Tax Tips and Alerts


Feb
5
2019
When Loans Become Taxable

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Many people don’t realize that forgiveness of a loan triggers a taxable event. One of the more common examples is forgiveness of credit card debt but it is certainly not the only example. This is something to pay attention to if you are considering settling a loan for less than you owe, this includes all debt. One of the more common is forgiveness of credit card debt but it is certainly not the only example. A terrific article by Robert Wood goes a bit deeper and is well worth the read.

https://www.forbes.com/sites/robertwood/2019/02/05/irs-says-loans-arent-taxed-but-audits-when-loans-are-income/amp/

 

Feb
1
2019
Higher mileage rate may mean larger tax deductions for business miles in 2019

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

Jan
30
2019
What will your marginal income tax rate be?

While the Tax Cuts and Jobs Act (TCJA) generally reduced individual tax rates for 2018 through 2025, some taxpayers could see their taxes go up due to reductions or eliminations of certain tax breaks — and, in some cases, due to their filing status. But some may see additional tax savings due to their filing status.

Unmarried vs. married taxpayers

In an effort to further eliminate the marriage “penalty,” the TCJA made changes to some of the middle tax brackets. As a result, some single and head of household filers could be pushed into higher tax brackets more quickly than pre-TCJA. For example, the beginning of the 32% bracket for singles for 2018 is $157,501, whereas it was $191,651 for 2017 (though the rate was 33%). For heads of households, the beginning of this bracket has decreased even more significantly, to $157, 501 for 2018 from $212,501 for 2017.

Married taxpayers, on the other hand, won’t be pushed into some middle brackets until much higher income levels for 2018 through 2025. For example, the beginning of the 32% bracket for joint filers for 2018 is $315,001, whereas it was $233,351 for 2017 (again, the rate was 33% then).     

2018 filing and 2019 brackets

Because there are so many variables, it will be hard to tell exactly how specific taxpayers will be affected by TCJA changes, including changes to the brackets, until they file their 2018 tax returns. In the meantime, it’s a good idea to begin to look at 2019. As before the TCJA, the tax brackets are adjusted annually for inflation.

Below is a look at the 2019 brackets under the TCJA. Contact us for help assessing what your tax rate likely will be for 2019 — and for help filing your 2018 tax return.

Single individuals
10%: $0 – $9,700
12%: $9,701 – $39,475
22%: $39,476 – $84,200
24%: $84,201 – $160,725
32%: $160,726 – $204,100
35%: $204,101 – $510,300
37%: Over $510,300

Heads of households
10%: $0 – $13,850
12%: $13,851 – $52,850
22%: $52,851 – $84,200
24%: $84,201 – $160,700
32%: $160,701 – $204,100
35%: $204,101 – $510,300
37%: Over $510,300

Married individuals filing joint returns and surviving spouses
10%: $0 – $19,400
12%: $19,401 – $78,950
22%: $78,951 – $168,400
24%: $168,401 – $321,450
32%: $321,451 – $408,200
35%: $408,201 – $612,350
37%: Over $612,350

Married individuals filing separate returns
10%: $0 – $9,700
12%: $9,701 – $39,475
22%: $39,476 – $84,200
24%: $84,201 – $160,725
32%: $160,726 – $204,100
35%: $204,101 – $306,175
37%: Over $306,175

© 2019

Jan
25
2019
2 major tax law changes for individuals in 2019

While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look.

1. Medical expense deduction threshold

With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that was already difficult for many taxpayers to meet, and it may be even harder to meet this year.

The TCJA temporarily reduced the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI. Unfortunately, the reduction applies only to 2017 and 2018. So for 2019, the threshold returns to 10% — unless legislation is signed into law extending the 7.5% threshold. Only qualified, unreimbursed expenses exceeding the threshold can be deducted.

Also, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018 through 2025, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

2. Tax treatment of alimony

Alimony has generally been deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, hasn’t been deductible by the payer or taxable income to the recipient.

Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. So, essentially, alimony will be treated the same way as child support.

Because the recipient ex-spouse would typically pay income taxes at a rate lower than that of the paying ex-spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.

