Dear Valued Client,
We hope you enjoyed the Holiday season.
As we start the new year, it is time to focus on finances and start preparing for tax filing season. In this edition of our newsletter, we have covered some important topics, including reasonable compensation for S Corporation owners, important disaster loss tax planning insight, a review of an IRS offer in compromise, small business growth tips 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
2019 Standard Mileage Rates Announced
- Standard Mileage Rates for 2019
- Business, Charitable, Medical and Moving Rates
- Important Considerations for 2019
- Switching between the Actual Expense and Standard Mileage Rate Methods
- Employer Reimbursements
- Employee Deductions Suspended
- Special Allowances for SUVs
The Internal Revenue Service (IRS) computes standard mileage rates for business, medical and moving each year, based on a number of factors, to determine the standard mileage rates for the following year.
As it does annually around the end of the year, the IRS has announced the 2019 optional standard mileage rates. Thus, beginning on Jan. 1, 2019, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:
58 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is up from 54.5 cents in 2018;
20 cents per mile driven for medical or moving* purposes. This is up from 18 cents in 2018; and
14 cents per mile driven in service of charitable organizations.
* For years 2018 through 2025, the deduction for moving is only allowed for members of the armed forces on active duty who move pursuant to a military order.
The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for 20 years).
Important Consideration: The 2019 rates are based on 2018 fuel costs. Based on the potential for substantially higher gas prices in 2019, it may be appropriate to consider switching to the actual expense method for 2019 or at least to keep track of the actual expenses, including fuel costs, repairs and maintenance, so that the option is available for 2019.
Taxpayers always have the choice of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension and expansion of the bonus depreciation as well as increased depreciation limitations for passenger autos in the Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year when a vehicle is placed into business service.
However, the standard mileage rates cannot be used if you used the actual method (using Section 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.
Employer Reimbursement — When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of the employment-connected business travel.
The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, employees may no longer take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans. Members of a reserve component of the U.S. Armed Forces, state and local government officials paid on a fee basis and certain performing artists continue to be allowed to deduct unreimbursed employee travel expenses, including the business standard mileage rate, because they are deductible from gross income rather than as an itemized deduction.
Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) — Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the limit rules on luxury auto depreciation. Taxpayers who purchase a heavy SUV and put it into business use in 2019 can utilize both the Section 179 expense deduction (up to a maximum of $25,500) and the bonus depreciation (if the Section 179 deduction is claimed, it must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (self-employment income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.
If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.
The 1099-MISC Filing Date Is Just Around the Corner – Are You Ready?
- Independent Contractors
- Non-employee Compensation
- 1099 Filing Requirement
- Due Dates
- Form W-9 and 1099 Worksheet
If you engage the services of an individual (independent contractor) in your business, other than one who meets the definition of an employee, and you pay him or her $600 or more for the calendar year, then you are required to issue that person a Form 1099-MISC to avoid penalties and the prospect of losing the deduction for his or her labor and expenses in an audit. Payments to independent contractors are referred to as non-employee compensation (NEC).
Because so many fraudulent tax returns were being filed right after e-filing opened up in January and before the old 1099-MISC due date at the end of February, the IRS had no way of verifying NEC. That opened the door for the IRS to be scammed out of millions of dollars in erroneous earned income tax credit (EITC). To plug that hole, the IRS moved the filing date for NEC 1099-MISCs to January 31 and no longer releases refunds for returns that include EITC until the NEC amounts can be verified.
Thus, the due date for filing 2018 1099-MISC forms for NEC is now January 31, 2019. That is also the same due date for mailing the recipient his or her copy of the 1099-MISC.
It is not uncommon to have a repairman out early in the year, pay him less than $600, use his services again later in the year, and have the total for the year be $600 or more. As a result, you may have overlooked getting the needed information from the individual to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.
The government provides IRS Form W-9, Request for Taxpayer Identification Number and Certification, as a means for you to obtain the vendor’s data you’ll need to accurately file the 1099s. It also provides you with verification that you complied with the law, in case the vendor gave you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 prior to engaging in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalty for failure to file a required information return such as the 1099-MISC is $270 per information return. The penalty is reduced to $50 if a correct but late information return is filed no later than the 30th day after the required filing date of January 31, 2019, and it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2019. If you are required to file 250 or more information returns, you must file them electronically.
