community. And to make an even larger difference, I have decided to “dollar match” each pound our employees donate so local food banks will be able to buy perishable food items (such as turkeys, eggs, butter, milk etc.) that can be used to prepare hot meals.
We challenge you and your business to get into the spirit of giving this season as well and host your own holiday food drive! Click on any or all of the three links below to find food banks in your community.
Popular choices for holiday dinners (which Food Pantries use to round out their perishable offerings) include boxed stuffing mix, instant mashed potatoes in boxes or packets, jars of turkey gravy or dried gravy mix packets, canned yams, cranberry sauce, canned veggies, cornbread mix, fixings for green bean casserole (cream of mushroom soup, canned green beans and French-fried onions), canned pumpkin or fruit pie filling, pie crust mix, salt & pepper. Other “evergreen items” include canned milk, cereal, rice, beans, cans of instant coffee, peanut butter, jelly, sandwich bread, canned fruits, and juices.
After all, the more food we collect, the more dollars we raise – and the more reasons we ALL have to be thankful! Won’t you join with Tax Savings Professionals as we celebrate the “season of giving” helping our friends and neighbors? Through the acceptance of our challenge to launch your own dollar match food drive, we guarantee it will “feed your soul” and those who are hungry. That’s what we call - a win-win.
Happy Thanksgiving and all the best to you and yours from Tax Savings Professionals!
Drew Miles, President & Founder, Tax Saving Professionals
Whether state university or private school, the cost of sending a child to college has become quite expensive. According to CollegeData.com, a moderate college budget for an in-state public college for the 2017-2018 Academic Year averaged $25,290 dollars, while a moderate budget at a private college averaged $50,900. While that includes tuition, fees, housing and meals, books and school supplies, personal and transportation expenses, it doesn’t take into account that colleges can and will increase how much they charge for tuition in future years. According to CNN Money, the average net price went up by $900.00 at public colleges and $1,760.00 at private colleges over the past two years, So what’s a parent to do? At Tax Savings Professionals, we recommend checking Net Price Calculator Center to get an idea of costs at preferred schools, then start putting money into a 529 Plan.
A 529 Plan offers many tax benefits which are better than depositing funds into a traditional savings account or tapping into your retirement savings. Investment earnings in a 529 Plan are not subject to federal capital gains tax and are generally not taxed by state governments when used for qualified education expenses such as tuition, fees, books, room and board. Plans vary state-by-state, but, as an example, the direct-sold Florida 529 Savings Plan offers several investment portfolio options designed for savers of all risk levels, and the Florida Prepaid College Plan lets you lock in tuition at today’s prices even if they skyrocket by the time your child is ready to enter college.
Sounds like a win-win, but the 529 Plan you might be considering may not cover all education expenses. If you have questions, it’s best to consult with an expert to help you create a customized college saving strategy before you commit. Because 529 Plans are different in each state, the same advice applies no matter where you live in the U.S. With income tax breaks, possible state tax breaks (in over 30 states and the District of Columbia), simplified tax reporting and flexibility to change investment options or rollover funds, everyone is eligible to take advantage of a 529 Plan.
Do you already have a 529 Plan in place? Congratulations and go to the head of the class! Depending on how much money you’ve amassed, you might be interested to know that you now have the option (through the 2017 Tax Cuts and Jobs Act) to use up to $10,000 in annual tax-free 529 withdrawals to cover private elementary and high schools costs. While there are a number of benefits to paying for K-through-12 tuition with a 529 Plan, first take into consideration how much you’ve saved, and how much more you will eventually deposit. Because a college education is much more costly, you don’t want withdrawals for earlier education to drain college savings. If you have an impressive balance, by all means, investigate whether the recently passed tax advantage for 529 Plans can be utilized as a tax saving strategy.
At Tax Saving Professionals, we have worked with thousands of clients over the past 18 years and can answer any questions you may have about 529 Plans and offer financial strategies for yourself, your children or grandchildren. Give us a call at (772) 257-7888 or click on our contact form today.
