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- Tax Preparation vs. Tax Planning
- New Tax Rules for Divorce and Alimony Payments
- Small Business: Tips for Ensuring Financial Success
- Tax Advantages of S-Corporations
- File 2018 Tax Returns by Oct. 15 Extension Deadline
- Be Prepared When Natural Disasters Strike
- Employer Credit for Family and Medical Leave
- Expat Compliance With US Tax Filing Obligations
- Rental Real Estate Qualifies as a Business
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
TAX PREPARATION VS. TAX PLANNING
Many people assume tax planning is the same as tax preparation but the two are actually quite different. Let's take a closer look:
WHAT IS TAX PREPARATION?
Tax preparation is the process of preparing and filing a tax return. Generally, it is a one-time event that culminates in signing your return and finding out whether you owe the IRS money or will be receiving a refund.
For most people, tax preparation involves one or two trips to your accountant (CPA), generally around tax time (i.e., between January and April), to hand over any financial documents necessary to prepare your return and then to sign your return. They will also make sure any tax reporting on your return complies with federal and state tax law.
Alternately, Individual taxpayers might use an enrolled agent, attorney, or a tax preparer who doesn't necessarily have a professional credential. For simple returns, some individuals prepare and file their own tax forms with the IRS. No matter who prepares your tax return, however, you expect them to be trustworthy (you will be entrusting them with your personal financial details), skilled in tax preparation and to accurately file your income tax return in a timely manner.
WHAT IS TAX PLANNING?
Tax planning is a year-round process (as opposed to a seasonal event) and is a separate service from tax preparation. Both individuals and business owners can take advantage of tax planning services, which are typically performed by a CPA and accounting firm or an Enrolled Agent (EA) with in-depth experience and knowledge of tax law, rather than a tax preparer.
Examples of tax planning include bunching expenses (e.g., medical) to maximize deductions, how to use tax-loss harvesting to offset investment gains, increasing retirement plan contributions to defer income, and best timing for capital expenditures to reap the tax benefits. Good recordkeeping is also an important part of tax planning and makes it easier to pay quarterly estimated taxes, for example, or prepare tax returns the following year.
Tax planning is something that most taxpayers do not take advantage of - but should - because it can help minimize their tax liability on next year's tax return by planning ahead. While it may mean spending more time with an accountant, say quarterly or even monthly, the tax benefit is usually worth it. By reviewing past returns an accountant will have a more clear picture of what can be done this year to save money on next year's tax return.
If you're ready to learn more about what strategies you can use to reduce your tax bill next year, help is just a phone call away.
NEW TAX RULES FOR DIVORCE AND ALIMONY PAYMENTS
Divorce is a painful reality for many people both emotionally and financially, and quite often, the last thing on anyone's mind is the effect a divorce or separation will have on their tax situation. To make matters worse, most court decisions do not take into account the effects divorce or separation has on your tax situation, which is why it's always a good idea to speak to an accounting professional before anything is finalized.
Furthermore, tax rules regarding divorce and separation can and do change - as they recently did under tax reform and divorced and separated individuals should be aware of tax law changes that take effect in 2019 (and affect 2019 tax returns).
WHO IS IMPACTED
The new rules relate to alimony or separate maintenance payments under a divorce or separation agreement and includes all taxpayers with:
- Divorce decrees.
- Separate maintenance decrees.
- Written separation agreements.
Tax reform did not change the tax treatment of child support payments which are not taxable to the recipient or deductible by the payor.
TIMING OF AGREEMENTS
Agreements executed beginning January 1, 2019. Alimony or separate maintenance payments are not deductible from the income of the payor spouse, nor are they includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after December 31, 2018.
Agreements executed on or before December 31, 2018 and then modified. The new law applies if the modification does these two things:
- Changes the terms of the alimony or separate maintenance payments.
- Specifically states that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
Agreements executed on or before December 31, 2018. Prior to tax reform, a taxpayer who made payments to a spouse or former spouse was able to deduct it on their tax return and the taxpayer who receives the payments is required to include it in their income. If an agreement was modified after that date, the agreement still follows the previous law as long as the modifications do not:
- Change the terms of the alimony or separate maintenance payments.