In order to avoid a penalty, copies of the 1099-MISCs you’ve issued for 2018 need to be sent to the IRS by January 31, 2019. The forms must be submitted on magnetic media or on optically scannable forms (OCR forms). Note: Form 1099-MISC is also used to report other types of payments, including rent and royalties. The payments to independent contractors are reported in box 7 of the 1099-MISC, and the dates mentioned in this article apply when box 7 has been used. When the 1099-MISC is used to report income other than that in box 7, the due date to the form’s recipient is January 31, 2019, while the copy to the government is due by February 28, 2019.
If you have questions, please call. This firm prepares 1099s for submission to the IRS along with recipient copies and file copies for your records. Use the 1099 worksheet to provide this office with the information needed to prepare your 1099s.
When To Claim a Disaster Loss
- Disaster Losses
- Net Operating Loss
- AGI Limitations
- Possible Gain
Tax reform eliminated the deduction for casualty losses but did retain a deduction for losses within a disaster area. With the wild fires in the west, hurricanes and flooding in the southeast and eastern seaboard we have had a number of presidentially declared disaster areas this year. If you were an unlucky victim and suffered a loss as a result of a disaster, you may be able to recoup a portion of that loss through a tax deduction. If the casualty occurred within a federally declared disaster area, you can elect to claim the loss in one of two years: the tax year in which the loss occurred or the immediately preceding year.
By taking the deduction for a 2018 disaster area loss on the prior year (2017) return, you may be able to get a refund from the IRS before you even file your tax return for 2018, the loss year. You have until the unextended due date of the 2018 return to file an amended 2017 return to claim the disaster loss. Before making the decision to claim the loss in 2017, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.
If you elect to claim the loss on either your 2017 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.
If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, and results in negative income, you may have what is referred to as a net operating loss (NOL). Because tax reform changed how NOLs are treated after 2017 your decision whether to claim the loss in the current year or the prior year will have significant tax ramifications.
- Claimed in 2017 – If the loss is claimed in 2017 and results in an NOL, that NOL is carried back two years and the forward 20. Meaning if the loss results in a negative 2017 income the NOL can be carried back to your 2015 return before being carried forward.
- Claimed in 2018 – Tax reform changed the treatment of NOLs and as a result no longer be carried back to prior years. In addition, NOL occurring in 2018 and subsequent years can only offset 80% of a subsequent years taxable income. Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.
Casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.
For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster.
As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.
If you need further information on disaster losses, your particular options for claiming the loss, or if you wish to amend your 2017 return to claim your loss, please give this office a call.
6 Common Small Business Accounting Problems That Are Killing Your Growth
If you’re a small business owner, you want your organization to do far more than survive: you want it to thrive! Unfortunately, to make sure that customers are happy and the lights stay on there are a lot of details that need attention, and some end up being overlooked. The intricacies of accounting are neither sexy nor fun, and most business owners don’t have the training or background that’s needed for this vital area of operations. To help make sure that you’re doing everything you can to maximize your profitability and fiscal responsibility, here’s a list of the six most common accounting problems small businesses encounter. By addressing each, you’ll go a long way toward assuring your business’ success and growth.
1. Not Using Accounting Software
There are a lot of benefits to using accounting software, and the most obvious of these is that if you try to do all of the necessary calculations by hand, you’re at risk for making a small mistake that can lead to a giant headache. There is a fantastic selection of software available — it may even feel overwhelming when you first begin doing the research — but if you take your time, read reviews and look for something that is designed to meet the needs of your particular type of business, you’re sure to end up satisfied. If you’re not sure what to look for, use this checklist of minimum requirements:
- Sales tracking
- Financial statements, cash flow statements and balance sheet
- Generating Invoices
- Contacts management and contact history tracking
- Budget planning
- Account to accept credit card payments
- Inventory management
2. Not Knowing How to Use the Software That You Have
It may seem funny, but the second most common mistake that small business owners make in terms of accounting is also about accounting software — it’s having the software in-house but not using it, not using it the right way, or not really knowing how to use it. Like the treadmill that sits in the corner of your bedroom and slowly becomes something to throw your clothes over, having invested in accounting software and then not actually using it (or using it the right way) is a reason for regret, and so much more beyond that. When you’re not using your software the right way, you leave yourself vulnerable to making accounting mistakes. More importantly, you end up taking far too much time on bookkeeping tasks that it could do for you quickly and efficiently. Most of the packages available come with tutorials, but if you need help, contact an accounting professional and ask them to run through bookkeeping basics with you so that you can use it to its best benefit.