We all know someone who has been affected by breast cancer. Your mother, your sister, your friend, maybe even you.
Approximately 1-in-8 women in the United States will develop invasive breast cancer over the course of their lifetime. In 2018 alone, more than 250,000 cases of breast cancer are expected to be diagnosed in women in the U.S. and more than 2,500 cases in men. Everyone is at risk.
October is National Breast Cancer Awareness month and as a team, we at Tax Saving Professionals are doing what we can to build awareness and provide financial assistance to local organizations that provide support to those diagnosed with breast cancer and their caregivers.
If you haven’t been affected already, you will be touched in some way by breast cancer during your lifetime. How can you help make life a little easier for those currently diagnosed with breast cancer and help find a cure for this horrible disease? Just one of the things we will be doing as a team is walking in our local Making Strides Against Breast Cancer Walk on Saturday, October 13th.
If you would like to participate in your local walk or make a donation to your local American Cancer Society, we’ve made it extremely easy for you. See the two buttons at the bottom of this page? One is to the American Cancer Society events page where you can find information on the local walk nearest to you. From this page, you can either sign up to walk or make a local donation. Or, if you would like, the second button will take you to our team page where you can make a donation. We appreciate your thoughtful consideration and thank you in advance for any support you can lend to this important cause.
So, are you ready to walk? Think pink, lace up your sneakers and come join Tax Saving Professionals at the American Cancer Society’s “Making Strides Against Breast Cancer Walk.” With each step we take, we are one step closer to finding a cure for Breast Cancer!
There’s been “much ado” about the creation of the new 20% tax deduction for “Qualified Business Income” (QBI) in the Tax Cuts and Jobs Act of 2017. Although the deduction “tax relief” for small businesses (pass-through entities) in order to free up more funds to help them grow and create more jobs, high-income professions which generate profits directly from their owner’s skills and talent (think doctors, lawyers, accountants, entertainers) were classified as “specified service trades or businesses” (SSTB) and essentially excluded from the QBI deduction.
While most middle-class business owners will qualify for the deduction based on their income (up to $157,000 for individual filers and up to $315,000 for married couples filing joint returns), the exclusion from the QBI deduction is aimed at high-income earners classified as a “service business,” generating taxable income above those specified thresholds. The Legislative Text of IRC Section 199A states a Specified Service Trade or Business would include:
“…any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”
Due to the broad definition, questions immediately arose.
-Are pharmacists, medical technicians or veterinarians treating non-human patients regarded as SSTB’s in the healthcare industry?
-If a business provides widespread services such as “tax preparation” or “insurance products,” is that considered a product or skill?
-What is the classification for a business offering a vast array of skilled services?
-Does a business that provides “a specialized service” and sells products to generate income qualify for QBI?
Just a few examples of the many questions that have surfaced, it’s no wonder the issuance of proposed regulations on the Qualified Business Income Deduction (IRC Section 199A) by the IRS was highly-anticipated by tax professionals and business owners alike. Issued on August 8, 2018, they provide much-needed direction to determine what businesses should be classified as a Specified Service Trades or Business and excluded from the QBI Deduction. Following are some of the highlights.
Specific information regarding the healthcare and financial industries provides clarification on which skilled professionals should be considered as SSTBs.
Multi-purpose and blended businesses are also addressed. The proposed regulations do not allow a single business to separate non-SSTB profits from SSTB profits. The entire business is either a non-SSTB that could qualify for a QBI Deduction (under income thresholds) or an SSTB entity that does not qualify.
One of the most notable proposals is the 80/50 Spin-Off rule which aims to prevent a tax strategy (commonly known as crack and pack) that spins off portions of an SSTB into a separate entity or investment in order to shift income. (think a doctor buying real estate then renting it back to himself or herself as office space.) Basically, if a business has 50% or more common ownership with an SSTB which provides 80% or more of its services to the business, by regulation, it will be regarded as an SSTB in its entirety.
