Dear Valued Client,
Welcome to the start of tax season. The IRS has been busy providing guidance on some of the changes found in the Tax Cuts and Jobs Act.
This edition of our newsletter is loaded with vital information. We have covered some essential tips to help make the best out of your tax appointment, crucial guidelines for rental property owners, payroll withholding tips, some sound business advice and much more.
Our goal is to provide you with an unparalleled level of client service. If you see something that you want to talk about, please contact us to explore the possibilities. We rely on satisfied clients as the primary source of new business, and your reviews and referrals are both welcomed and most sincerely appreciated!
Tricia McCullough, President
Tax Time Is Around the Corner! Are You Ready?
- Time to gather your information for your tax appointment
- New for 2018
- Choosing your alternatives
- Choosing your alternatives
Tax time is just around the corner, and if you are like most taxpayers, you are finding yourself with the ominous chore of pulling together the records for your tax appointment. The difficulty of this task depends upon how well you maintained your tax records throughout the year. No matter how good your record keeping was, arriving at your tax appointment fully prepared will give us more time to:
- Consider every possible legal deduction;
- Evaluate which income reporting methods and deductions are best suited to your situation;
- Explore current law changes that are affecting your tax status; and
- Talk about tax-planning alternatives that could reduce your future tax liability./li>
New for 2018— There are a number of new complications this year, including:
To combat tax fraud, the IRS is requiring all tax preparers to verify their clients’ identity with a government picture ID, although there is an exception for clients if the preparer has had a multi-year business relationship with a client AND has previously verified the client’s identity with a government picture ID. Since that was not previously required, it will be necessary for all clients this year, so be sure to bring a picture ID (also a requirement for a spouse) to your appointment.
Although the federal government changed its tax rules with the tax reform, many states with state income tax, such as California, have not conformed to the federal changes, which means a separate set of rules may apply to your state and federal tax returns.
The tax reform added a new 20% deduction for pass-through income from business activities. In some cases, the computation can be very complicated and will take additional time.
Choosing Your Best Alternatives – The tax law allows a variety of methods of handling income and deductions on your return. The choices you make as you prepare your return will often affect not only the current year but also future returns. Topics these choices relate to include:
If the disaster is only temporary and shuts down the electrical grid to your business, a generator may be a sound investment. The generator can power your computer system, equipment, refrigerators and other crucial items.
Sales of property – If you’re receiving payments on a sales contract over a period of years, you can sometimes choose between reporting the whole gain in the year you sell or over a period of time as you receive payments from the buyer.
Depreciation – You’re able to deduct the cost of your investment into certain business properties. You can either depreciate the costs over a number of years or, in certain cases, deduct them all in one year.
Where to Begin – Preparation for your tax appointment should begin in January. Right after the New Year, set up a safe storage location, such as a file drawer, cupboard, or safe. As you receive pertinent records, file them right away, before you forget or lose them. Make this a habit, and you’ll find your job a lot easier on your appointment date. Other general suggestions to prepare for your appointment include:
Segregate your records according to income and expense categories. File medical expense receipts in one envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, fill out every section that applies to you. (Important: Read all explanations, and follow the instructions carefully. By design, organizers remind you of transactions you may otherwise miss.)
Call attention to any foreign bank account, foreign financial account, or foreign trust in which you have an ownership interest, signature authority, or controlling stake. We also need to know about foreign inheritances and ownership of foreign assets. In short, bring any foreign financial dealings to our attention so we know if you will have any special reporting requirements. The penalties for not making and submitting required reports can be severe.
If you acquired your health insurance through a government marketplace, you will receive Form 1095-A, issued by the marketplace, which will include information needed to complete your return. In addition, you will need to provide proof of insurance to avoid a penalty or qualify for one of the many exemptions from the penalty. If you received a hardship penalty exemption from the marketplace, you will have been issued an exemption certificate number (ECN), which must be included on your tax return. The 1095-A and ECN documentation need to be included with the other material you bring to your appointment. If your insurance coverage was through an employer and the employer issued a Form 1095-B, Form 1095-C, or substitute form detailing your coverage, bring it to the appointment.
Keep your annual income statements separate from your other documents (e.g., W-2s from employers; 1099s from banks, stockbrokers, etc.; and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
Write down your questions so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to your income for the current year. A dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale, or that you haven’t yet received the current year’s 1099-DIV form.
Make sure you have Social Security numbers for all of your dependents. The IRS checks these carefully and can deny deductions and credits for returns filed without them.
Compare deductions from last year with your records for this year. Did you forget anything?
Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.
