Blog: Ask A CPA

Tax Reform Update—Here’s What to Expect

The IRS is working on implementing the changes created by the Tax Cuts and Jobs Act (TCJA).  Here are some of the major tax reform changes you can expect.

New Business Deduction Form

One of the most exciting TCJA changes is the new form the IRS is developing for taxpayers to calculate the qualified business income deduction (QBI). Self-employed taxpayers, partners, and S corporation shareholders will use this form to claim the QBI deduction on their tax return. If you are in this group then stay tuned for IRS guidance expected to come out during 2018 and be sure to work with your tax preparer to maximize your QBI deduction. I will keep you informed.

TCJA Changes for Individuals

One important change: You won’t claim a dependent exemption for your children or other dependents or a personal exemption for yourself or your spouse. You will still need to provide the information needed to take the credits for your children and non-child dependents if you qualify. Another change is the doubling of the standard deduction to $24,000 for taxpayers who are married and filing jointly. But your total allowable deduction for state and local taxes such as sales tax, state income tax, real estate tax, and personal property tax is limited to $10,000. The interest payments on your home equity loan might not be deductible. As we discussed in recent weeks, you can no longer deduct employee business expenses on Form 2106 and you can no longer deduct miscellaneous itemized deductions. Casualty and theft losses are no longer deductible unless they occur in a federally declared disaster area. And lastly, medical expenses are only deductible to the extent they exceed 7.5% of AGI. I hope this helps—I will continue to review TCJA tax law changes in the weeks and months to come.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can reach my office at (713) 785-8939. You can also leave a comment on this post.

Deducting Travel, Meals, and Entertainment as a Business

Last week, we discussed how all employee business expenses are non-deductible for individuals on their Form 1040. The only way an individual could be reimbursed (without it being included in his W-2) for an out of pocket business expense would be if his employer had an Accountable Plan, which is when you itemize your business expenses on an expense report, with your receipts attached, and your employer reimburses the exact amount. The bottom line is that the Form 2106, Employee Business Expenses is now obsolete and the Miscellaneous Expenses section of Schedule A, Itemized Deductions is also obsolete.

This week, we will discuss when Travel, Meals, and Entertainment are deductible by a business.

The Tax Cuts and Jobs Act (TCJA) completely eliminates the employer (business) tax deduction for entertainment, either paid directly or reimbursed to the employee. But there is one way for a business to get a deduction. If the business pays entertainment expenses on behalf of or by reimbursement to an employee and the amount is included in his Form W-2 as compensation, then the employer may take a 100% deduction as Wages. Otherwise, business entertainment is 100% non-deductible for expenses paid or incurred after December 31, 2017 for both employee and employer. Don’t be surprised if reimbursement policies change.

Business Meals are more complicated. The 50% limitation for business food and beverage expense still applies to meals while traveling away from home on business, and it still applies to business meals with clients as long as it’s not extravagant. Now it also applies to food and beverages provided to employees through an employer-operated eating facility, and to employer-provided de minimis food and beverages at the workplace such as coffee, cokes, donuts, water service, and overtime meals for the convenience of the employer.

The 100% deductible items include travel expenses such as airline tickets, hotels, rental cars, and taxis. Also the office holiday party, the company picnic, and any company provided gathering that lifts employee morale is still 100% deductible. So feel free to plan your company Christmas party and be sure to deduct 100% of your expenses.

Finally, you may want to establish separate general ledger accounts for: Non-deductible Entertainment; 50% Food and Beverage; and 100% Travel and Holiday Party.

That is all today. I look forward to visiting with you next week.

Business Expenses and the New Tax Law

It is important to remember the age-old tax rule: “Expenditures are not deductible unless specifically allowed by law, and all income is taxable unless specifically excluded by law.”