For high-income small business owners engaged in some type of specified services with income over QBI thresholds, the new SSTB rules require careful planning in order to avoid pitfalls when planning tax strategies.
At Tax Savings Professionals, we have worked with thousands of clients over the past 18 years and can answer any questions you may have about the QBI Deduction, SSTB status or any other tax issue. Give us a call at (772) 257-7888 or click on our contact form today.
No matter your chosen field, it’s likely you’ll leave at least one job, if not more, with a balance of 401(k) funds to your credit. When that happens, “it pays” to consider a roll-over of those funds from the employer into an independent IRA. A popular retirement investment planning strategy, if done correctly, a rollover of funds into an independent IRA will allow you to avoid paying taxes on the money until you withdraw from the new plan. This plan will help you save for the future by continuing to grow the balance tax-deferred and offering access to more investment options. But, before you get started, don’t allow your employer (or previous employer) to cut a check in your name, and don’t cash out. In both cases, you’ll risk paying income taxes off the top.
With that said, here are the ways you can complete a rollover, according to the IRS.
1.) Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
2.) Trustee-to-trustee transfer – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
3.) 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.
Please note that Option #3 calls for federal income tax to be withheld (currently 20%). There may be cases in which having the distribution paid directly to you make sense, but we recommend Options #1 and 2 as better choices for retirement investment planning.
How do I choose an IRA provider? Finding the best match depends on whether you prefer to actively manage your investments or prefer to be hands-off. For active management types, you may wish to work directly with a professional who can help you build a portfolio that you can manage. For hands-off investors, a financial planner or investment software can assist you in choosing an IRA provider that reflects your preferences.
Should I choose a Roth IRA or a Traditional IRA? These investment accounts vary greatly in tax treatments. If you expect higher taxes in retirement, a Roth IRA may suit you best. If you expect lower taxes, a traditional IRA could be a better bet.
At Tax Saving Professionals, we have worked with thousands of clients to help them craft financial and tax planning strategies over the past 18 years, and we are here to answer any questions you may have. Give us a call at (772) 257-7888 or click on our contact form today.
For commercial real estate investors and business owners, increased cash flow, reduced tax liability, a deferral of taxes and/or the ability to reclaim missed depreciation deductions are welcome ways to improve their bottom lines, open up more options to generate income and, of course, grow their business. At Tax Savings Professionals, we believe cost segregation can be used as a tax planning strategy to help achieve those goals.
What is cost segregation? Once utilized by only the largest real estate investors, it is a tax planning strategy now widely used by commercial property owners of all sizes to accelerate depreciation deductions, defer taxes and improve cash flow. How do they achieve that? By starting with a cost segregation study, which (according to the Internal Revenue Service) allocates or reallocates building costs to tangible personal property. Put another way, it assigns costs to the “parts” that make up a building in order to accelerate tax depreciation deductions to reduce taxable income.
How does cost segregation work? It essentially takes the real estate and breaks its components down into various categories with various depreciable lifespans. These categories may include personal property, such as furniture and carpeting, and land improvements, such as sidewalks and fences. After assigning a value to the personal property and land improvements, the remainder of the purchase price not associated with the land will be allocated to the building. Any cost allocated to land is not depreciable for tax purposes. Because the IRS is very particular about “cost segregation” and what qualifies, an engineering professional should be hired to conduct the study. At this point, you might be saying, “Is the effort worth it?”
Given the fact that a commercial real estate investor or business is setting him or herself up to take advantage of accelerated tax depreciation deductions (which would have otherwise occurred slowly over the years) and that current tax policy encourages companies to incur capital expenditures by providing them with a bonus” depreciation for certain assets added now through December 2019 – the short answer is “probably yes.”
The long answer – anyone considering cost segregation should consult with a financial and tax planning professional to gather all the details needed to make an informed decision. After all, each business is unique, and thoughtful consideration is key when considering any tax planning strategy. Also, keep in mind, a variety of advanced tax planning strategies, hand-picked to suit your business, is the best way to maximize your tax savings and financial success.
