Blog: Ask A CPA

Important Update on Corporate Tax Reform

A new tax plan recently passed through the House, and this week, everyone in Washington is talking about corporate tax reform. I parsed the legislation and have summarized some key points below. The implications for S and C Corporations are especially great.

Tax Reform – Don’t Get Excited Unless You’re a “C Corporation”

Unfortunately that’s true. It appears the only real winners are your regular corporations, or C corporations as they are called. Their rate reduction is expected to go from 35% down to 20%. Individual taxpayers may discover that they, depending on your circumstances, got very little from this version of tax reform. I’m not saying your tax liability won’t go down at all, I’m just saying that the House bill takes away too many deductions and the rates are not significantly different from the rates we now have. There are other changes that make the bill good such as repeal of the AMT, a significant increase in the unified credit (for estates and gifts), and the doubling of the standard deduction, but rate reduction is the true solution to creating jobs.

The House Bill and S Corporations – A Major Tax Increase and More Complication

The House Bill passed last week has a top rate of 25% for S Corporations and other pass-through businesses, but in many cases the real rate is significantly higher. S Corporation shareholders need to pay attention. If you are a professional service firm, the 25% rate doesn’t apply to professional service businesses. Specifically, the bill excludes businesses engaged in “the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, or investing, trading, or dealing in securities, partnership interests, or commodities.”

What this means is that the top tax rate prescribed in H.R. 1 is the new rate for personal service corporations. For active owners of non-professional services corporations, the bill imposes a separate limitation on the 25% pass-through rate. It would cap the owner’s profit eligible for the 25% rate at 30% of the sum of their wages and profits from the business. The remaining 70% would be subject to the higher personal rates. It gets even more complicated, because H.B. 1 makes S Corporation profits subject to the self-employed payroll tax and your state and local income, sales, and property taxes are not deductible.

Next Week

Next week we will discuss Records Retention and how long you need to keep those old tax records. We will also review H.B. 1 changes to tax credits and other tax items related to paying for college.

Thanks for reading. Wishing you and your family a happy Thanksgiving.

Is That Knock at the Door Someone From the IRS, or Someone Scary?

Happy Halloween! Read on for an update on the federal aid package for hurricane and wildfire victims. Plus, I teach you how to distinguish an IRS employee form a common scammer—or a neighborhood trick-or-treater.

Disaster Aid Package is Signed by the President

In my October 17 post, I discussed the $36.5 billion aid package for hurricane and wildfire victims that had passed in the House. It finally passed in the Senate and President Trump signed the bill on October 26, 2017. I also mentioned that the financially troubled National Flood Insurance Program would be bailed out—it received approximately $17 billion. I have heard people complain that their loss far exceeded their insurance reimbursement and I have also heard the uninsured speak of how difficult it was to get paid for their loss from FEMA. We now understand that there wasn’t enough aid to go around. Due to this current infusion of aid for disaster relief in Texas, Florida, Puerto Rico, California, and the U.S. Virgin Islands, I would suggest you go online again.

It’s Halloween! Is That Knock at the Door Someone From the IRS, or Someone Scary?

Children knock on doors pretending to be spooks and movie characters. Scammers don’t limit their impersonations to just one day. People can avoid falling victim to scammers by knowing how and when the IRS does contact a taxpayer in person. These 8 tips can help you determine if an individual is truly an IRS employee.

1. The IRS initiates most contacts through regular mail delivered by the USPS.
2. There are special circumstances when the IRS will come to a home or business. These are:

  • When a taxpayer has an overdue bill.
  • When the IRS needs to secure a delinquent tax return or a delinquent payroll tax payment.
  • To tour a business as part of an audit.
  • As part of a criminal investigation.

3. Generally, home or business visits are unannounced and are made by IRS Revenue Officers.
4. IRS Revenue Officers carry two forms of identification. Both forms have serial numbers, and taxpayers can ask to see both IDs.
5. The IRS can assign certain cases to private debt collectors, but the IRS does this only after giving written notice to the taxpayer or their appointed representative. Private debt collection agencies will never visit a taxpayer at their home or business.
6. The IRS will not ask a taxpayer to make a payment to anyone other than the “United States Treasury.”
7. IRS employees conducting audits may call taxpayers to set up appointments, but only after notifying them by mail.
8. IRS criminal investigators may visit a taxpayer’s home or business unannounced while conducting an investigation. These are federal law enforcement agents and they will not demand any sort of payment. At this stage, you should have a tax attorney and privileged communication.