3. Failing to Produce Monthly Financial Reports
A lot of small businesses tend to minimize the importance of financial reports, feeling that if they produce some snapshot every few months or even twice a year, it’s good enough. The truth is that if you have financial backers or are interested in getting additional investment in your business, having a monthly report is an essential tool for them, as well as a sign that you’re taking their investment seriously. More importantly, the more closely you monitor your company’s financial activities, the faster you can pick up on issues as they develop, including slow-paying clients, oversites in your accounts payable, and more.
4. Having the Numbers, But They’re Wrong
There are a lot of things that can lead to your financials being incorrect: it can be not using accounting software (or not using it correctly); failing to update data; inputting incorrect data; and more. Whatever the cause, the result is never good and can cause problems significant enough to close your business or scare investors away. Worse, it can leave you vulnerable to bad actors who can use the inaccuracy to perpetrate fraud.
5. Mixing Your Personal Accounts with Your Business Accounts
Even if you are operating a pass-through business, it is essential that you keep separate books, separate credit cards, and separate banking for your personal needs and your business needs. Failing to do this will make it nearly impossible to determine what expenses are deductible, what capital investments generate profit and more. Small oversights are more likely to occur in accounting for out-of-pocket expenses, and this generally leads to paying more in taxes than you need to. Worse, if you face an audit, it will lead to a nightmare of having to separate and justify accounting measures that have been taken.
6. Failure to Properly Manage Your Payroll
Payroll is one of the most complex areas of running a business. Not only do you want to make sure that you’re paying your employees appropriately, but you need to be sure that essential areas like payroll taxes and withholding are being done accurately. When in doubt, it makes sense to bring in outside professionals for assistance.
If you need further information on disaster losses, your particular options for claiming the loss, or if you wish to amend your 2017 return to claim your loss, please give this office a call.
Do I Qualify for an IRS Offer in Compromise?
If you’re facing outstanding tax debt that you cannot pay, you may want to consider looking into an Offer in Compromise from the IRS. Specifically, an Offer in Compromise is an option offered from the IRS to qualifying individuals that allows them to settle tax debt for less than what they actually owe.
Unfortunately, there seem to be a lot of misunderstandings about Offers in Compromise; many people falsely believe that these are seldom accepted by the IRS. In reality, it is estimated that the current acceptance rate is over 40%, with the average dollar amount of a settlement reaching more than $10,000.
If you’re worried about your inability to pay tax debt, knowing the basic qualifications of an IRS Offer in Compromise and what to expect from the application process can be extremely helpful moving forward.
How to Know if You Qualify
Generally, there are three factors that are considered by the IRS when somebody applies for an Offer in Compromise. Most commonly, the IRS must have a belief that you will not be able to pay your tax debt off at any point in the near future. This means that your financial situation is probably not going to improve anytime soon and that the IRS would not likely be successful in forcing collections on you.
At the end of the day, the IRS needs to believe they are getting a fair deal – so if you have any potential to pay your debt at any point in the near future, you may not qualify.
You might also qualify for an Offer in Compromise if there is doubt as to your actual tax liability; if you have documentation proving that you owe less in taxes than the IRS believes to be true, or if an assessor has made a mistake on your reporting, you may be more likely to have an Offer in Compromise accepted by the IRS.
Finally, if paying your tax bill would create a significant financial hardship, you may also qualify for an Offer in Compromise. Of course, proving financial hardship can sometimes be a challenge.
In addition to all of these considerations, there are several other eligibility requirements that you must meet in order to qualify for an Offer in Compromise:
- You must pay the application fee
- You must have filed all of your required tax returns
- You cannot be going through a bankruptcy at the time of filing
- AGI Limitations
- You cannot be going through a bankruptcy at the time of filing
What to Expect From the Process
One of the most complicated aspects of going through the application process for an IRS Offer in Compromise is filling out and submitting all the required paperwork. There are several documents you may need to complete to even be considered for an Offer in Compromise, including:
- IRS Form 433-A – this form requires information on your assets, liabilities, expenses, and income to determine your Reasonable Collection Potential.
- IRS Form 433-B – this form needs to be filled out for businesses applying for an Offer in Compromise.
- IRS Form 656 – use this form to apply for an Offer in Compromise so long as there are no doubts as to your tax liability.
- IRS Form 656-L – use this form to apply if you are disputing your tax liability to the IRS.