At Tax Savings Professionals, we are here to recommend missed, misunderstood, underutilized, and even unknown strategies. To learn more, please call us at (772)257-7888 or click on our contact form today.
Being declared “high risk” or faced with fluctuating insurance premiums and a long claims process, many high-net-worth individuals are taking a “fresh look” at captive insurance for their businesses. Not only for coverage flexibility and less hassle but to also save and earn money.
Recommended, in the right circumstances, as an option for advanced tax planning strategies, we’ve compiled information to give you a better understanding of what captive insurance is, and why it might be of benefit.
The “brainchild” of an Ohio insurance broker, Frederic M. Reiss, in the 1950s, the term “captive” was coined to describe an insurance company he helped form to provide coverage solely to its parent company. With regulations making it prohibitively expensive to operate a captive within the United States at that time, offshore financial centers such as Bermuda and other willing nations were needed to establish a captive. Committed to the concept, Reiss worked diligently to gain a “toehold” for captive insurance and eventually became known as “The Father of Captive Insurance.”
Given the off-shore hurdles, it took a while for the captive insurance concept to gain broader acceptance. However, in the midst of a hard-commercial insurance market in the mid-to-late 1980’s (when liability insurance was either unavailable or unaffordable), it started to gain momentum.
Over the past 30 years, there has been significant growth with the Center for Insurance and Policy Research reporting more than 5,000 captives around the world in a variety of industries. More than 1,000 captives are domiciled in the United States after a handful of states revised their regulations to attract captive insurance business.
Why such a significant interest and growth in captive insurance? By providing an option for corporations, groups or individuals to manage risk by underwriting their own insurance, it can allow for more flexible coverage, reduced or steady premiums and an underwriting profit for the insurer. In addition, captive insurance has other benefits such as enhanced investment opportunities, possible tax advantages, secured loan options and more.
Captive Insurance is not for everyone, but it can make sense for companies, groups or wealthy individuals who are interested in managing insurance costs and gaining increased ways to earn profits and grow assets. It’s important to note, captive insurance places the capital of those who are insured at risk. Anyone who purchases captive insurance must have the financial resources and the willingness to invest it into the policy. That’s because they will have control and ownership and earn benefits from its overall profitability.
We recommend anyone considering captive insurance meet with an experienced financial consultant to go over all the benefits of captive insurance, as well as the disadvantages, in order to make an informed decision. If properly executed and meticulously managed, captive insurance can be beneficial to the bottom line.
At Tax Savings Professionals, we’ve worked with thousands of clients to help them craft financial and tax planning strategies over the past 18 years, and we are here to assist you. Give us a call at (772) 257-7888 or click on our contact form today.
It’s the American Dream of millions – “to be your own boss.” And after the Financial Crisis of 2008, more people than ever have been deciding to make that happen. With the number of self-employed U.S. workers (now at 15 million) expected to almost triple to 42 million by 2020 – now is the ideal time to break down the advantages of the Solo 401(k). After all, “the boss” has to be in charge of his or her retirement planning too!
ELIGIBILITY. There are limits on who can qualify, such as the business has to consist of an individual or an individual and spouse. Those who work for an employer with a retirement plan and do free-lance work on the side may not be eligible for a Solo 401(k).
INCREASED SAVING. If requirements are met and self-employment income is in the five-figure range, a Solo 401(k), aka an individual 401(k), allows self-employed workers to set aside more money than the more commonly used SEP-IRA does. The Solo 401(k) allows tax-deferred contributions for retirement, as of 2018, up to $55,000 annually. Much like a traditional or Roth 401(k), $18,000 can be put aside for retirement through a salary deferral; and, as of 2018, $24,500 for persons 50 and older. Here’s the twist. With the Solo 401(k), 25% of compensation can be added up to the $55,000 cap for quicker savings.