Taxpayers who believe they were visited by someone impersonating the IRS can visit IRS.gov for information on how to report it.

Home Equity Loans and Proposition 2

A proposed amendment to the Constitution of the State of Texas that would loosen restrictions on home equity borrowing comes to a vote on Tuesday, November 7. Known as Proposition 2, this amendment should hold serious interest for homeowners. Below, I outline the history of home equity loans in Texas and analyze this new proposition.

Home Equity Loan and Line of Credit

In the early 1990s, Texans amended the state constitution to allow home equity lines of credit. Prior to the amendment, Texans could only borrow on the equity in their home to finance home improvements. A home equity loan/LOC includes any indebtedness that is secured by a home if the proceeds were not used to purchase, construct, or substantially improve a home. Under the tax law rules, a taxpayer can deduct interest on up to $100,000 of home equity indebtedness that is secured by the taxpayer’s main home or one other home. The proceeds of the loan may be used for any purpose, including the payment of a child’s college expenses, paying off credit cards, or paying for a new car.  

Proposition 2 

On November 7, 2017, voters will again have the chance to amend the Texas constitution regarding home equity loans. I have included the ballot wording and some explanatory comments.  

The proposition reads as follows:

“The constitutional amendment to establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, establishing certain authorized lenders to make a home equity loan, changing certain options for the refinancing of home equity loans, changing the threshold for an advance of a home equity line of credit, and allowing home equity loans on agricultural homesteads.”

After talking to my mortgage banker (www.capitalabcfunding.com), I can tell you that this amendment will help reduce your borrowing costs by removing some of the many fees that you pay when you borrow on your home and limiting some of the fees that lenders charge for credit checks, loan applications, and others, as well as making it easier to get a home equity loan. It will also expand the types of agricultural properties that can borrow on their equity.

This amendment will be effective on January 1, 2018, if it is approved by the voters. It takes a 2/3 majority of the Texas House and Senate to get a proposition on the ballot. Then, it is submitted for approval to the qualified voters of the state. A proposed amendment becomes a part of the constitution if a majority of the votes cast in an election on the proposition are cast in its favor.

Now, it is up to you.

FAFSA Tips and Post-Harvey Aid

It’s time to be thinking about Federal Student Aid. If you need help filling out the FAFSA form, please read on or give me call. Also below, I unpack a few of the tax implications of a House bill designed to provide hurricane and wildfire relief.

Let’s begin.

Helpful Tips on the FAFSA

Do you have children in college? Then the Free Application for Federal Student Aid is the form that you will complete if you want to enter the federal financial aid system. Go to www.fafsa.ed.gov to electronically file if you want a Stafford Loan, a work-study job for your student on campus, a federal grant, or maybe even a little scholarship money from the endowment. You will need your 2016 Form 1040 and a list of your assets. If you need help, please give me a call at (713) 785-8939.

U.S. House Approves $36.5 Billion Aid Package

Last Thursday, October 12th, the House approved a bill that will provide Hurricane Harvey, Irma, and Maria relief as well as wildfire relief, and will bail out the financially troubled National Flood Insurance Program. The bill now awaits consideration by the Senate.

The bill also includes a few tax changes that might benefit you. This legislation allows you to take a casualty loss from these storms without having to itemize. You will also be able to deduct your uninsured personal losses in excess of a $500 threshold without regard to the 10% of adjusted gross income offset that generally applies to get that deduction. I don’t need to tell you how big that could be.

Also of note, the 10% penalty on pre-age-59 ½ withdrawals from retirement accounts is waived, as long as the IRA or retirement plan withdrawals are not greater than $100,000. The regular income tax due on these distributions can be paid over three years. You can also borrow more from your 401(k), up to $100,000, and loan repayments can be deferred. These are some of the changes that may affect you.

Tax Records Lost During Harvey?

If you lost your tax records during the hurricane you can use the Get Transcript tool on IRS.gov to print a summary of your W-2, 1099, and 1098 information. A tax transcript is a summary of key information and not a copy of your return. If you want a copy of an actual return, you must file Form 4506. If you want a copy of your transcript by mail, then you must file Form 4506-T. To expedite the processing and waive the customary fees, write “Hurricane Harvey” on the top of the form.