In addition to completing these official forms as part of the application process, you will also need to provide some documentation, such as:
- health care statements
- bank and credit card statements
- investment information
- proof of living expenses
- car loan, mortgage, and similar loan statements
- copies of related tax returns
Working With a Tax Professional Can Help
As you can probably see, the process of determining your eligibility and applying for an Offer in Compromise with the IRS can be quite time consuming and complex. This is where it can be helpful to consult with a tax professional for assistance. A qualified and experienced tax professional will be able to assess your current tax situation and give you a better idea as to whether or not going through the Offer in Compromise application process is worth your time and efforts.
If so, he or she will also be able to assist you with the application process, ensuring that you’re filling out the correct forms and that you submit all required documentation as well. This can increase your chances of reaching a successful offer with the IRS and take a lot of the stress and burden off your chest.
Even if you don’t qualify for an Offer in Compromise, your tax professional may be able to assist you in figuring out other alternatives for making your tax payment more financially manageable for you. This might include options to work out a payment/installment program with the IRS, among other options.
The Bottom Line
Overall, getting an Offer in Compromise accepted by the IRS is nearly a 50/50 shot – but if you meet the eligibility requirements and take the time to correctly submit all paperwork and documentation, your chances of reaching an offer are high. And the best way to get the help you need in gathering this documentation and submitting this paperwork is to consult with an experienced tax professional, so reach out to yours today. If you don’t already have a tax professional that you can turn to, schedule a consultation with one at your earliest convenience to get the ball rolling.
Will Gifts Now Using the Temporarily Increased Gift-Estate Exclusion Harm Estates after 2025?
- Annual Gift Exclusion
- Unified Gift-Estate Exclusion
- Tax Reform’s Temporary Exclusion Increase
- Taxpayer-Friendly Regulations
Individuals with large estates generally want to gift portions of their estate to beneficiaries while they are still living, to avoid or lessen the estate tax when they pass away. That can be done through annual gifts (up to the inflation-adjusted annual limit for each gift recipient each year — $15,000 for 2019) and/or by utilizing the unified gift-estate exclusion for gifts in excess of the annual exclusion amount. The tax reform virtually doubled the unified gift-estate exclusion for years 2018 through 2025, after which — unless further extended by Congress — it will return to its inflation-adjusted former amount. This has caused concerns related to what the tax consequences will be for post-2025 estates if the decedent, while alive, had made gifts during the 2018-through-2025 period utilizing the higher unified gift-estate exclusion. Would that cause a claw back due to the reduced exclusion?
The Treasury Department has proposed taxpayer-friendly regulations to implement changes made by the tax reform, the 2017 Tax Cuts and Jobs Act (TCJA). As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level for those gifts once the exclusion decreases after 2025.
In general, gift and estate taxes are calculated using a unified rate schedule on taxable transfers of money, property, and other assets. Any tax due is determined after applying a credit based on an applicable exclusion amount.
The applicable exclusion amount is the sum of the basic exclusion amount established in the statute plus other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax, and any remaining credit is available to reduce or eliminate estate tax.
The TCJA temporarily increased the basic exclusion amount from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted basic exclusion amount is $11.18 million; for 2019, it is $11.4 million. In 2026, the basic exclusion amount will revert to the 2017 level of $5 million, adjusted for inflation.
To address concerns that an estate tax could apply to gifts exempt from gift tax through the increased basic exclusion amount, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the basic exclusion amount applicable to gifts made during life or the basic exclusion amount applicable on the date of death.
If you have any questions related to gifting and estate planning, please give this office a call.
If You Are a Recreational Gambler, Here Are Some Tax Issues You Need to Know
- W-2G Reporting
- Social Security Income
- Health Care Insurance Premium Subsidies
- Medicare B and D Premiums
- Online Gambling Accounts
Gambling takes many forms: casino games, horse racing, sports book betting, lotto tickets, scratchers, bingo, etc. For virtually everyone, gambling is a recreational activity and, as such, is done for fun. For most gamblers, their losses for the year will exceed their winnings, and since losses in excess of winnings are not deductible, most gamblers don’t bother to report either, which isn’t in line with the tax law’s filing requirements.
If your winnings at one time hit certain levels, the government requires the gambling establishment to collect your Social Security number and report your winnings to Uncle Sam on a Form W-2G. Gambling establishments will issue a Form W-2G if you:
- Win $1,200 or more on a slot machine or from bingo.
- Win $1,500 or more on a keno jackpot.
- Win more than $5,000 in a poker tournament.