LOAN OPTIONS. The Solo 401(k) loan option, which is not available with SEP or Simple IRAs, allows for a loan limit up to 50% of an account’s value, not to exceed $50,000. The loan proceeds can be used for any purpose. Solo 401(k) participants can also borrow up to $50,000 to fund or inject money into a business or to make an investment.
DIVERSE INVESTING. Solo 401(k) plans allow a variety of investment options for greater diversification from the average investor’s portfolio. In addition to stocks and bonds, alternative Solo 401 (k) investments options include real estate, precious metals, life insurance, private business, private equity & debt and much more. There are some investment choices that may be off-limits so it’s wise to ask a professional if your desired investment is allowed and what rules might apply.
ROLLOVERS WELCOME. A Solo 401(k) plan can accept rollovers of funds from other retirement savings accounts, such as an IRA, a SEP, or a previous employer's 401(k) plan. Only Roth IRA funds cannot be rolled into a Solo 401(k) plan.
TAX PERKS. In comparison to other retirement accounts, the Solo 401(k) is relatively easy to administer. It is not subject to Form 5498 like SIMPLE and SEP IRAs, and it allows self-employed business owners to serve as their own trustees if so desired. The Solo 401(k) does not require the filing of tax forms unless a distribution is made or the total account value exceeds $250,000. If involved in real estate investment, the Solo 401(k) is exempt from payment of unrelated debt-financed income tax (UBIT or UDFI).
As with any retirement investment account, there are a number of things to consider when choosing a savings vehicle, and a fair amount of fine print to digest. At Tax Savings Professionals, we’ve answered financial and tax planning questions for thousands of clients over the past 18 years; and we are here to help you. Call us at (772) 257-7888 or click on our contact form today.
When it comes to tax strategies, many business people are wondering which business structure is best for their bottom line in 2018. Following the passage of the 2017 Tax Act, American companies registered as C-Corporations now qualify for a permanent maximum 21% tax rate, while U.S. businesses registered as S-Corporations (which are pass-through entities) will see owners’ or partners’ profits taxed at their individual tax rate of up to 37%. C-Corps can also fully deduct state and local taxes while S-Corps are subject to the individual deduction limited to a maximum of $10,000. It’s true, with tax reform, S-Corps will be able to deduct up to 20% of qualified business income, but that change is only temporary, (for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026) and still leaves the pass-through entity technically paying more taxes than companies registered as C-Corps. Thus, the question, C-Corp or S-Corp?
The advantages of a C-Corp also include lower tax rates, tax deductions, limited liability, strong growth potential and unlimited shareholders, just to name a few. At first blush, a switch to C-Corp status may sound like a great idea, but there are also disadvantages to take into consideration such as high filing fees, double taxation (on revenue & dividends), no loss deductions and stricter government regulations.
The advantages of an S-Corp include single taxation, protection for shareholders against financial or legal issues, income options such as salaries, dividends or tax-free distributions, loss deductions and ease of ownership transfer. The disadvantages of an S-Corp range from high filing fees, less income allocation options, and stock limitations to (often) more IRS scrutiny since shareholders can take a salary or dividend.
Those are just the broad-strokes, with a variety of issues to be “weighed” when choosing to be defined as a C-Corp or S-Corp. At Tax Savings Professionals, we have studied the new tax code to devise tax strategies for small businesses to large corporations, and are proficient at helping CPA’s “run the numbers” to help clients make an informed decision on S-Corp or C-Corp status.
Because the new Tax Code (like all U.S. law) can be subject to repeal, amendment or a court-ordered change in the future, some business owners may be reluctant to convert their status as a tax strategy, only to find the rates or rules changing again. What are the odds of that happening, and when? No one knows for sure. At Tax Savings Professionals, we still think it’s a good idea to measure out any potential savings doing business as a C-Corp and an S-Corp. Then compare side by side. If you stand to gain by switching status to save on taxes, it might be worth the effort.