- Specifically state that alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
Tax reform made an already complicated situation even more so. If you have any questions about the tax rules surrounding divorce and separation, don't hesitate to call.
SMALL BUSINESS: TIPS FOR ENSURING FINANCIAL SUCCESS
Can you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination?
While you may wish it was that easy, the truth is that you can't let your business run on autopilot and expect good results and any business owner knows you need to make numerous adjustments along the way. So, how do you handle the array of questions facing you? One way is through cost accounting.
COST ACCOUNTING HELPS YOU MAKE INFORMED DECISIONS
Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions - raw materials, labor, inventory, and overhead, among others.
Cost accounting differs from financial accounting because it's only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.
Cost accounting allows you to understand the following:
- Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?
- Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.
- Budgeting. You can't create an effective budget if you don't know the real costs of the line items.
IS IT HARD?
To monitor your company's costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.
Fixed costs don't fluctuate with changes in production or sales. They include:
- dues and subscriptions
- equipment leases
- payments on loans
- management salaries
Variable costs DO change with variations in production and sales. Variable costs include:
- raw materials
- hourly wages and commissions
- office supplies
- packaging, mailing, and shipping costs
Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company's functioning.
If you'd like to understand the ins and outs of your business better and create sound guidance for internal decision making, consider setting up a cost accounting system.
Please call if you need assistance setting up cost accounting and inventory systems, preparing budgets, cash flow management or any other matter related to ensuring the financial success of your business.
TAX ADVANTAGES OF S-CORPORATIONS
As a small business owner, figuring out which form of business structure to use when you started was one of the most important decisions you had to make; however, it's always a good idea to periodically revisit that decision as your business grows. For example, as a sole proprietor, you must pay a self-employment tax rate of 15.3% in addition to your individual tax rate; however, if you were to revise your business structure to become a corporation and elect S-Corporation status you could take advantage of a lower tax rate.
WHAT IS AN S-CORPORATION?
An S-Corporation (or S-Corp) is a regular corporation whose owners elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax (and sometimes state) purposes. That is, an S-corporation is a corporation or a limited liability company that's made a Subchapter S election (so named after a chapter of the tax code). Rather than a business entity per se, it is a type of tax classification. Shareholders then report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates, which allows S-corporations to avoid double taxation on corporate income. S-corporations are, however, responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S-corporation status, the corporation must submit a Form 2553, Election by a Small Business Corporation to the IRS, signed by all the shareholders, and meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders. Shareholders may be individuals, certain trusts, and estates but may not be partnerships, corporations or non-resident alien shareholders.
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
WHAT ARE THE TAX ADVANTAGES OF AN S-CORP?
Personal Income and Employment Tax Savings
S-corporation owners can choose to receive both a salary from the corporation and nondividend distributions, which are earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services, and are tax-free. Because their compensation is less than it would be if they were operating a sole proprietorship, for example, S-corp owners save on Social Security and Medicare taxes.
The split between salary and distributions must be "reasonable" in the eyes of the IRS, however. Paying self-employment tax on 50 percent or less of profits or a salary that is in line with similar businesses is one example.
Most S-corporation distributions are non-dividend distributions; however, dividend distributions can occur in a company that was previously a C-corporation or acquired C-corporation attributes in a non-taxable transaction (i.e., merger, reorganization, QSub election, etc.). These dividends are taxed at a lower rate than self-employment income, which lowers taxable income.
Finally, some S-corp owners may be able to take advantage of the Qualified Business Income Deduction for pass-through entities as well, thanks to tax reform.
Losses are Deductible
As a corporation, profits and losses are allocated between the owners based on the percentage of ownership or number of shares held. If the S-corporation loses money, these losses are deductible on the shareholder's individual tax return; however, in order for the shareholder to claim a loss, they need to demonstrate they have adequate stock and/or debt basis. For example, if you and another person are the owners and the corporation's losses amount to $20,000, each shareholder can take $10,000 as a deduction on their tax return - provided there is adequate stock and/or debt basis to claim that loss and/or deduction item.