- Win $600 or more from all other games, but only if the payout is at least 300 times your wager.
Reporting Winnings – Many individuals believe that they only have to report the winnings for which they receive a Form W2-G. Unfortunately, the IRS has a different viewpoint. Although you may be able to offset your reported gains with gambling losses, the IRS anticipates that you will also have had gambling winnings that were under the W2-G reporting threshold and will raise this issue during an audit.
Gambling Losses – The good news is that you can deduct gambling losses if you itemize your deductions but only to the extent of your gambling income. In other words, you can’t have a net gambling loss on your tax return. Bad news: if you don’t itemize your deductions, you will have to pay taxes on the entire winnings, even if you have a net gambling loss, as is the case for most individuals.
GAMBLING GOTCHA #1 – Since you can’t net your winnings and losses, the full amount of your winnings ends up in your adjusted gross income (AGI). The AGI is used to limit other tax benefits, as discussed later. So, the higher the AGI, the more the tax benefits may be limited.
GAMBLING GOTCHA #2 – If you don’t itemize your deductions, you can’t deduct your losses. Thus, individuals taking the standard deduction will end up paying taxes on all of their winnings, even if they had a net loss. The recent tax reform brought us significantly higher standard deduction amounts and, for itemized deductions, limited the deduction for state and local taxes and eliminated the deduction for unreimbursed employee business expenses and investment expenses, among other changes. The anticipated result is that fewer taxpayers will be itemizing their deductions and more gamblers will be paying taxes on their winnings.
Documenting Losses – The next logical question is: how are you going to document your gambling losses, if audited? Don’t rush down to the track and start collecting discarded tickets, since they generally aren’t acceptable documentation because of their ready availability. The IRS has published guidelines on acceptable documentation to verify losses. They indicate that an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence to substantiate wagering winnings and losses. In general, this diary should contain at least the following information:
(1) the date and type of each specific wager or wagering activity,
(2) the name of the gambling establishment,
(3) the address or location of the gambling establishment,
(4) the names of other persons (if any) present with the taxpayer at the gambling establishment, and
(5) the amounts won or lost.
Save all available documentation, including items such as losing lottery and keno tickets, checks, and casino credit slips. You should also save any related documentation such as hotel bills, plane tickets, entry tickets, and other items that would document your presence at a gambling location. If you are a member of a slot club, the casino may be able to provide a record of your electronic play. You might also obtain affidavits from designated gambling officials at the gambling facility. With regard to specific wagering transactions, your winnings and losses might be further supported by:
- Keno – Copies of keno tickets you purchased and that were validated by the gambling establishment. Win $1,200 or more on a slot machine or from bingo.
- Slot Machines – A record of all winnings by date and time for each machine that was played.
- Table Games – The number of the table at which you were playing as well as casino credit card data indicating whether credit was issued in the pit or at the cashier’s cage.
- Bingo – A record of the number of games played, the cost of the tickets purchased, and the amounts collected on winning tickets.
- Racing – A record of the races, entries, amounts of wagers, and amounts collected on winning tickets and lost on losing tickets. Supplemental records can include unredeemed tickets and payment records from the racetrack.
- Lotteries – A record of ticket purchase dates, winnings, and losses. Supplemental records can include unredeemed tickets, payment slips, and winning statements.
Other Tax Side Effects of Gambling – Because gambling income is reported in full as income and the losses are an itemized deduction, gambling winnings increase a taxpayer’s AGI for the year. An individual’s AGI is used to limit other tax benefits, and having gambling income can have an adverse impact on your taxes. Here are some examples:
- Social Security Income – For taxpayers receiving Social Security benefits, whether those benefits are taxable depends upon the taxpayer’s AGI for the year. The taxation threshold for Social Security benefits is $32,000 for married taxpayers filing jointly, $0 for married taxpayers filing separately, and $25,000 for all other filing statuses. If the sum of AGI (before including any Social Security income), interest income from municipal bonds, and one-half the amount of Social Security benefits received for the year exceeds the threshold amount, then 50–85% of the Social Security benefits will be taxable.
- Health Insurance Subsidies – Under Obamacare, lower-income individuals who purchase their health insurance from a government marketplace are given a subsidy in the form of a tax credit to help pay the cost of their health insurance. That tax credit is based upon the AGIs of all members of the family, and the higher the family’s income, the lower the subsidy will become.