TCJA impact on 2018 and 2019

Most TCJA changes went into effect in 2018, but not all. Contact us if you have questions about the medical expense deduction or the tax treatment of alimony — or any other changes that might affect you in 2019. We can also help you assess the impact of the TCJA when you file your 2018 tax return.

© 2019

Jan
23
2019
Stop receivables fraud before it starts

From invoices and payments to discounts and write-offs, many business transactions are recorded to accounts receivable. This makes receivables a popular fraud target. But your business doesn’t have to become a victim.

Common schemes

Receivables fraud occurs when dishonest employees divert customer payments for their personal use. They use various methods, including:

Lapping. This is the most common type of receivables fraud. It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on.

Write-offs and discounts. Instead of crediting a payment to the customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer’s account. Despite the diversion of incoming payments, the customer’s account will reflect the expected current balance.

Prevention tips

Segregation of duties is critical to preventing receivables fraud. This means that the employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints. Such complaints often increase when receivables fraud is occurring.

In addition, require mandatory vacation time for all employees. Receivables schemes typically require their perpetrators to remain vigilant — and in the office — to avoid detection. For this reason, it’s also advisable to rotate job duties among accounting staffers.

Tracking thieves

When receivables fraud is suspected, a forensic expert will use several methods to uncover illicit activities. For example, the expert might trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. The expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Other items that deserve scrutiny are:

  • Bad debt write-offs,
  • Accounts with unexplained credits,
  • Increased customer credit limits, and
  • Random adjustments to the accounts receivable ledger.

To identify perpetrators and find internal control weaknesses, experts often interview employees.

Take control

Even though fraud experts have methods of finding receivables fraud, it’s better for companies to stop these schemes before they start. Contact us for help strengthening your business’s internal controls.

© 2019

Jan
18
2019
Business owners: An exit strategy should be part of your tax planning

Tax planning is a juggling act for business owners. You have to keep your eye on your company’s income and expenses and applicable tax breaks (especially if you own a pass-through entity). But you also must look out for your own financial future.

For example, you need to develop an exit strategy so that taxes don’t trip you up when you retire or leave the business for some other reason. An exit strategy is a plan for passing on responsibility for running the company, transferring ownership and extracting your money from the business.

Buy-sell agreement

When a business has more than one owner, a buy-sell agreement can be a powerful tool. The agreement controls what happens to the business when a specified event occurs, such as an owner’s retirement, disability or death. Among other benefits, a well-drafted agreement:

  • Provides a ready market for the departing owner’s shares,
  • Prescribes a method for setting a price for the shares, and
  • Allows business continuity by preventing disagreements caused by new owners.

A key issue with any buy-sell agreement is providing the buyer(s) with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income.

Succession within the family

You can pass your business on to family members by giving them interests, selling them interests or doing some of each. Be sure to consider your income needs, the tax consequences, and how family members will feel about your choice.

Under the annual gift tax exclusion, you can gift up to $15,000 of ownership interests without using up any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift.

With the gift and estate tax exemption approximately doubled through 2025 ($11.4 million for 2019), gift and estate taxes may be less of a concern for some business owners. But others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership.

Plan ahead

If you don’t have co-owners or want to pass the business to family members, other options include a management buyout, an employee stock ownership plan (ESOP) or a sale to an outsider. Each involves a variety of tax and nontax considerations.

Please contact us to discuss your exit strategy. To be successful, your strategy will require planning well in advance of the transition.

© 2018

Jan
16
2019
Bogus vendors may be costing your company a bundle

Are you harboring fictitious vendors in your accounting system? These are vendors invented by an employee — usually someone with the authority to approve invoices — to embezzle from the company. Thieves fabricate invoices and deposit payments to the fictitious vendor in their own bank accounts.

This scam is easier to perpetrate in companies with a large number of vendors because fictitious accounts simply get lost in the sheer volume of paperwork. However, small companies are also vulnerable to the scheme because they often lack internal controls, such as segregation of duties.

Spotting the fake

Regardless of the size of your company, there are likely to be tracks for you to follow:

Missing information. You expect to find phone numbers, taxpayer identification numbers, contact names and specific street addresses (not P.O. box numbers) in your vendors’ files. When such routine data is missing, investigate.

