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

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.

Three Exceptions to the Three-Year Statute of Limitations for Tax Assessments & Refund Claims

Statutes of limitations are provisions of law that require actions to be initiated for prior events within a certain maximum prescribed time period. Therefore, if an action is to be brought or pursued for a prior event, it typically must be initiated before the maximum prescribed time period expires. The purpose of statutes of limitations is to allow for the best evidence that is available to be presented in the pursuit of the action. As time expires, evidence may become lost or unavailable, witnesses may no longer be available, and prosecuting such untimely actions and defending them will become very difficult. Therefore, statutes of limitations are designed to compel action be initiated before evidence becomes unavailable. Failure to initiate such action within this specified maximum prescribed time period is a valid defense and precludes the pursuit of the action.

Statutes of limitations apply for federal income tax matters, as well as other legal matters, civil and criminal. The Internal Revenue Code prescribes specific provisions for when prior tax matters may be pursued by either the IRS or the taxpayer. It depends on whether the IRS is seeking an additional assessment of tax or the taxpayer is seeking a claim for refund. The general rule for imposing additional tax or claiming a refund is three years from the date the tax return is filed or the due date, whichever is later.

As with any rule, there are exceptions.

There are two exceptions from the general rule for IRS assessment of additional tax. The first exception applies to the substantial omission of income. In the case of substantial omission of income, the statute of limitation for the general rule described above is extended to six years. For this exception to apply, substantial omission of income is defined as more than 25% of the gross income is omitted on the tax return. For example, if the taxpayer has $126,000 of gross income and only reports $100,000, then this will trigger the six-year statute of limitation. If the taxpayer had reported $102,000, then the general rule three year statute of limitation would still apply. It is noteworthy to recognize that the six-year statute of limitation applies only to the substantial omission of income and not to other items such as claiming excessive deductions, etc.

The second exception to the general rule for assessments applies to fraud (the willful intent to evade tax) or to tax returns not filed at all. In either of these cases there is no statute of limitations. There is no time limit for the IRS to assess additional tax or initiate a court action. The burden of proof generally remains with the IRS in cases of fraudulent tax returns or tax returns not filed.

The third exception has to do with how long a taxpayer has to claim a refund for the overpayment of tax. A claim for refund must generally be made within three years from the date the tax return was filed or the due date, whichever is later. If no tax return is filed, then the claim for refund must be made within two years from the date the tax was paid. Any tax deducted and withheld from the wages of a taxpayer is treated as paid on April 15. My advice: If you have a refund, then be sure to file within two years of the due date of the return.

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.