With that in mind, let’s discuss Travel, Meals, and Entertainment under the new law. The new law makes it very simple. If you are a Form W-2 employee and you previously deducted your business expenses on Form 2106 Employee Business Expenses, then your Travel, Meals, and Entertainment are no longer deductible. That’s right! No longer deductible.

But there is a solution, and it’s called an Accountable Plan. It is not new, but it now has greater importance. With an accountable plan, you itemize your business expenses on an expense report, include your receipts, and your employer reimburses the exact amount. The employer gets the deduction and you have no income. Many employers give their employees a “flat allowance.” For the employee, this flat allowance will be income on their Form W-2 and the related expenses will not be deductible.

I recommend you be frank with your boss about the new law’s favoritism toward businesses. You may want to ask for reimbursement under an accountable plan and for certain costs to be covered for reimbursement. Good Luck.

For those taxpayers that are self-employed and report their income and expenses on a Schedule C, corporate return, or partnership return, then we will discuss what Travel, Meals, and Entertainment you can deduct in our tax letter next week.

Due Today: Your Franchise Tax Report and Public Information Report

If you have state law protection in any of these forms, then you will need to file your 2018 Texas Franchise Tax Report by May 15, 2018: C Corporation; S Corporation; Professional Corporation; Professional Association; Limited Liability Company; Limited Liability Partnership; Professional Limited Liability Partnership; Professional Limited Liability Company; Limited Partnership; and there are more.

If your gross revenues are below $1,130,000, then you may use the No Tax Due Report, and you will not owe any tax—but you still must file the report. If your revenues are over that amount, then you must file the forms and pay the tax. The rate is .0075%, or three quarters of one percent. If you are a service company, then you can deduct salaries and benefits. If you are a manufacturing company, then you may deduct cost of goods sold (COGS). Be sure to look at the instructions online to see all the items to include in COGS. It is more inclusive than the COGS on your federal return. If you can’t file by the due date, then you may file an extension and if you owe tax then you must pay at least 90% to avoid any penalty. The rules are very complicated, so try to get it done as soon as possible. Good Luck.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can send an email to robert@robertstevensoncpa.com or call (713) 785-8939. You can also leave a comment on this post.

 

Why is the Deadline April 17 this Year?

This tax season, April 15 falls on a Sunday and Monday, April 16 is Emancipation Day. Emancipation Day is a holiday in Washington D.C. to mark the anniversary of the signing of the Compensated Emancipation Act, which President Abraham Lincoln signed on April 16, 1862. It is annually held on April 16 and is a legal holiday in Washington D.C., and it has the effect of nationally extending the due date for filing your personal and trust income tax returns. The Compensated Emancipation Act freed about 3,000 slaves in Washington D.C. in 1862, but slavery did not officially end in the United States until after the Civil War in 1865, when the House passed the Thirteenth Amendment to the U.S. Constitution.

If you don’t file your return by the due date or you don’t get an extension and you owe tax, then you will be subject to the late filing penalty and the late payment penalty. Together, they add up to 5% per month, or fraction thereof, up to a maximum of 25% of your unpaid tax. Please give me a call if you would like to file for an extension of time to file your return. If you know that you will owe additional tax with your return, then you must pay your tax with the extension to avoid the above penalties. Remember, this is an extension of time to file, not an extension of time to pay; you will have six months to get the job done—until October 15, 2018. See you soon.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can send an email to robert@robertstevensoncpa.com or call (713) 785-8939. You can also leave a comment on this post.

Hurricane Harvey Casualty Loss and NOLs

As Tax Day draws nearer, I continue to hear questions from taxpayers whose homes were affected by Hurricane Harvey. Today, I explore one instance in which a casualty loss from Harvey may be treated as an NOL, or net operating loss, and used to recover prior tax payments.

Can Your Casualty Loss from Hurricane Harvey Create an NOL for Carryback?

Yes. There may be an opportunity for an additional refund.