Accuracy Even for Details – Make sure you review personal data to ensure the greatest accuracy possible in all detail on your return. Check names, addresses, Social Security numbers, and occupations on last year’s return. Note any changes for this year. Although your telephone number and e-mail address aren’t required on your return, they are always helpful should questions occur during return preparation
Marital Status Change – If your marital status changed during the year, you lived apart from your spouse, or your spouse died during the year, list the dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.
Dependents – If you have qualifying dependents, you will need to provide the following for each (if you previously provided us with items 1 through 3, you will not need to supply them again):
1. First and last name
2. Social security number
3. Birth date
4. Number of months living in your home
5. Their income amounts (both taxable and nontaxable). If your dependent is your child over age 18, note how
long the child was a full-time student during the year.
For anyone other than your child to qualify as your dependent, they must pass five strict dependency tests. If you think one or more other individuals qualify as your dependents (but you aren’t sure), tally the amounts you provided toward their support vs. the amounts they provided. This will simplify the final decision.
Some Transactions Deserve Special Treatment – Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following types of transactions:
Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other property need to be reported on your return, even if you had no profit or loss. List each sale, and have purchase and sale documents available for each transaction.
The purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.
Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you will need to know the original owner’s death date and the property’s value at that time. You may be able to find this on estate tax returns or in probate documents; otherwise, ask the executor.
Reinvested Dividends: You may have sold stock or a mutual fund for which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.
Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude up to $500,000 of the gain from your primary home if you file a married joint return and meet certain ownership, occupancy, and holding period requirements. The maximum exclusion is $250,000 for others. Since the cost of improvements made on your home can also be used to reduce any gains, it is good practice to keep a record of them. The exclusion of gains applies only to a primary residence, so keeping a record of improvements to other property, such as your second home, is important. Be sure to bring a copy of the sale documents (usually the final closing escrow statement).
Purchase of a Home: Be sure to bring a copy of the final closing escrow statement if you purchased a home.
Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.
Home Energy–Related Expenditures: If you installed a solar, geothermal, or wind power-generation system in your home or second home, please bring the details of the purchase and manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.
Identity Theft: Identity theft is rampant and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing if you have had your identity stolen.
Car Expenses for Business: If you used one or more automobiles for business, list the expenses of each business vehicle separately. When claiming vehicle-related business expenses, the government requires your total mileage, business miles, and commuting miles for each business vehicle to be reported on your return, so be prepared to have those numbers available. Job-related vehicle expenses are not deductible by employees on their federal returns in years 2018 through 2025. However, some states, including California, still allow them. So if you have unreimbursed employee business expenses, continue to provide the information noted above in case the deduction is allowed for state taxes, and if you were reimbursed for mileage through an employer, know the reimbursement amount and whether it was included in your W-2.
Charitable Donations: You must substantiate cash contributions (regardless of amount) with a bank record or written communication from the charity showing the name of the charitable organization, date, and amount.
Unreceipted cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, donated items must generally be in good or better condition, and items such as undergarments and socks are not deductible. You must keep a record of each item contributed that indicates the name and address of the charity, the date and location of the contribution, and a reasonable description of the property. Contributions valued under $250 and dropped off at an unattended location do not require a receipt. For contributions above $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions above $5,000 and other types of contributions, please call this office for additional requirements.
If you have questions about assembling your tax data prior to your appointment, please give this office a call.
Important – Rental Owners! Guidance Related to the 20% Pass-Through Deduction
- 199A 20% Pass-Through Deduction
- Rental Safe Harbor Qualifications
- Books & Records
- 250 Hours
- Contemporaneous Record
- Triple Net Leases
- Vacation Home Rentals
- Double-Edged Sword
Ever since tax reform was passed, over a year ago, taxpayers have been uncertain whether rental property will be classified as a trade or business for purposes of qualifying for the new IRC Sec 199A 20% pass-through deduction (commonly referred to as the 199A deduction).
Finally, on January 18, 2019, the IRS issued a notice which provided “safe harbor” conditions under which a rental real estate activity will be treated as a trade or business for purposes of the 199A deduction.
It’s important to note that this notice prescribes several conditions that must be met for a rental real estate enterprise (a tax term introduced by the IRS in this notice) to be deemed to be a trade or business and eligible for the section 199A 20% deduction. For purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held for the production of rents and may consist of an interest in multiple properties.
