Tax Planning Tips 2018 – Doerhoff & Associates CPA

Tax Planning Tips 2018 - Doerhoff & Associates CPA

Everything we do is focused on the core belief that we succeed in life by helping others succeed.

This letter is one complimentary piece of our intense planning and research effort throughout the year to help in your success.  Feel free to share it with anyone you know who could benefit.  

 

Big Tax Changes for 2018: Changes in the tax law generally last only until the next time there is a change in the party in power.  Whether you agree or disagree with tax changes, it sometimes helps to know the background behind the changes.  The US had the highest corporate tax rate in the free world and businesses were moving profits to low tax countries to avoid our high taxes.  Congress and the President dropped the corporate tax rate to a flat rate of 21% and as a result billions of dollars were moved back into the US economy and many US corporations gave bonuses to employees with some of the tax savings.  When congress made that change they understood they had to do something to help non C corp businesses compete because with the corporate change, the individual tax rates would be much higher than 21% so they passed the Qualified Business Income Tax Deduction which lets business owners deduct 20% of their profits before paying tax at the higher individual income tax rates.   There are lots of exclusions and complexities to the 20% deduction in the new law but the basic premise was to help business compete worldwide and to make it attractive for business to bring worldwide profits back to the US.

Good news is you may qualify for this new tax break.  Bad news is for certain types of business this calculation can be very complex and may result in additional tax preparation fees and you may need to make some changes before year end to maximize the deduction.  Give us a call to discuss your situation.

As with any tax legislation there are lots of other things thrown in to help pay for the big changes.  Here is a laundry list of some of those changes:

  • State tax, sales tax and property tax are capped at $10,000 on joint return, $5,000 single. This hits folks harder in states with high income &/or property tax.
  • The limit for deductible home mortgage drops from $1,000,000 to $750,000. Existing home loans are grandfathered in.
  • Interest on home equity loans is no longer deductible
  • Expenses related to any job where you receive a W-2 are no longer deductible. This hits employees like sales people and union workers that had to travel a lot to various temporary jobsites harder than others.
  • The standard deduction rose to $24,000 married and $12,000 single. At this higher level many will find the standard deduction is higher than the taxes, interest, charity, work related expense they had in previous years when they were able to itemize.
  • There is no more deduction for a dependent. This will hit larger families hardest.  However, the child tax credit increased from $1,000 to $2,000 per child to help offset the loss of a dependent.  The income level at which you start to lose the child tax credit has increased to $200,000 for individuals and $400,000 for joint returns.  There is also a new $500 credit for non-child dependents.
  • Deduction for investment fees and tax preparation cost are no longer deductible for an individual. Tax preparation fees related to a business are still deductible.
  • Alimony for divorces after 2018 is not deductible by the person paying alimony and not taxable to the recipient. Divorce decrees entered into prior to the end of 2018 continue to be taxed under the old law.
  • Medical expense is still deductible but only the amount that exceeds 7.5% of your income. That is one deduction you hope you don’t ever get to use.
  • The tax rates generally drop a couple percent across the board whether you are married or single. So far as we have run projections for our clients, the new law almost always results in a lower tax.
  • Starting in 2019 the individual mandate that requires everyone to have health insurance goes away but for 2018 the old law is still in effect and you will pay a penalty if you do not have “minimum essential coverage”. As the rates for medical insurance continue to skyrocket I have seen more people looking into the health sharing ministries that are allowed under Obamacare.  The one I have seen more than any others is MediShare.  If health care has gotten unaffordable for you, do an internet search of “health sharing ministries”.  They aren’t for everyone but might work in your personal situation as an alternative to totally dropping health coverage.
  • Like kind exchanges are changing. You can still trade real estate for real estate and defer the tax on the gain.  However, when you trade equipment you now have to treat it as two transactions.  You show a sale for the amount they allowed for the old piece of equipment on the trade and report a gain based on that sale.  Then you get to depreciate the new purchase for the total purchase price rather than just the net trade.  So this year if you traded vehicles be sure to get us the full purchase price of the new item and what they allowed you in trade for the item you traded in.
  • Business losses are capped in any one year. Losses in excess of $500,000 on a married return and $250,000 on a single return must be carried forward.
  • The 9% domestic production deduction is gone.
  • The business meals and entertainment deduction has been changed to just meals. Business entertainment is no longer deductible.
  • The alternative minimum tax was repealed for corporations and the exemption from the tax was raised for individuals.
  • Kiddie tax rates changed. In the past a child had to pay tax at the parents tax rate if the child had unearned income above a threshold.  That has been changed and the child now pays tax at the trust tax rates for unearned income above the threshold.  Unfortunately the trust rates hit the highest tax rate at a very low threshold so be careful of too much investment income in a child’s investment account.
  • The old law that phased out part of your itemized deductions as your income rose is repealed.
  • The deduction for tuition and fees is eliminated but the tuition tax credit remains so you may still be able to benefit from higher education costs.