Even when the shareholder has adequate stock and/or debt basis to claim the S corporation loss or deduction item, the shareholder must also consider the at-risk and passive activity loss limitations and therefore may not be able to claim the loss and/or deduction item.
No Corporate Income Tax
Although S-corps are corporations, there is no corporate income tax because business income is passed through to the owners instead of being taxed at the corporate rate, thereby avoiding the double taxation issue, which occurs when dividend income is taxed at both the corporate level and at the shareholder level.
Less Risk of Audit
In 2017, S-corps faced an audit risk of just 0.2% compared to Schedule C filers with gross receipts of $100,000 who faced an audit rate of 0.9% (2018 IRS Data Book). While still low, individuals filing Schedule C (Profit or Loss from Business) are at higher risk of being audited due to IRS concerns about small business owners underreporting income or taking deductions they shouldn't be.
HELP IS JUST A PHONE CALL AWAY.
Whether you keep your existing structure or decide to change it to a different one, keep in mind that your decision should always be based on the specific needs and practices of the business. Don't hesitate to call the office if you have any questions about electing S-Corporation status or are wondering whether it's time to choose a different business entity altogether.
FILE 2018 TAX RETURNS BY OCT. 15 EXTENSION DEADLINE
Time is running short for taxpayers who requested an extra six months to file their 2018 tax return. As a reminder, Tuesday, October 15, 2019, is the extension deadline for most taxpayers. For taxpayers who have not yet filed, here are a few tips to keep in mind about the extension deadline and taxes:
1. Taxpayers can still e-file returns. Filing electronically is the easiest, safest and most accurate way to file taxes.
2. For taxpayers owed a refund, the fastest way to get it is to combine direct deposit and e-file.
3. Taxpayers who owe taxes should consider using IRS Direct Pay, a simple, quick and free way to pay from a checking or savings account using a computer or mobile device. There are also other online payment options. Please call the office if you need details about other payment options.
4. Members of the military and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.
5. Taxpayers should always keep a copy of tax returns for their records. Keeping copies of tax returns can help taxpayers prepare future tax returns or assist with amending a prior year's return.
BE PREPARED WHEN NATURAL DISASTERS STRIKE
While September and October are prime time for Atlantic hurricanes, natural disasters of any kind can strike at any time. As such, it's a good idea for taxpayers to think about - and plan ahead for - what they can do to be prepared.
Here are four tips to help taxpayers be prepared:
1. Update emergency plans. Because a disaster can strike any time, taxpayers should review emergency plans annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, they should update plans accordingly. They should also tell employees about the changes. Individuals and businesses should make plans ahead of time and be sure to practice them.
2. Create electronic copies of key documents. Taxpayers should keep a duplicate set of key documents in a safe place, such as in a waterproof container and away from the original set. Key documents include bank statements, tax returns, identification documents, and insurance policies.
Doing so is easier now that many financial institutions provide statements and documents electronically, and financial information is available on the Internet. Even if the original documents are provided only on paper, these can be scanned into a computer. This way, the taxpayer can download them to a storage device like an external hard drive or USB flash drive.
3. Document valuables and equipment. It's a good idea for a taxpayer to photograph or videotape the contents of their home, especially items of higher value. Documenting these items ahead of time will make it easier to claim any available insurance and tax benefits after the disaster strikes.
4. Payroll service providers should check fiduciary bonds.Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider. The IRS also encourages employers to create an EFTPS.gov account where they can monitor their payroll tax deposits and sign up for email alerts.
EMPLOYER CREDIT FOR FAMILY AND MEDICAL LEAVE
Thanks to the passage of the Tax Cuts and Jobs Act last year, there's a new tax benefit for employers: the employer credit for paid family and medical leave. As the name implies, employers may claim the credit based on wages paid to qualifying employees while they are on family and medical leave.
Here are seven facts about this credit and how it benefits employers:
1. To claim the credit, employers must have a written policy that meets certain requirements such as:
- Providing at least two weeks of paid family and medical leave annually to all qualifying employees who work full time. This can be prorated for employees who work part-time.
- Providing paid leave that is not less than 50 percent of the wages normally paid to the employee.