Individuals can claim an NOL for casualty losses that exceed the amount that can be utilized in the year the loss was sustained and reported. For those who suffered severe damage, the casualty loss may exceed their income and, therefore, they would not be able to fully utilize their casualty loss deduction for the year in which the loss occurred. The IRS allows such individuals to treat the loss as an NOL and carry it back to prior years. If income was insufficient in the prior years, a carryforward is available.

If done within one year of the NOL year, then you would use Form 1045; this will allow the taxpayer to receive a prompt refund. If the claim is filed more than one year after the close of the NOL year, then it must be filed on Form 1040X within the relevant statute of limitations for the loss year. Your normal NOL gets a two year carryback, but a special rule for casualty losses extends the carryback period to three years.

Congress enacted a special five-year carryback for those who suffered a loss from Hurricane Katrina. However, a similar special five-year carryback was not enacted for those who suffered losses from Hurricane Sandy. Tax professionals will be keeping an eye out for any new legislation that might extend the carryback period for victims of Hurricanes Harvey and Irma. Hopefully very few taxpayers will need five years to absorb their loss.

That is all for today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out with questions. Feel free to email robert@robertstevensoncpa.com or call my office at (713) 785-8939. I’m also available by text at (713) 906-8331.

Can You Deduct Interest on a Home Equity Loan Used to Remodel Your Home?

In short, yes.

Debt secured by a first or second home and used to improve the place has always been considered acquisition indebtedness, so the new law’s crackdown on home equity loans doesn’t apply. After 2017, you can no longer deduct interest on home equity debt used for other purposes, such as to buy a car, pay off credit card debt, or pay college tuition. Remember when we changed the Texas Constitution to allow borrowing on the equity in your farm, ranch, or home for purposes other than home improvements? It was the early 1990s. Well, you can still borrow on your equity for other purposes, you just can’t deduct the interest.

There is also a new limit on eligible acquisition mortgage debt. The new law limits the deductibility of interest on acquisition indebtedness to $750,000 for tax years after December 31, 2017. The new law allows homeowners with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home, but for new buyers, the $1 million limit fell to $750,000 for a first and second home.

When it comes to refinancing your mortgage, homeowners can refinance mortgage debt up to $1 million that existed on December 14, 2017, and still deduct the interest. But the new loan cannot exceed the amount of the mortgage being refinanced, unless used to improve your home.

Example: If Joe has a $1 million mortgage he has paid down to $800,000, then he can refinance up to $800,000 of debt and continue to deduct interest on it. If he refinances for $900,000 and uses the $100,000 of cash to upgrade the home, then he could deduct the interest on the $900,000. But if he uses the $100,000 for other purposes, such as paying off credit card debt, then he couldn’t deduct interest on any of the $900,000 refinancing. I hope this helps.

That is all for today. I look forward to visiting with you next week.  In the meantime, don’t hesitate to reach out with questions.

Attention Small Business Owners: Don’t Forget Your Franchise Tax Report

Everyone seems to remember their federal tax returns, but for small business owners, state tax returns are also due. If you have a small business and you filed Articles with the Secretary of State to get state law protection in some form, such as an LLC, or a corporation, or another form of protection suitable to your needs, then you will need to file a Texas Franchise Tax Report and a Public Information Report by May 15, 2018.

These reports must be filed electronically and to file electronically you must have your Webfile Number. The Texas Comptroller of Public Accounts sent you a reminder last week that your Franchise Tax Report is coming due. This reminder will have all the information your CPA (or you) will need to file the return electronically, including your Webfile Number. Please be sure to keep this form and get it to your CPA as soon as possible along with your federal tax information — and definitely before May 15.

Hurricane Harvey Casualty Loss and Form 4684

As Tax Day draws nearer, I’ve had a number of questions about Hurricane Harvey and casualty loss. Today, I’ll walk you through what you need to file Form 4684 for casualty loss deductions with your 2017 tax return.