- Medicare B and D Premiums – If you are covered by Medicare, the amount you are required to pay (generally withheld from your Social Security benefits) for Medicare B premiums is normally about $130–$134 per month and is based on your AGI two years prior. However, if that AGI is above $85,000 ($170,000 for married taxpayers filing jointly), then the monthly premiums can more than triple. If you also have prescription drug coverage through Medicare Part D and your AGI exceeds the $85,000/$170,000 threshold, then your monthly surcharge for Part D coverage will range from $13.30 to $74.80 (2018 rates).
- Online Gambling Accounts – If you have an online gambling account, there is a good chance that the account is with a foreign company. All U.S. persons with a financial interest or signature authority over foreign accounts with an aggregate balance of over $10,000 anytime during the prior calendar year must report those accounts to the Treasury by the April due date for filing individual tax returns or face draconian penalties.
GAMBLING GOTCHA #3 – So, if your gambling winnings push your AGI for the year over the threshold amount, then your gambling winnings – even if you had a net loss – can cause some (up to 85%) of your Social Security benefits to be taxable.
GOTCHA #4 – Thus, the addition of gambling income to your family’s income can result in significant reductions in the insurance subsidy, requiring you to pay more for your family’s health insurance coverage for the year. Additionally, if your subsidy was based upon your estimated income for the year, your premiums were reduced by applying the subsidy in advance, and you subsequently had some gambling winnings, then you could get stuck paying back part of the subsidy when you file your return for the year.
GAMBLING GOTCHA #5 – The addition of gambling winnings to your AGI can result in higher Medicare B and D premiums.
GAMBLING GOTCHA #6 – Regardless of whether you were a winner or loser, if your online account was over $10,000, you will be required to file aFinCEN Form 114 (Report of Foreign Bank and Financial Accounts), commonly referred to as the FBAR. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation.
Other Limitations – The forgoing are the most significant “gotchas.” There are numerous other tax rules that limit tax benefits based on AGI, as discussed in gotcha #1. These include medical deductions, child and dependent care credits, the child tax credit, and the earned income tax credit, just to name a few.
If you have questions related to gambling and taxes, please call this office.
Are You an S Corporation Stockholder? Are You Taking Reasonable Compensation in the Form of Wages?
- S Corporation Compensation
- Reasonable Compensation
- Factors Determining Reasonableness
- In the Spotlight
- Sec. 199A Deduction
S corporation compensation requirements are often misunderstood and abused by owner-shareholders. An S corporation is a type of business structure in which the business does not pay income tax at the corporate level and instead distributes (passes through) the income, gains, losses, and deductions to the shareholders for inclusion on their income tax returns. If there are gains, these distributions are considered return on investment and therefore are not subject to self-employment taxes.
However, if stockholders also work in the business, they are supposed to take reasonable compensation for their services in the form of wages, and of course, wages are subject to FICA (Social Security and Medicare) and other payroll taxes. This is where some owner-shareholders err by not paying themselves a reasonable compensation for the services they provide, some out of unfamiliarity with the requirements and some purposely to avoid the payroll taxes.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
If the S corporation does not pay its working stockholders a reasonable compensation for their services, then the IRS generally will treat a portion of the S corporation’s distributions as wages and impose Social Security taxes on the deemed wages.
There is no specific method for determining what constitutes reasonable compensation, and it is based upon facts and circumstances. Generally, it is an amount that unrelated employers would pay for comparable services under like circumstances and based upon the cost of living in the area where the business is located. The following are just some of the many factors that would be taken into account in making this determination:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar servicesCompensation agreements
- The use of a formula to determine compensation
The problem here, of course, is that it is easy for the IRS to list contributing factors used by the courts in determining reasonable compensation and leave it to the corporation to quantify these factors into a reasonable salary but still have the ability to challenge the selected amount later if an auditor, off the top of their head, decides the compensation is unreasonable.
The IRS has a long history of examining S corporation tax returns to ensure that reasonable compensation is being paid, particularly if no compensation is shown being paid to employee-stockholders.
Reasonable Compensation in the Spotlight — With the passage of tax reform, reasonable compensation will be in the spotlight because of the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will figure intro the shareholder’s income tax return. The QBI for the stockholder of an S-corporation is the amount of net income passed through to the stockholder and designated as QBI on the K-1, but the stockholder may not include the reasonable compensation (wages) he or she was paid as QBI. Thus, wages paid to stockholders actually reduce the QBI because the S corporation deducts the wages as a business expense, therefore reducing the corporation’s net income and QBI. But that does not mean wages can be arbitrarily adjusted to maximize the Sec. 199A deduction.