Failure of the taxpayer to satisfy the requirements of this safe harbor does not preclude a taxpayer from otherwise establishing that a “rental real estate enterprise” is a trade or business for purposes of section 199A. The following are the requirements that must be satisfied for the safe harbor:
1. Separate books and records must be maintained for each rental real estate enterprise;
a. A real estate enterprise can consist of a single or multiple real estate rentals.
b. Commercial and residential rentals cannot be combined in the same real estate enterprise.
2. For years prior to 2023, at least 250 hours of rental services must be performed by the taxpayer and workers for the taxpayer for the year in question with reference to each rental real estate enterprise.
A three-year lookback rule applies for taxable years for 2023 and following. It specifies that the taxpayer must meet the 250-hour requirement for the rental enterprise for any three of the five prior consecutive taxable years; and
3. The taxpayer must maintain contemporaneous records, including time reports, logs, or similar documents, to document the following:
a. hours of all services performed;
b. a description of all services performed;
c. dates on which such services were performed; and
d. who performed the services.
Because the safe harbor requirements were issued after the close of 2018, the requirement for contemporaneous records for 2018 will not apply.
Rental services that may be counted toward the 250 hour requirement include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in tenant applications; (iv) collecting rent; (v) daily operation, maintenance, and repair of the property; (vi) management of the real estate; (vii) purchase of materials for operation such as repairs; and (viii) supervision of employees and independent contractors.
However, rental services do NOT include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations, planning, managing, or constructing long-term capital improvements; or hours spent traveling to and from the real estate.
Rental services counted toward the 250 requirement may be performed by owners or employees, agents, and/or independent contractors working for the owners.
Triple net Leases are not eligible for safe harbor. Real estate rented or leased under a triple net lease agreement is not eligible for this safe harbor. A triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities. Also ineligible for the safe harbor is a property leased under an agreement that requires the tenant or lessee to pay a portion of the taxes, fees, and insurance, and to be responsible for maintenance activities allocable to the portion of the property rented by the tenant.
Vacation rentals are not eligible for safe harbor. Real estate used as a residence by the taxpayer for any portion of the taxable year is not eligible for the safe harbor rules.
The Statement must be attached to the tax return. A statement signed by the taxpayer, or the person responsible for keeping the records with personal knowledge of them, must be attached to the return declaring that all of the safe harbor requirements have been met and must include the following language: “Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”
Double-edged sword. The 199A deduction is 20% of a taxpayer’s qualified business income from all of the taxpayer’s trades or businesses subject to certain limitations. Many rentals do not show a profit and a rental that is treated as a trade or business that shows a loss for the year will reduce the qualified business income of other trades or businesses of an individual, and as a result, reduces the 199A deduction of that individual.
If you have questions regarding rentals as a trade or business or other issues related to this new 199A deduction, please give this office a call.
IRS Giving a Break to Some Taxpayers Who Under-prepaid Their 2018 Taxes
- Tax Reform
- Safe Harbor Payments
- Penalty Waivers & Exceptions
- Mitigating the Penalty
Taxpayers are required to pre-pay their taxes for any tax year through payroll withholding, estimated tax payments or a combination of the two. Employees and retirees generally accomplish this through withholding, and self-employed individuals and those with investment income by paying quarterly estimated payments.
The late-2017 passage of tax reform that became effective for 2018 and its radical changes added considerable confusion for taxpayers trying to determine how much they should prepay for 2018. This confusion was made worse because the existing W-4 that employees complete and that their employers use to determine the correct withholding was designed for prior law and does not work well with the new tax law. As a result, there has been ongoing concern by the IRS that many taxpayers will end up owing tax this year when they file their 2018 returns, even though they got a tax reduction due to the tax reform changes, simply because their pre-payments through withholding and estimated tax payments were not enough.
For most of 2018, the IRS was issuing alerts that taxpayers may be under-withheld because of tax reform and the fact the W-4 could no longer be relied upon to produce a correct withholding amount.
Taxpayers whose pre-payments are less than certain safe harbor amounts are penalized. Those safe harbors are:
- 90% of the current year’s tax liability or
- 100% of the prior year’s tax liability (110% where the prior year AGI is over $150,000 ($75,000 if married and filing separate returns).
Recently several members of Congress have called upon the IRS to waive underpayment penalties for 2018. On January 16, 2019, although not waiving the penalties entirely, the IRS did change the current year safe harbor from 90% of the 2018 tax liability to 85%, providing a break for some taxpayers.
Even if you don’t meet one of the safe-harbor exceptions, a waiver of the penalty for 2018 may apply if you:
- Retired (after reaching age 62) or became disabled in 2017 or 2018.
- You did not make payments because of one of the following situations and it would be inequitable to impose the penalty:
b. Disaster, or
c. Other unusual circumstance.