For more than eighteen years, we’ve helped thousands of clients around the country. Give us a call at (772) 257-7888 or use our convenient Contact form to discuss your options and what will best fit your business needs.
The Impacts of the Tax Cuts and Jobs Acts
As of January 1, 2018, the Tax Cuts and Jobs Acts offers a 20% deduction for qualified business income pass-through entities. The owner of a sole proprietorship, S-Corporation, or partnership is entitled to take a deduction equal to 20% of the “qualified business income” earned from the business. Qualified business income is the non-investment income of the business – the revenue the business was intended to generate minus expenses. It does not include income such as interest, dividend income, or capital gains from the sale of property.
Prior to the Tax Cuts and Jobs Act, income from these small businesses would pass-through to the business owner on his or her own taxes and was subject to individual rates as high as 39.6%. Now, the qualified business deductions effectively lower that top marginal tax rate down to about 29.6%.
The qualified business deduction is limited to the lesser of:
- 20% of qualified business income, or
- 50% of the W-2 wages of the business.
In some, very rare cases, the deduction may be equal to 25% of the W-2 wages of the business plus 2.5% of the unadjusted bases of the business’s assets.
If the business owner is married and files jointly and the total taxable income of the business owner is less than $315,000 annually ($157,500 if single), the 20% of qualified business income is automatically taken. If the total taxable income of the business owner is more than $415,000 annually ($207,500 if single), the 50% of the W-2 wages of the business applies in full. Between $315,000 and $415,000 of taxable income, there is a phase-out and the business owner is able to deduct the lesser of the 20% of the qualified business income or 50% of the W-2 wages of the business.
For example, Mark, a married taxpayer, operates a business as a sole proprietor. The business has one employee who is paid $50,000 during 2018. The business has no significant assets. During 2018, the business generates $200,000 of income to Mark and Mark’s total taxable income, after deductions, is $215,000. Mark is entitled to a deduction of $40,000 ($200,000 x 20%). The W-2 wage limitation – which would have been $25,000 ($50,000 x 50%) does not apply because Mark’s taxable income is less than $315,000.
If all these facts remain true but the business generates $400,000 of income to Mark and, after deductions, his taxable income is $450,000, Mark’s deduction is limited to $25,000. Mark’s income is now over the $415,000 threshold so he is limited to the lesser of:
- 20% of $400,000, which equals $80,000
- 50% of W-2 wages $50,000, which equals $25,000.
The qualified business deduction includes certain rules designed to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction. For taxpayers who are married filing jointly with taxable income above $315,000 ($157,000 if single), an exclusion from qualified business income begins to be phased in for income of “specified service” trades or businesses.
Specified services are defined as any trade or business involving the performance of services in the fields of health, laws, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of the trade or business is the reputation or skill of one or more of its employees. However, architects and engineers are excluded from the definition of specified services.
The qualified business deduction is a significant potential tax break for business owners, but it comes with a great deal of complexity and uncertainty. At this time, how the tax forms will be modified to accommodate the new deduction and what information will be required to be reported by pass-through entities to their owners to calculate the deduction is unclear.
Preparing for New Partnership Audit Rules
Although there are many uncertainties regarding New Partnership Audit Rules reissued by the IRS, tax partnerships and their partners are advised to review and amend their partnership agreements or limited liability company agreements to prepare for any changes effective for the 2018 tax year.
Tax partnerships are not subject to federal tax; income, loss and other tax items are allocated among partners for use in calculating their own tax liabilities. Prior to the enactments of the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA), all income tax audits of partnership items occurred at the partner level. After 1982, TEFRA audit rules went into effect with the intent to increase the efficiency of partner tax audits. For partnerships subject to the TEFRA rules, income tax audits were conducted at the partnership level and once resolved, the IRS then contacted and collected any additional tax from individual partners, not the partnership.