IRC Sec. 199A Deduction — Here are some details about how the 199A deduction works and the impact of the reasonable compensation wages on the Sec. 199A deduction.
- The S corporation’s employee-stockholder’s wages are NOT included in qualified business income (QBI) when computing the 199A deduction. Thus, the larger the wages, the smaller the K-1 flow-through income (QBI) and thus the smaller the 199A deduction, which is 20% of QBI. In this case, an S corporation would tend to pay the stockholder a smaller salary to maximize the flow-through income and, as a result, the 199A deduction.
- If married taxpayers filing a joint return have taxable income that exceeds $315,000 ($157,500 for other filing statuses), the 199A deduction begins to be subject to a wage limitation, and once the taxable income for married taxpayers filing a joint return exceeds $415,000 ($207,500 for other filing statuses), the 199A deduction becomes the lesser of 20% of the QBI or the wage limitation. For these high-income taxpayers, an S corporation will tend to pay stockholders less wage income for them to benefit from the Sec. 199A deduction.
- If an S corporation is a specified service trade or business, the Sec. 199A deduction phases out for married taxpayers filing a joint return with taxable income between $315,000 and $415,000 (between $157,500 and $207,500 for other filing statuses). And although the wage limitation is used in computing the phase out, once the taxpayer’s taxable income exceeds $415,000 ($207,500 for other filing statuses), the taxpayer will receive no benefit from the wage limitation and therefore would again want to minimize their reasonable compensation to minimize FICA taxes. Specified service trades or businesses (SSTBs) include those in the fields of health, law, accounting, actuarial science, performing arts, athletics, consulting, and financial services (for more information on what constitutes an SSTB, please call).
Of course, taxpayers cannot pick and choose a reasonable level of compensation to minimize taxes or maximize deductions. Therein lies a trap for taxpayers who do not consider the factors related to reasonable compensation. There are commercial firms that have the data necessary to determine reasonable compensation and specialize in doing so. These firms can be found by searching the Internet for “reasonable compensation.” Even the IRS has employed these firms to provide reasonable compensation data in tax court cases.
If you want additional information related to reasonable compensation, please give this office a call.
Resolve to Do These 3 Things in QuickBooks Online This Month
‘Tis the season for making resolutions and setting goals. Try exploring these three areas to dig deeper into QuickBooks Online.
By now, many New Year’s resolutions have already been made. Though they’re usually created with the best of intentions, they’re often just too ambitious to be realistic.
For example, you might decide to learn more about QuickBooks Online and keep up with your accounting chores more conscientiously in 2019. That’s hard to quantify. How will you know if you achieved that goal?
Instead, why not pick three (or more) specific areas and focus on them this month? We’ll get the ball rolling for you by making some suggestions.
Explore the QuickBooks Online mobile app:
Yes, QuickBooks Online itself is already mobile; you can access it from any computer that has an internet connection and browser. But you probably don’t always lug a laptop around when you’re away from the office, and you’re sometimes at locations where using it wouldn’t be practical. But you can always pull out your smartphone and fire up the QuickBooks online app, available for both iOS and Android.
No matter how small your smartphone (this image was captured on an iPhone SE), you can still do your accounting tasks using QuickBooks Online’s app.
QuickBooks Online’s app replicates a surprising percentage of the features found on the browser-based version. You can create, view, and edit invoices, estimates, and sales receipts for example, as well as see abbreviated customer and vendor records. Your product and service records are available there, including tools for recording expenses on the road.
Create a budget for one month:
Budgets are intimidating. That’s one reason why some small businesses don’t create them. So instead of trying to estimate what your income and expenses will be for an entire fiscal year, just build a budget for one month. In QuickBooks Online, you’d click the gear icon in the upper right, then select Budgeting. Click Add budget in the upper right to open the New Budget window.
Give it a name, like “February Budget,” and select FY2019. Leave the Interval at Monthly , and open the Pre-fill data? menu to click on Actual data — 2018 (if you have data from last year). Then click Create Budget in the lower right corner. Look at last year’s February numbers and estimate how they might change in 2019. Replace the old numbers with your new ones.
Creating a framework for a budget in QuickBooks Online is easy.
We’re suggesting you try it for just one month, so you get a feel for how this tool works. And that experiment will probably leave you with some questions. We can help you go further and complete an annual budget.
