Category: Analysis

PPP Loans – A Primer

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Let’s discuss the Paycheck Protection Program (PPP) loan initiative enacted under the CARES Act to keep small businesses afloat during COVID-19. The PPP lets small businesses borrow up to 250% of their average monthly payroll to cover payroll, utilities, rent, and interest. If the loan proceeds are used for these specific expenses during the 24-week period following disbursement of the loan, then the loan need not be repaid, provided that at least 60% of the proceeds are used for payroll.

The CARES Act says that forgiven PPP loans are nontaxable. The law is silent on whether expenses paid with forgiven PPP funds are deductible. So, the IRS issued an administrative ruling which said that to prevent a double tax benefit, the expenses are not deductible. Businesses with PPP loans are pleading with Congress to reverse the ruling and the lawmakers are listening. The Senate is trying to pass a narrow bill that would reverse the IRS ruling and many House members are also in agreement. I am telling my clients to book the receipt of the PPP loan and the subsequent disbursements as follows. Upon receipt of the loan proceeds, you should debit cash and credit Note Payable – PPP. As you spend your loan proceeds, you should credit cash and debit Note Payable – PPP. This will have no effect on the Income Statement and will comply with the IRS ruling. I would advise keeping a list of all your expenses in a separate file off the books.

Keep a close eye on your net income because if the loan proceeds and the related non-deductible expenses exceed your reduction in revenues then you could have a large increase in your taxable income. If Congress reverses the IRS, then you will have a huge benefit. I will keep you posted.  

A Quick Overview of Tax Reform Changes

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The changes enacted by the Tax Cuts and Jobs Act affect every taxpayer filing a 2018 tax return this year. To help my fellow taxpayers understand these changes, I have prepared a quick overview below.

Tax Rates Lowered

Starting in 2018, tax rates are lower for almost every income bracket. The seven rates range from 10 percent to 37 percent.

Standard Deduction Nearly Doubled

For 2018, the basic standard deduction is $12,000 for singles, $18,000 for head of household, and $24,000 for married couples filing a joint return. Higher amounts apply to people who are blind or at least age 65. Along with other changes, this means that more than half of those who itemized their deductions in tax year 2017 may instead take the higher standard deduction on their 2018 tax return.

Itemized Deductions Limited or Discontinued

Home mortgage interest on a new mortgage above $750,000 is not deductible, as well as interest on home equity loans not used for home improvements. State and local taxes are only deductible up to $10,000, but this limit does not apply to your rental property or business taxes. All those business expenses and other miscellaneous itemized deductions that you deducted on Form 2106 and Schedule A in prior years are no longer deductible in 2018.

Child Tax Credit Doubles and Phase-out Expanded

The child tax credit is now $2,000 for each qualifying child under the age of 17. And the phase-out doesn’t begin until your AGI exceeds $400,000 for married couples and $200,000 for other taxpayers. Remember: Last year the credit was $1,000 and the phase-out began at $110,000 for married couples. This is a big deal for young families.

New Credit for Other Dependents

Taxpayers can claim a $500 credit for each dependent who doesn’t qualify for the Child Tax Credit. This includes older children, as well as qualifying relatives, such as a parent.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939, send me an email, or leave a comment on this post. I’d love to hear from you.

The Internal Revenue Service After the Shutdown

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The tax system administered by the IRS will feel the effects of the federal shutdown for a long time. The five-week closure in December and January couldn’t have come at a worse time for the Service, which was gearing up for the 2019 filing season, its first under the new tax law. Some experts are saying it could take the Service up to eighteen months to recover.

During the shutdown, the IRS lost about 125 IT employees, which averages about 25 for each shutdown week. Given the agency’s antiquated computer systems, losing these people is a big deal. Training service workers, especially customer service workers, on the new tax law was also delayed. This will also likely affect the already dismal level of service provided on the IRS’s toll-free helplines. Are you wanting to call the IRS with a question? Be prepared to give personal information about yourself to help customer service representatives confirm your identity. You will have to supply your Social Security number and date of birth, your filing status, and probably data from your prior year return.

There is also a huge mail backlog—over 5 million pieces of unprocessed mail. So if you mailed correspondence to the Service during the shutdown, good luck.

The audit rate for 2019 will plunge, since enforcement was put on hold. The IRS will also have a difficult task of attracting and retaining talented workers, especially millennials. Fear of future shutdowns may lead existing employees to retire early or flee to the private sector, adding to the IRS’s ongoing brain drain problem. Over 33% of IRS employees are over age 55, and only 125 workers nationwide are under age 26. Does this sound good to you? So I must ask, does the federal government seem like the best alternative to run our healthcare system? You will get to decide in 2020.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939, email me at robert@robertstevensoncpa.com, or simply leave a comment on this post. I’d love to hear from you.

Welcome to Tax Season! Details on the New 199A Deduction

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Tax season has begun. This week, I examine a new section to the Internal Revenue Code that intends to give some degree of parity to certain types of small businesses—you can find the details below.

The New Section 199A Deduction

Congress added a new section to the Internal Revenue Code. Section 199A is intended to give some degree of parity to small businesses that operate as partnerships, S corporations, sole proprietorships, trusts, publicly traded partnerships, and REITS. Since C corporations are now taxed at 21%, Congress decided to give small flow-through businesses taxed at the higher individual level a break. The deduction is limited to the lower of 20% of Qualified Business Income or 20% of the individual’s taxable income.

If you are a Service Trade or Business, i.e. health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services, or any other trade or business that relies on the reputation or skill of one or more of its employees, then your deduction is only allowed if your taxable income is below $315,000 if filing MFJ and $157,500 for all others.

For businesses other than service—businesses whose owners have taxable income above the phase out limit of $415,000 for MFJ and $207,500 for all others—there are deduction limitations based on W-2 wages and depreciable assets. It is a little complicated, but it is a great deduction.

Tax Season Has Begun

The IRS has begun accepting 2018 tax returns and is issuing refunds. Now is the time to begin gathering your tax data and making an appointment with your tax preparer. If you need a tax preparer and would like to use our firm, then do not hesitate to give me a call and we will set an appointment for you.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939 or leave a comment on this post. I’d love to hear from you.

What Should Texas Do About Sales Tax – The Wayfair Decision

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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

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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

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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

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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

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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

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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.