The IRS encountered a variety of issues under TEFRA audit rules including challenges identifying audit worthy partnerships and collecting any resulting tax liability from individual partners. To complicate matters, the number of tax partnerships were on the rise and the value of assets held through partnerships was increasing with many entities also favoring complex multi-tiered partnerships. The result: fewer audits and fewer tax deficiencies collected.
Many proposals to fix the challenges of TEFRA were made in following years, but in 2015, the Bipartisan Budget Act of 2015 was enacted to avoid a government shutdown. It also replaced existing rules for auditing large partnerships with a new set of streamlined rules that the IRS recently reissued as New Partnership Audit Rules taking effect on January 1st, 2018. Designed to address issues with partnerships with 100 or more partners, the term “eligible partner” has been defined within the rules as any person who is an individual, C-Corporation, eligible foreign entity, S-Corporation or an estate of a deceased partner. The New Partnership Audit Rules do allow smaller partnerships with 100 or fewer partners to opt out with their returns audited as part of each partner’s individual audit.
The New Partnership Audit Rules, which assess and collect tax at the partnership level, are intended to streamline challenging audit procedures faced by the Internal Revenue Service in the past. Applying to partnership tax years after December 31, 2017, the rules require that any tax due on partnership adjustments made by the IRS must be paid directly by the partnership. The partnership can then choose to collect any amount due from individual partners.
The New Partnership Audit Rules require that a partnership representative is chosen for tax matters. This representative, designated by the partnership, does not have to be a partner. It can be an individual or an entity with a designated representative. The representative is granted the sole authority to act on behalf of the partnership in tax matters under scrutiny by the Internal Revenue Service. The partner representative, not the IRS, bears the responsibility of notifying partners of IRS proceedings.
When conducting an audit, the IRS examines all income, gains, losses, deductions and credits, and partner distributions. Any tax underpayment, according to new rules, is calculated by multiplying the total netted partnership adjustment by the highest rate of federal income tax in effect for the year under review. That number is then increased or decreased by any adjustments made to the partnership’s credits. Any tax effect is at the partnership level, any penalties are determined at the partnership level and any tax assessed and collected is at the partnership level. The partnership, however, may elect to provide amended Schedule K-1’s to its partners within 45 days of the date of the notice of the final partnership adjustment. With this election, each partner becomes responsible for their share of the adjustment; which seems counter-intuitive to the new rules’ original intent.
With an effective date of January 1, 2018, The American Institute of Certified Public Accountants is urging the IRS and Treasury officials to work with Congress to revise the Bipartisan Budget Act to change the New Partnership Audit Rules effective date to December 31, 2018. Stating the rules are significantly different from previous law, the AICPA argues “virtually every partnership currently operating in the United States, regardless of size, will need to amend its partnership agreement…in a time frame that simply is not feasible.”
While we wait for a decision on the AICPA’s request, it would be prudent to prepare for The New Partnership Audit Rules. While many of the changes are still uncertain given the lack of technical corrections and final regulations interpreting the rules, all partnerships and partners should make plans to have their partnerships agreements reviewed and amended prior to the arrival of new regulations.
Not surprisingly, The Tax Cuts and Jobs Act is far from a quick and easy read; it’s quite the opposite, actually – comprised of nearly 1,097 pages. Unfortunately, the length alone can act as a deterrent, so we’ve taken some time to break it down into more concise terms. But, the intricacies of this bill apply to everyone and are important for everyone to understand.
Tax Bracket Rates
While taxpayers still fall into 1 of 7 tax brackets based on their income, the new rates from lowest to highest income are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The standard deduction for single filers has increased from $6,350 dollars to $12,000 dollars; for married couples filing jointly, it has increased from $12,700 to $24,000 dollars.
Under the new tax code, the personal exemption has been eliminated; the state & local tax deduction has been capped at $10,000; while the child tax credit has been expanded. Doubling to $2,000 for children under 17, single parents who make up to $200,000 and married couples who make up to $400,000 can claim the entire credit in full. There is a new temporary $500 tax credit available for non-child dependents, such as children over 17, elderly parents or adult children with a disability.