9 Tips for Reconstructing Records after Hurricane Harvey

Taxpayers who are victims of a disaster might need to reconstruct records to prove their loss. Doing this may be essential for tax purposes, getting federal assistance, or an insurance reimbursement.

Here are nine things individual taxpayers can do to help reconstruct their records after a disaster:

  1. Taxpayers can get free tax return transcripts by using the Get Transcript tool on IRS.gov, or use their smartphone with the IRS2Go mobile phone app. They can also call (800) 908-9946 to order it by phone.
  2. To establish the extent of the damage, taxpayers should take photographs or videos as soon after the disaster as possible.
  3. If a taxpayer doesn’t have photographs or videos of their property, a simple method to help them remember what items they lost is to sketch pictures of each room that was impacted.
  4. If you lost your car, there are several resources that can help you determine the FMV before the loss. These resources are all available online or at the library: Kelley’s Blue Book, National Automobile Dealers Association, or Edmunds.
  5. Taxpayers can contact the title company, escrow company, or bank that handled the purchase of their home to get copies of their destroyed documents.
  6. If you bought furniture or appliances with your credit card, then you should contact your credit card company or bank for past statements.
  7. Homeowners should review their insurance policy as the policy usually lists the value of the building to establish a base amount for replacement and starting point for determining FMV before the loss.
  8. Absent that, you can go to the HCAD website for a record of the value of your property, both land and improvement.
  9. You can also support your loss with cancelled checks, credit card receipts, photographs on your phone, and videos.

I hope this helps!

Robert T. Stevenson, CPA

Three Easy Ways to Report Your Property Damage

Harris County homeowners who suffered damage from Hurricane Harvey can report their damage to the Harris County Appraisal District (HCAD) through the following ways:

  1. The HCAD’s upgraded app, available for Apple and Android phones.
  2. By phone at (713) 812-5805. You will need to provide your name, address, phone number, and account number, if you have it, along with the type of property damage and amount of water you received.
  3. You can also email that information to help@hcad.org.

Reporting property damage now will help the appraisal district identify the most damaged neighborhoods and properties to help homeowners next year when property is reappraised.

Remember, your property tax liability is based on the appraised value as of January 1 of each year. Therefore, your tax bill for 2017 is based on your appraised value at January 01, 2017. And likewise, if your home has not been completely repaired as of January 1, 2018, then you should become eligible for a reduced value for 2018.

3 Common Tax Return Myths

Nobody wants to be the target of an IRS audit. Fear of an audit leads taxpayers to believe myths about what may or may not catch the eyes of the IRS. Unfortunately, these misconceptions could steer taxpayers toward greater audit risk and a higher tax liability. Below, I unpack three widespread individual tax return myths — and reveal the truth behind them.

Myth #1: Extending an Individual Return Increases Your Chances of Being Audited

The IRS offers an automatic six month extension to all individuals with no explanation necessary. If the IRS viewed extended returns as risky, then there would be rules in place to restrict extensions. Quite the opposite is true — the IRS makes it very easy for individuals to file extensions.

Individuals may rush to file their personal returns out of fear that they will be penalized for an extension, even if their returns are incomplete or inaccurate. This behavior may result in higher audit risk if the IRS catches the inaccuracies. Instead, taxpayers should take the time to collect and review their tax information to ensure they have included everything. If that involves filing an extension, then it is better to extend than to file without all of the information.

While an automatic extension extends your time to file your income tax return, it does not extend the time you have to pay your tax. If you expect to owe additional money with your income tax return, then you will need to pay all tax due when you file your extension.

Myth #2: Getting a Large Refund Means You Are Maximizing Deductions and Minimizing Risk

A large income tax refund may simply mean that you are over withholding on your Form W-2 or overpaying your estimated taxes. That refund is actually interest-free money that you overpaid to the government.

Be leery of those who brag about their IRS Refunds. Rather than optimizing deductions, they may be getting back money that they had over withheld. Discuss your personal circumstances with your CPA to ensure that you maximize your deductions.

Large refunds have now become potential red flags for the IRS. With the drastic increase in identity theft, the IRS is now on the lookout for returns seeking large refunds to ensure that those returns are legitimate.