 

Tax trouble you probably didn’t know existed:

Limited Partnership In IRA:  Don’t ever invest in limited partnerships in an IRA or retirement plan.   If the combined total of your share of limited partnership income is over $1,000, the IRA has to file a form 990-T and pay tax at the highest tax rate on that “unrelated business income”.

Donating Annuities to Charity: Don’t ever donate an annuity to charity because you are treated as receiving taxable income equal to the difference between the cash value of the annuity less your original cost.  Just another of the many reasons to use annuities and life insurance policies as the last choice for investment products.

Congress passes a tax law but the IRS enforces it.  Here are items getting IRS attention:

Enforcement revenue is up:  Audits and correspondence have brought in an increase of 8% over the previous five year period.  Individual taxpayers and not big business accounted for the greatest increase in those collections.

IRS is hiring: They are trying to hire 250 special agents for the criminal investigations division and 3,000 new auditors and revenue officers.  New tax laws and more IRS agents……I think we should have called this year the “Accountants Full Employment Act”!!!!!!

 

Who is getting audited:

  • For those who get an earned income credit, more than 1 of every 100 returns were audited
  • For those who are self-employed more than 2 of every 100 returns were audited.
  • For those in the high income tax bracket almost 5 of every 100 returns were audited.
  • All in all 6 of every 100 returns filed was lucky enough to get a letter from the IRS questioning something on the return.

For those self-employed businesses who do get audited don’t think that just because you have support for an expense you are in the clear, the IRS made changes in 92% of those audits.  Based on the high percent of audits yielding changes, it is safe to expect more audits of self-employed businesses.  We have people tell us all the time that they have always deducted some expense.  Just be aware that just because you added a bill in with your business expenses and put the deduction on the return, that does not make it correct unless the IRS audited the return and agreed it was an allowable business deduction.  That brings to mind a true story from a few years back.  I had an individual who did his own taxes using one of the popular do it yourself tax software programs.  The IRS was auditing him and said he owed $20,000 in additional tax.  His comment was there is no way because I used XYZ tax software and answered every question it asked truthfully.  As I looked further at his return and asked him about certain deductions I realized he was telling the truth.  However, there are many deductions in the tax code that can be taken several different ways and you have to choose the method that helps you most.  The tax software would ask him if he had a deduction and he said yes and keyed in the total.  Then in another area it would ask him about the same deduction and every time he answered the question yes and keyed in the deduction.  The end result was he had unknowingly deducted many of his expenses in 2 and 3 places on the return.  The end result was he owed back $20,000 in taxes plus interest and penalties.  Needless to say he didn’t think I helped him much.  That is a great example of how complex the tax law is and why it makes sense for self-employed individuals to pay someone to help them with their taxes.  If learning tax law so you can prepare your own tax return is the best use of your time, then you are probably in the wrong business.  My advice to any business owner is spend your time doing what you are good at and hire the best advisors to help you so you have more time to grow your business and focus on what makes you money.