There are two other exceptions to the penalty for 2018:
- If the total tax shown on your 2018 return minus the tax that was withheld is less than $1,000, you will not owe a penalty.
- If you had no tax liability in 2017, were a U.S. citizen or resident alien for all of 2017, and your 2017 return was for a full 12 months (or would have been had you been required to file), you won’t be charged an under-prepayment penalty.
In addition, where your tax liability and /or tax pre-payments were uneven, the penalty amount may be mitigated by figuring it on a quarterly basis.
If you have questions or would like to make sure your withholding and estimated payments are adequate for 2019, please give this office a call.
Reasons Why Your Small Business Needs an Employee Identification Number
Entrepreneurs often shrug off the idea of obtaining an employee identification number, or EIN, believing that their small business really doesn’t need one. Though there are some cases where a solo business can get away with merely utilizing the business owner’s Social Security Number, doing so is not necessarily the best idea, even if you don’t have plans to hire employees in the future. In almost all instances, having an EIN is a good idea. It provides many benefits that go beyond facilitating the payment of employees.
Using an EIN Instead of Your Social Security Number Protects Your Personal Information
One of the top benefits offered by an Employee Identification Number is that it can help protect your personal identity. Though you still need to protect your EIN and shouldn’t share it without being certain of how it will be applied, using it for your business means that your personal information will have less exposure. Government forms and documents require an identifier, and the EIN (which is issued by the IRS) can be used on all of these instead of the Social Security Number. Though you can still suffer significant damage if your EIN is stolen, the information that is limited to your business is less sensitive than the information that is connected with your Social Security Number. Both require vigilant protection.
If You’re Going to Incorporate, You Need an EIN
Immediately incorporating your business makes it into a separate entity, and as such, it needs its own form of identification, especially if you’re going to have employees. Even if you’re considering yourself an employee, you will need to pay yourself a salary, and that means that you will need to collect payroll tax and take other steps that keep you in step with the IRS requirements. This is true whether your entity is established as a corporation, an LLC, and especially as a partnership, as you can’t use two Social Security numbers for filing financial papers.
The EIN Has Multiple Applications
Having an Employer Identification Number has long-term benefits that go far beyond its initial issuance. In addition to facilitating payroll, it can also be used to apply for all types of credit accounts and bank accounts needed by entities including general partnerships, LLCs, S corporations and sole proprietorships. You’ll need to have that number available for filing to change your business’ entity, for filing your tax returns every year, for setting up financial instruments such as profit-sharing plans, pensions, and retirement plans, and more.
Every business is different, and though we encourage all business owners to give serious consideration to obtaining an Employer Identification Number, we know that it may not apply to your situation. Please call this office if have questions related to an Employer Identification Number and your particular circumstances.
Getting the W-4 Right Is Important
- W-4 Complications
- Working Spouse
- Adjusting Refund
- Other Income and Tax Issues
As they do at the beginning of every year, employers will be requesting employees to complete the IRS Form W-4. Its purpose is to provide employers with the information they need to determine the amount of federal income taxes to withhold from an employee’s paycheck. So, it is very important that the form be completed correctly.
The problem is that as simple as the form looks, getting those entries on the form to produce the desired withholding amount can be tricky. The passage of the tax reform added additional complications, and the IRS has delayed a major revision of the W-4 until the 2020 tax year. In the meantime, taxpayers must get along as best they can using the old version of the W-4.
Even though the W-4 form itself appears to be simple, the instructions come with an extensive worksheet, which may or may not produce the desired results. In addition, there are other issues to consider, such as:
- Perhaps you desire to have a substantial refund when your taxes are completed next year. This generally requires custom W-4 adjustments, to produce excessive withholding. Keep in mind: when you have a large refund, you have provided Uncle Sam with an interest-free loan.
- Your spouse may also work, and your combined incomes may put you in a higher tax bracket. Although the IRS provides a special worksheet for married taxpayers if both spouses work, it may not always provide the desired results.
- In addition to payroll income, you may also have self-employment income, which is subject to both income tax and self-employment, and so you may require a combination of payroll withholding and estimated tax payments, adding additional complications to the W-4.
- These are just the tip of the iceberg, as there may be investment income or losses, business losses, tax credits, special deductions and loss carryovers, just to name a few more situations that could impact your tax prepayments and withholding for the year.
If you are concerned about getting your withholding correct, please contact this office. We can project your 2019 tax liability and complete your W-4 after taking into account multiple employments, a working spouse, self-employment income and other tax issues unique to your specific tax situation.