Myth #3: Individuals Should Not Take the Home Office Deduction Due to Audit Risk

Unlike in the past, working from home is very common today due to technology and the savings to companies in office space. Therefore, remote employees and the self-employed do not necessarily increase their audit risk.

There are some rules to consider. First, individuals can only claim space used exclusively and regularly for business. Also, the home office deduction is available only to individuals who do not have nearby access to a physical office location. Also, the deduction is only allowed to the extent of profit in the business.


If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.

5 Tips for Tax-Smart Charitable Contributions

The generosity of the American people is never more evident than during a disaster event. Houston has experienced widespread devastation as a result of Hurricane Harvey. In its aftermath, hundreds of relief funds are being set up and promoted to aid those impacted by the storm. You clearly want to help, so how do you ensure that your generous donation will not only benefit those in need but also be tax deductible?

Here are a few things to consider.

1. Verify Tax Exempt Status

Make sure your recipient organization has been granted 501(c)(3) tax exempt status by the Internal Revenue Service. These organizations have been established for charitable purposes and donations to them are tax deductible as allowed by law. They also are required to file annual tax returns reporting their charitable contribution income, their unrelated business taxable income, and their business expenses. These returns are available for public inspection, usually upon request. You can confirm an organization’s exempt status on the IRS website.

2. Get a Receipt

Organizations that are eligible to receive tax deductible donations are required to provide a receipt to donors for any gift of $250 or more. The receipt acknowledges the donation amount, the date of donation, the organization’s tax exempt status, and their tax ID number. You should obtain and keep the receipt as additional support for your tax deductible donation.

3. Be Wary of Crowdfunding

Crowdfunding sites such as GoFundMe or YouCaring are popular ways to raise money for various types of causes on social media. Since crowdfunding websites are open for use by anyone, many of the funding pages are not established by qualified charitable organizations. Before giving through such sites, do your homework to ensure that your support is going to a charitable organization with qualifying tax-exempt status.

4. Appreciated Securities

Consider donating appreciated stocks, bonds, or mutual funds to a charity or a donor advised fund. When you donate appreciated securities held longer than a year, you are able to deduct the fair market value of the security as a charitable contribution. This also avoids the capital gains tax because the security is being donated instead of being sold.

5. Autos and Boats Worth More Than $5,000

In most cases you will need a written appraisal, which will be attached to the return. You will also need a written acknowledgement from the donee organization which will include any proceeds from the disposition of the vehicle by the donee organization. This acknowledgement must also be attached to the return.

In addition, you will need a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, from the donee organization. Most charities will use the Form 1098-C to fulfill the written acknowledgement requirement. And yes, you will attach the Form 1098-C to your tax return.


If you have additional tax questions, give me a call at (713) 785-8939. I’d love to hear from you.

9/12 Weekly Tax Letter: Casualty Loss Deduction and New Filing Deadline

Dear Taxpayer,

I would like to send you my weekly tax letter to keep you informed and also to stay in touch.  I will try to keep it to the point and informative.  If you have questions, please feel free to call me at 713-785-8939.  If you think a friend would benefit then pass it on.  Let’s begin.

Casualty Loss Deduction from Hurricane Harvey

I promised that I would explain the rules and the math behind this deduction in my last letter.  I will try to give you the most important things you need to know in a simple example.  Remember to take photographs of the damage and to use your HCAD appraisal for your allocation.  This example will have a family that had their home and their car flooded.

For each asset, you are allowed to deduct the lower of the fair market value (FMV) before the storm or your cost basis, less insurance proceeds, less the FMV after the event, less $100 per item, and for each event subtract 10% of your adjusted gross income (AGI).

Example: Your home was flooded by Hurricane Harvey.  The FMV of your home before the event was $300,000, of which $100,000 was land and $200,000 was improvement.  You bought the home in 2010 for $150,000.  The FMV of the improvement after the event was zero, your insurance proceeds were $40,000, and your AGI was $120,000.  Your car was a total loss.  Your cost was $21,000 and the FMV before the storm was $10,000, the insurance proceeds were $7,000.

Your Casualty Loss Deduction would be $50,800.  Computed as follows: ($100,000 less $40,000 less $100 plus $10,000 less $7,000 less $100 less $12,000 equals $50,800).