2. A qualifying employee is any employee who has been employed for one year or more, and for the preceding year, had compensation that did not exceed a certain amount. To be a qualifying employee in 2019, an employee must have earned no more than $72,000 in compensation in the preceding year. Looking ahead, to be a qualifying employee in 2020, an employee must have earned no more than $75,000 in compensation in the preceding year.
3. "Family and medical leave" as defined for this particular credit, is leave that is taken for one or more of the following reasons:
- Birth of an employee's child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- To care for the employee's spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying event due to an employee's spouse, child, or parent being on covered active duty - or being called to duty - in the Armed Forces.
- To care for a service member who is the employee's spouse, child, parent, or next of kin.
4. The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.
5. To be eligible for the credit, an employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Any wages taken into account in determining any other general business credit may not be used toward this credit.
6. The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019, i.e., starting January 1, 2020.
7. To claim the credit, employers file two forms with their tax return: Form 8994, Credit for Paid Family and Medical Leave and Form 3800, General Business Credit.
For more information about the employer credit for family and medical leave, please contact the office.
EXPAT COMPLIANCE WITH US TAX FILING OBLIGATIONS
Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. If you're an expat who has relinquished -- or intends to relinquish -- your US citizenship but still has US tax filing obligations (including owing back taxes) you'll be relieved to know there are new IRS procedures in place that allow you to come into compliance and receive relief for any back taxes owed.
Here's what you need to know:
Intended for anyone who has relinquished, or intends to relinquish their United States (U.S.) citizenship, the Relief Procedures for Certain Former Citizens apply to taxpayers who want to come into compliance with their US income tax and reporting obligations and avoid being taxed as a "covered expatriate" under section 877A of the U.S. Internal Revenue Code (IRC).
The Relief Procedures for Certain Former Citizens apply only to individuals (not estates, trusts, corporations, partnerships, and other entities) who:
- Have not filed U.S. tax returns as U.S. citizens or residents;
- owe a limited amount of back taxes to the United States; and
- have net assets of less than $2 million.
Furthermore, only those US taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Typically, this situation involves someone born in the United States to foreign parents or someone born outside the United States to U.S. citizen parents, who may be unaware of their status as U.S. citizens or the consequences of such status.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer's tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.
There is no specific termination date associated with the new IRS procedures; however, a closing date will be announced prior to ending the procedures. Also, individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible as long as they satisfy the other criteria of the procedures.
Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Please contact the office if you have any questions about this topic.
RENTAL REAL ESTATE QUALIFIES AS A BUSINESS
A safe harbor is now available for taxpayers seeking to claim the section 199A deduction with respect to a "rental real estate enterprise." What this means is that certain interests in rental real estate - including interests in mixed-use property - are allowed to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code.
Rental Real Estate Enterprise Defined
For the purposes of this safe harbor, a rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant pass-through entity (RPE) relying on this revenue procedure must hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.
Qualifying for the Safe Harbor
The following requirements must be met by taxpayers or RPEs to qualify for this safe harbor:
- Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
- For rental real estate enterprises that have been in existence less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
- The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
- The taxpayer or RPE attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.
If all the safe harbor requirements are met, an interest in rental real estate will be treated as a single trade or business for purposes of the section 199A deduction. If an interest in real estate fails to satisfy all the requirements of the safe harbor, it may still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the Section 199A regulations.
Help is just a phone call away.
If you would like more information about the qualified business income deduction, safe harbor requirements, or any other aspect of tax reform, don't hesitate to call.
TAX DUE DATES FOR OCTOBER 2019
Employees who work for tips - If you received $20 or more in tips during September, report them to your employer. You can use Form 4070.
Individuals - If you have an automatic 6-month extension to file your income tax return for 2018, file Form 1040 and pay any tax, interest, and penalties due.
Corporations - File a 2018 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.
Employers Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in September.
Employers - Social Security, Medicare, and withheld income tax. File form 941 for the third quarter of 2019. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.
Certain Small Employers - Deposit any undeposited tax if your tax liability is $2,500 or more for 2019 but less than $2,500 for the third quarter.
Employers - Federal Unemployment Tax. Deposit the tax owed through September if more than $500.