Fewer taxpayers will be affected by the alternative minimum tax as the exemption rises from $54,300 to $70,300 for singles and from $84,000 to $109,400 for married couples. Previously phasing out for joint filers at $160,900, and $120,700 for individuals. the new tax legislation’s phaseout would kick in at $1 million for married filers and $500,000 for those who are single. Over the threshold, filers lose 25 percent of their exemption, or to phrase it another way -a quarter out of every dollar of income.
Homes, Healthcare & Education? Moving forward, anyone purchasing a home will only be able to take a mortgage interest tax deduction of the first $750,000. Down from $1 million, this will likely impact people buying homes in more expensive regions.
The capital gains tax exemption for home sellers remains unchanged. The amount of money exempt from estate taxes has been doubled.
The individual Obamacare mandate penalizing people without health care coverage has been eliminated.
Funds in untaxed 529 Savings Accounts, which previously could only be applied toward college expenses, will now also be allowed to cover the cost of sending a child to a public, private or religious elementary or secondary school.
Tax Reform Affecting Business Deductions
Some major changes include a cut in the corporate tax rate from 35% to 21%; and the elimination of alternative minimum tax (AMT) for corporations. There is a new deduction for owners of “pass-through” entities (S-corporations, partnerships and sole proprietorships). Business owners are able to take a deduction of up to 20% of the business’s income on their personal tax return. Certain professions, such as lawyers and physicians, may only take this deduction if their taxable income is under $315,000 for married couples or $157,000 for individuals.
The itemized deduction for individuals for state and local taxes, previously unlimited, is now capped at $10,000. The taxes paid by businesses are still fully deductible.
While the Business-related meals deduction remains unchanged at 50%, meals for employer convenience has been reduced from 100% to 50%, meal expenses while traveling on business remains at 50%; but business-related entertainment expenses are no longer eligible for any deduction – down from 50% to 0%. The deduction for emergency meals for doctors has been reduced from 100% to 50%
The Bonus Depreciation Deduction for eligible property has been increased from 50% to 100%. The Section 179 limit has been increased from $500,000 to $1,000,000; and the limit on equipment purchases has been raised from $2,000,000 to $2,500,000. The Domestic Production Activity Deduction has been repealed for taxable years beginning December 31, 2017.
Non-profits have a new 21% excise tax on nonprofit employees for salaries they pay out above $1 million.
Unchanged Tax Laws
While we’ve already mentioned several changes, we would also like to highlight a few things that will remain the same: The Medical Expenses Deduction exceeding 7.5% of a patient’s adjusted gross income; the Student Loan Interest Tax Deduction up to $2500; Tax Free Tuition Waivers (typically awarded to teaching & research assistants); the Teacher’s Deduction of up to $250 for money spent on classroom resources; the Electric Car Credit up to $7500, and as mentioned previously, the home-sellers “capital gains” deduction; as well as the charitable tax deduction. According to the IRS, you may deduct up to 60% of your adjusted gross income in most cases. Some filers can be limited to 20% and 30%. Cost Segregation allowing commercial and residential property owners to benefit by accelerating depreciation remains in play; as well as the Conservation Easement Deduction of up to 50% for taxpayers preserving land, minerals or historic buildings and/or sites. There have been no changes to the rules & regulations for captive insurance; which provides business owners the ability to self-insure for risks general insurance does not cover OR are too expensive to cover.
Overall, the Joint Committee on Taxation estimates tax reform will increase the deficit by $1 trillion over the next decade. Tax cuts alone will amount to about $1.47 billion. However, eliminating the Affordable Care Act mandate accounts for $700 billion in savings and growth. Also, the Act will boost GDP by about 1.7% each year.
While tax reform does offer “tax relief” in a variety of areas, given the intricacies of the legislation, a financial expert, well-versed in The Tax Cuts and Jobs Act, can offer additional insight to help you make the most of this latest incarnation of U.S Tax Code for your clients.