This example is very simplified and does not include personal property.  I would combine your personal possessions such as furniture, clothing, and household items into one amount.  Remember, you deduct the lower of FMV or cost.  Also remember that you may amend your 2016 tax return to take the deduction or wait and take it on your 2017 Form 1040.  You will also need to provide the date you acquired the property and the date you incurred your casualty loss.  The casualty loss deduction is taken on Form 4684 Casualties and Thefts.  I imagine this leaves many of your questions unanswered, so please give me a call if I can be of any further assistance.       

New Filing Deadline

The filing deadline for income tax and payroll tax returns and estimated tax payments due on or after August 23, 2017 and before January 31, 2018 have been pushed back to January 31, 2018.  It includes taxpayers who had valid extensions to file their 2016 return that would have been due on either September 15, 2017 or October 16, 2017.  It also includes the quarterly estimated tax payments originally due on September 15, 2017 and January 16, 2018, and the quarterly payroll tax returns normally due on October 31, 2017.  Please don’t wait until January 31, 2018.  Come and see me as close to the original due date as possible – you will be glad you did.  Thank you.  See www.irs.gov for more details.

Till next week,
Robert Stevenson, CPA
September 12, 2017

   

  

 

     

                                                                                                                                                                                       

 

 

Three Tax Issues to Watch For in 2017 and Beyond

Between now and April, I’ll use my blog to periodically answer client questions and spread awareness about some of the biggest tax issues that could affect your 2017 return. Let’s begin with a brief overview of three potential changes with large implications.

Health Care

The individual and employer health insurance mandates remain the law now that the Senate has rejected GOP proposals for a repeal of  Obamacare. The Affordable Care Act remains in force unless and until changed by Congress. Uninsured individuals must pay a penalty tax if they don’t qualify for an exemption. Employers with 50 or more full-time employees but no affordable health plan owe a penalty tax if their employees opt to buy insurance on an exchange and qualify for the premium tax credit. Trump’s executive orders on Obamacare do not change the law, per the IRS. Don’t be surprised to see more exemptions to the individual mandate. There are several now.

Also, keep an eye out for a bipartisan plan with significant changes to Obamacare. A new proposal by the 30 plus members of the House’s Problem Solvers Caucus sets forth solutions intended to help stabilize the individual health insurance market. It includes two tax provisions: First, repeal of the 2.3% tax on medical device sales; second, an easing of the employer mandate so it would only apply to businesses with 500 or more employees, up significantly from the current 50-employee threshold. In addition, the 30 hour per week threshold to qualify as a full time employee would be hiked to 40 hours.  

Identity Theft

The incidence of reported individual tax identity theft is on the decline, but an increase in business tax identity theft is causing concern. This occurs when fraudulent individuals file bogus corporate, payroll, or excise tax returns, Schedule K-1s, and others, using stolen tax ID numbers and claiming false tax refunds. The IRS has flagged 10,000 suspicious business tax returns filed thus far in 2017. To help alleviate the problem, the IRS is asking more from tax return preparers. Beginning next year, tax preparation software will be updated to require additional data, such as the name and Social Security number of the executive signing the return and the company’s payment and filing history. The IRS anticipates that these questions will help it identify suspicious returns. Be ready for this. This would become a requirement by way of an internal IRS administrative ruling.    

Tax Reform

Tax reform is a priority in Congress, and GOP tax writers and their staff are busy working on a proposal to overhaul the federal tax system, which they expect to release after the August recess. In the meantime, those in the know are making the following forecast.

Will the business tax rate be cut to 15%? No. Despite President Trump’s promise to slash the current 35% corporate rate to 15%, this won’t fly with moderate congressional Republicans. There just aren’t enough revenue raisers to offset such a low rate, they argue, especially now that the projected savings from the repeal of Obamacare is no longer in the mix. GOP lawmakers will aim for a 20 to 25% rate in their plan which will also apply to owners of pass-through businesses such as partnerships and S Corporations and self-employed business owners, such as those filing on Schedule C with their personal tax return.



If you have tax questions, I’d love to hear from you. Feel free to call me at (713) 785-8939 or email me at robert@robertstevensoncpa.com – I may even feature your question in a future blog post.

Until next time,
Robert Stevenson, CPA