Customize your sales forms:
Every piece of paper and email you send to your customers contributes to their impression of you. Are you presenting an attractive, consistent image of your business to them? QuickBooks Online can help with this. It offers simple (for the most part) tools that allow you to modify the boilerplate forms offered on the site — without being an experienced graphic designer.
Start by clicking on the gear icon in the upper right and selecting Your Company | Custom Form Styles. Unless you’ve done some work in this area before, the screen that opens will have just one listed entry: your Master form, the one that comes standard in QuickBooks Online. To see what you can do, click Edit at the end of that line. Your four options are:
- Design. This section contains links to modifications you can make to your sales forms’ visuals. You can, for example, add a logo or color and change the default fonts.
- Content. Do you want to add or remove the standard columns (Date, Quantity, etc.) displayed on your invoices? You can do so by checking and unchecking boxes.
- Emails. QuickBooks Online sends email messages with forms; you can edit them here.
- Payments. This is a reminder that QuickBooks Online supports online payments, which can help you get paid faster.
There’s more you can do to make your sales forms look professional and polished. We can help you with these tools — and any others you want to explore to expand your use of QuickBooks Online. It’s a new year, and who knows what might come your way over the next 12 months? Contact us if you want to prepare for the new accounting challenges that 2019 might present.
January 2019 Individual Due Dates
January 2 – Time to Call For Your Tax Appointment –
January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you to do so before the calendar becomes too crowded.
January 10 – Report Tips to Employer –
If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.
January 15 – Individual Estimated Tax Payment Due –
It’s time to make your fourth quarter estimated tax installment payment for the 2018 tax year.
January 2019 Business Due Dates
January 15 – Employer’s Monthly Deposit Due –
If you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2018. This is also the due date for the nonpayroll withholding deposit for December 2018 if the monthly deposit rule applies. Employment tax deposits must be made electronically (no paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.
January 31 – 1099-MISCs Due To Service Providers & the IRS –
If you are a business or rental property owner and paid $600 or more to individuals (other than employees) as nonemployee compensation during 2019, you are required to provide Form 1099 to those workers by January 31. “Nonemployee compensation” can mean payments for services performed for your business or rental by an individual who is not your employee, commissions, professional fees and materials, prizes and awards for services provided, fish purchases for cash, and payments for an oil and gas working interest. In order to avoid a penalty, copies of the 1099s also need to be sent to the IRS by January 31, 2019 *. The 1099s must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. A business or individual who is required to file 250 or more information returns (i.e., 1099s among others) must file those forms electronically. Please call this office for preparation assistance.
*This due date for the IRS’ copy is one or two months earlier than in years prior to 2017 and applies when you have paid nonemployee compensation that is being reported in box 7 of the 1099-MISC.
January 31 – Form 1098 and Other 1099s Due to Recipients –
Form 1098 (Mortgage Interest Statement) and Forms 1099, other than 1099-MISC when box 7 is used, are also due to recipients by January 31. The IRS’ copy is not due until February 28, 2019, or April 1, 2019 if electronically filed. These 1099s may be reporting the following types of income:
- Dividends and other corporate distributions
- Amounts paid in real estate transactions
- Amounts paid in broker and barter exchange transactions
- Payments to attorneys
- Payments of Indian gaming profits to tribal members
- Profit-sharing distributions
- Retirement plan distributions
- Original issue discount
- Prizes and awards
- Medical and health care payments
- Debt cancellation (treated as payment to debtor)
January 31 – Employers – W-2s Due to All Employees & the Government –
EMPLOYEE’S COPY: All employers need to give copies of the W-2 form for 2018 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting. GOVERNMENT’S COPY: W-2 Copy A and Transmittal Form W-3, whether filed electronically or by paper, are due January 31 to the Social Security Administration. This is a month earlier than in years before 2017.
January 31 – File Form 941 and Deposit Any Undeposited Tax –
File Form 941 for the fourth quarter of 2018. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return.
January 31 – File Form 943 –
All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2018. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 11 to file the return.
January 31 – W-2G Due from Payers of Gambling Winnings –
If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2018.
January 31 – File 2018 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment –
If you file your prior year’s individual income tax return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment that was otherwise due earlier in January.
January 31 – File Form 940 – Federal Unemployment Tax –
File Form 940 (or 940-EZ) for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
January 31 – File Form 945 –
File Form 945 to report income tax withheld for 2018 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 11 to file the return.