Form 4684, Casualties and Thefts was designed especially for storms like Hurricane Harvey. In 2017, you will be able to take an itemized deduction by completing the form and attaching it to your Form 1040. Also, it’s important to know that twenty counties along the Texas Gulf Coast, including Harris County, were Presidentially Declared Disaster Areas. Once the President declares an area a Presidentially Declared Disaster Area, then the IRS can administratively make temporary changes to the law, such as extending the due dates of returns and estimated tax payments, and they can lift the 10% of AGI threshold for casualty losses. And that is what they did. If your home was flooded and your personal possessions were lost in the flood, then you need to complete Form 4684.

Here is what you will need to complete the form:

  • The cost or basis of your home
  • Your insurance or other reimbursement (ie: FEMA)
  • Your fair market value before the storm
  • Your fair market value after the storm

This is the information you will need to complete your casualty loss deduction. If you struggle with any of these items, such as the FMV of your home after the storm, don’t hesitate to ask your realtor or real estate appraiser, or contact the Harris County Appraisal District. If you need any help with any of this, then please give me a call.

That is all today. I look forward to visiting with you next week. In the meantime, please let me know if you have any questions — you can call my office at (713) 785-8939 or leave a comment on this post to get in touch.

Effects of the Tax Cuts and Jobs Act on the Wealthy

Let’s discuss the impact the new tax law will have on two high levels of income. The first example is an attorney making $500,000 who is married with no children. In 2017, the household will have itemized deductions made up of state and local taxes of $37,285, home mortgage interest of $39,000, and business expenses exceeding 2% of AGI of $10,000. Their itemized deductions will be $80,699 after the Pease deduction (this is a stealth tax from the ACA). Their personal exemptions are totally phased out. Their taxable income will be $419,301 and their regular tax will be $113,638, but their AMT will be $122,671. The effect of the additional Medicare tax from the ACA will not be considered because it is the same in 2017 and 2018. In 2017, their tax liability will be $122,671.  

In 2018, if our same family makes $500,000, then they will have state and local taxes limited to $10,000, they will get all their home mortgage interest of $39,000, and their business expenses from Form 2106 are no longer deductible. Personal and dependent exemptions are repealed.  Their taxable income will be $451,000 and their regular tax liability will be $109,229. AMT is less than the regular tax because the AMT exemption is greater and doesn’t begin to phase out until $1M for couples. Their 2018 tax liability is $109,229. This is a tax savings of $13,442 or put another way, a savings of 11% from 2017 to 2018.

In our second example, we have a married couple with no children. They file jointly and in 2017 they make $1,500,000. They live in beautiful, sunny California and they own their home. Because beautiful California has a 13.3% state income tax and they own their home, they will have $300,000 in state and local tax; they also have $39,000 in home mortgage interest, and their Form 2106 Employee Business Expenses do not exceed 2% of AGI. After the Pease deduction, their itemized deductions are $303,414, their exemptions are phased out and their taxable income is $1,196,586.  Their regular tax liability is $419,079. AMT is not even in the picture.

In 2018, the same family making $1,500,000 will have taxable income of $1,451,000.  Remember SALT deductions are limited to $10,000 plus home mortgage interest of $39,000, and personal and dependency exemptions were repealed. Their tax in 2018 will be $476,249. This is a tax increase of $57,170.  

Please remember that there are those who oppose any type of tax cut for the American people. For most Americans the new law is a tax cut, especially if you live in a low-tax state like Texas. But if you live in a high-tax state like California or you own expensive real estate, then you will very likely have a tax increase. In my experience, most high income taxpayers own a successful small business and they use any tax savings to hire someone young and tech savvy to make their business more efficient. Remember, the American people can allocate their capital and spend their money more equitably and efficiently in the marketplace than the federal government, which is wasteful, inefficient, and inclined toward political favors for special interests.      

That is all today. I look forward to visiting with you next week. In the meantime, please let me know if you have a question. You can call my office at (713) 785-8939 or leave a comment on this post.