Blog: Ask A CPA

What Should Texas Do About Sales Tax – The Wayfair Decision

In 1992, the US Supreme Court ruled in North Dakota v Quill that a physical presence test must be met for a state to charge sales and use tax. Online sales by retailers with no nexus in a state were not required to charge sales tax.

That may change very soon.

On June 21, 2018 the US Supreme Court ruled in South Dakota v Wayfair that states can impose a sales tax on out of state retailers, even those that do not have a physical presence in the state. It leaves the decision to the various state legislatures: Do they stay with the Quill decision and forego millions in sales tax revenue, or do they adopt the Wayfair decision and require the out of state seller to collect and remit the sales and use tax? In 1992 online sales were in the millions and now they are in the billions and states and cities want the revenue. There will probably be a threshold for small retailers that will exempt them from sales tax reporting similar to Quill if annual sales are (for example) less than $100,000 or they have less than 200 transactions. Also, can you imagine filing and paying 50 sales tax returns every quarter (or month)? What should Texas do?  Should we lower the state rate?

In Houston, we pay sales tax at an 8.25% rate. The state portion is 6.25%, the city portion is 1.00%, and the MTA (Metropolitan Transit Authority) portion is 1.00%.

I support charging sales tax on online purchases because it will help level the playing field.

I believe this will broaden the base and allow for a reduction in the rate.

I will keep you posted.

That is all today. I look forward to visiting with you next week. In the meantime, please don’t hesitate to reach out if you have a question. You can call my office at (713) 785-8939.

A Gift That Lasts a Lifetime – The Roth IRA

You should consider giving your child or grandchild a Roth IRA.  

In 2018, you can contribute up to $5,500 to a Roth IRA. The contribution cannot exceed the child’s earnings and if the child has no earnings, you should consider filing a Schedule C with their return and reporting and paying tax on an amount equal to their contribution up to the maximum. The $5,500 pay-in for your child or grandchild counts against your $15,000 gift tax exclusion ($30,000 if you are married).

Some of the advantages and disadvantages of the Roth IRA are…

  • The earnings grow tax deferred and, when taken out at age 59 ½, the entire distribution is tax free.
  • The original contributions are always tax free, even if you withdraw them before age 59 ½.
  • The contributions to a Roth IRA are not tax deductible.

When your child grows up she can continue the contributions…

  • When the child reaches age 50 she can contribute an additional $1,000 or $6,500.
  • When your child reaches age 70 ½, she will not be required to make minimum distributions.
  • If your child is single, the allowable contribution begins to phase out with adjusted gross income between $120,000 and $135,000… and if she’s married, the allowable contribution phases out between $189,000 and $199,000.
  • She can make contributions after age 70 ½.
  • She is not required to take distributions from her Roth IRA… ever.
  • To avoid the 10 percent penalty and any income tax on the earnings, there must not be any distributions during the 5 year period beginning with the first tax year a contribution was made, except if made on or after attaining age 59 ½, the individual’s death or disability, or to pay for first-time home buyer expenses.

I don’t need to tell you that the IRA could grow for 45 to 50 years and when she reaches age 59 ½ she could make withdrawals tax free. You should probably talk to your financial advisor to get the advice you need to reach your goals. Call me if you need a recommendation.

That is all today.  I look forward to visiting with you next week.  Please don’t hesitate to reach out if you have a question—you can reach me at (713) 785-8939.

Net Operating Loss Deductions Under the New Tax Law

This week, I continue my exploration of the reforms brought about by the Tax Cuts and Jobs Act. Today’s topic: Net Operating Loss Deductions.

Net Operating Loss Deduction – Old Law

NOL deductions are computed on Schedule A of Form 1045 and taken on Line 21 of the Form 1040. Under the previous law, if your business incurred an operating loss (expenses exceeded revenues) or you as an individual incurred a disaster loss in a Presidential Disaster Area (Hurricane Harvey), then you could compute and use an NOL deduction. NOLs could be carried back either 2, 3, or 5 years depending on the type of loss, and then carried forward. The taxpayer also had the option to waive the carryback period, but to qualify they were required to attach an election to their timely filed tax return—and that includes the additional time allowed if they filed an extension. The Tax Cuts and Jobs Act changed things.

Net Operating Loss Deduction – New Law

The new law repeals the various carryback periods, but provides a two-year carryback for certain losses incurred in farming businesses and insurance companies. The new law provides that NOLs may be carried forward indefinitely. The new law also limits the amount of the NOL that may be deducted in any one year to 80% of taxable income, determined without regard to the NOL deduction itself. The effective date of the new law is defined as tax years beginning after December 31, 2017. Therefore, any taxpayer with NOL carryovers from tax years prior to January 01, 2018 will not be subject to the 80% of taxable income limitation and taxpayers will have to distinguish between the two types of losses when computing the NOL deduction.

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 or just leave a comment on this post.

Tax Reform Update—Changes to the Child Tax Credit

Under pre-Tax Cuts and Jobs Act (TCJA) law, parents could claim a child tax credit (CTC) of $1,000 for each qualifying child under the age of 17. The CTC was phased out for taxpayers with an adjusted gross income (AGI) above certain thresholds—$110,000 for married filing joint taxpayers and $75,000 for single and head of household taxpayers. The CTC was reduced by $50 for each $1,000 or fraction thereof that their AGI exceeded their threshold amount.

All that is changing for 2018 and beyond. Below, I examine the changes in detail.

New Law – Qualifying Child

For tax years after December 31, 2017 and before January 1, 2026, the TCJA modifies the CTC by increasing the credit to $2,000 for each qualifying child under 17 and increasing the phase-out threshold to $400,000 for married filing joint taxpayers and $200,000 for all others. The phase-out computation stays the same. It is also important to know that the CTC has a refundable portion of $1,400. This means that if your total tax liability is less than the sum of your total child tax credits, then up to $1,400 per child can be refunded.

Example: H and W have three qualifying children under age 17 and their total tax liability is $1,500. Their total CTC is $6,000. Their refund is limited to $4,200 ($1,400 x 3).

New Law – Other Dependents

The CTC is also modified to provide a $500 non-refundable credit for qualifying dependents other than qualifying children. This would include dependent children 17 and over (such as college students), disabled adult children, or elderly parents under your care. The phase-out thresholds are the same as the CTC.

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.

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.