Vendor names. Embezzlers may create a company name that is similar to that of a legitimate vendor, or may use their own initials. But a fraudulent vendor won’t be called Microsoft, Wal-Mart or any other widely known corporate name.

Account activity. A fictitious vendor will probably be active. Because the payoffs are proportional to the effort, fictitious vendors usually don’t send invoices for small amounts. The risk of discovery increases with every transaction, so fake accounts are more likely to involve fewer invoices for larger amounts.

Services vs. goods. Most often, fictitious vendors will supply services rather than goods, simply because it’s easier. But occasionally someone — most often a purchasing agent — establishes a fake company from which to order products. This scam usually requires an accomplice on the receiving dock to record receipt of the goods and simultaneously alter inventory records.

More red flags

Also look for:

  • The absence of credit memos, because there won’t be any billing errors,
  • Prompt payments, because the perpetrator wants each transaction completed as quickly as possible,
  • Similar invoice amounts, which will probably be just below the fraudster’s authorization limit, and
  • One invoice listing per check, rather than the more customary bundling of invoices for payment.

Finally, if only one employee is requesting the company’s services, that’s a sign the vendor may not be legitimate.

They can’t hide

If you sense something isn’t right in your vendor records, don’t let it slide. Although the perpetrator may be devious and the scheme may be elaborate, good internal controls can help prevent and detect fraud.

© 2018

Jan
11
2019
You may be able to save more for retirement in 2019

Retirement plan contribution limits are indexed for inflation, and many have gone up for 2019, giving you opportunities to increase your retirement savings:

  • Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $19,000 (up from $18,500)
  • Contributions to defined contribution plans: $56,000 (up from $55,000)
  • Contributions to SIMPLEs: $13,000 (up from $12,500)
  • Contributions to IRAs: $6,000 (up from $5,500)

One exception is catch-up contributions for taxpayers age 50 or older, which remain at the same levels as for 2018:

  • Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $6,000
  • Catch-up contributions to SIMPLEs: $3,000
  • Catch-up contributions to IRAs: $1,000

Keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.

For more on how to make the most of your tax-advantaged retirement-saving opportunities in 2019, please contact us.

© 2018

Jan
9
2019
A refresher on major tax law changes for small-business owners

The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly.

With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea.

Taxation of pass-through entities

These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • A new 20% qualified business income deduction for eligible owners (the Section 199A deduction)
  • Changes to many other tax breaks for individuals that will impact owners’ overall tax liability

Taxation of corporations

These changes generally affect C corporations, personal service corporations (PSCs) and LLCs treated as C corporations:

  • Replacement of graduated corporate rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Replacement of the flat PSC rate of 35% with a flat rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)

Tax break positives

These changes generally apply to both pass-through entities and corporations:

  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • A new tax credit for employer-paid family and medical leave

Tax break negatives

These changes generally also apply to both pass-through entities and corporations:

  • A new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction (not to be confused with the new Sec.199A deduction), which was for qualified domestic production activities and commonly referred to as the “manufacturers’ deduction”
  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale (generally no more like-kind exchanges for personal property)
  • New limitations on deductions for certain employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Preparing for 2018 filing

Keep in mind that additional rules and limits apply to the rates and breaks covered here. Also, these are only some of the most significant and widely applicable TCJA changes; you and your business could be affected by other changes as well. Contact us to learn precisely how you might be affected and for help preparing for your 2018 tax return filing — and beginning to plan for 2019, too.

© 2018

Jan
4
2019
A review of significant TCJA provisions impacting individual taxpayers

Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.

Rates and exemptions

Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes:

  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
  • Elimination of personal and dependent exemptions
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers for 2018
  • Approximate doubling of the gift and estate tax exemption, to $11.18 million for 2018

Credits and deductions

Generally, tax breaks are reduced for 2018. However, a few are enhanced. Here’s a closer look:

  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
  • Near doubling of the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income or sales taxes; $5,000 for separate filers)
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
  • Elimination of the deduction for interest on home equity debt
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
  • Elimination of the AGI-based reduction of certain itemized deductions
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year

How are you affected?

As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning.

© 2019

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