Some other issues receiving special attention from the IRS:

Bitcoin and other virtual currencies are a big priority because IRS knows many use a virtual currency to evade US taxes.  This last year IRS won a court case and Coinbase, the Bitcoin virtual currency exchange, was required to provide the IRS with information regarding transactions of customers for 13,000 US customers.  IRS just started mailing out tax due notices based on the information they obtained from Coinbase and their assumption is if you did not report anything then everything is profit.

Big farm losses are a flag:  Things that will help convince the IRS the farm does have a profit motive are: a business plan, consulting outside experts and whether you have practical farming experience.

S corps are getting additional enforcement efforts in three areas. 

  1. The area of shareholder basis in an S corp has lots of complex rules. In general, you cannot deduct an S corp loss on your personal return if you do not have enough basis to cover the loss.  The three biggest parts of basis are 1. Money you put into the company. 2. Profits from prior years you paid tax on but left in the company, and 3. Money you loaned to the company.  Where most people get in trouble is when the corp borrows money to buy equipment or pay bills and the loss resulting from that depreciation or paying the bills is not deductible because the corp borrowed the money from a bank rather than the shareholder.  It does not matter that the shareholder had to personally guarantee the loan, it is still not his personal debt.  One way to resolve this is for the shareholder to borrow the money from the bank and then loan it to the corp.  That does create basis.  The IRS knows many people are ignoring the basis rules and is targeting S corps to disallow deductions for losses until the shareholder has basis.
  2. When a shareholder takes property out of an S Corp. If the market value of the property removed is higher than the remaining undepreciated cost, then the corp must treat this as a sale at the fair market value and the shareholder has to pay tax on the gain.  These rules also apply to LLCs that have elected to be taxed as an S corp.
  3. If the shareholder draws money out of the S corp in excess of his basis that creates a taxable dividend to the shareholder. This often happens when the S corp borrows money and later distributes part of the cash to the shareholder.

 

Businesses paying employees in cash to avoid paying payroll taxes is also a big flag.  The penalties and interest on these type of assessments can close a business because banks don’t like to loan money to a business with an IRS lien.

Reporting cash payments of $10,000 within a 24 hour time period.  If someone pays you in cash of at least $10,000, you have an obligation to file a form and report this to the IRS.  Auditors assessed $189 million in taxes, penalties and interest for unreported income based on this information.

Who pays the tax?  The top 5% of all taxpayers paid just over 58% of all tax for the latest reporting year and the bottom 50% paid just over 3% of all tax.  When you hear someone say that is a tax break for the wealthy, they are probably correct because there is no way to cut taxes and not have some of the savings go to those who pay 58% of all the tax.

 

New faces around our office:  Thanks to your support we continue to grow.  New faces we added to our team this year are Dan Kempker and Monica Ralston.  Dan was the former CFO of Mo Patient Care Foundation and brings lots of experience in analyzing financial data and dealing with government rules and regulations.  Monica formerly oversaw several franchise restaurant locations working with the managers at each location to monitor key performance indicators, grow the business and problem solve when things went wrong.  We are fortunate to add such quality staff at a time when there are more job openings than there are people looking for work.  I hope you will get a chance to work with each of them as we work together to help you and your business succeed.

One Last Thanks—To Our Valued Clients

Without you we would not be here today.  We are passionate about helping you achieve success.

We are both honored and humbled to serve you.   THANK YOU!!!!!!!.

 

 

And now for the required “you can’t believe or trust anything or anyone disclosures”………

Your records and our privacy policy:  We always return all original records to you and we retain copies of the work we perform for a period of 3 years.  This is just a reminder you need to review your record retention policies and make sure you keep copies of your tax returns and financial statements.  We are also required to notify you annually of our privacy policy so here is a repeat of the legal talk you get from every business involved in your financial matters. Types of Nonpublic Personal Information We Collect:  We collect nonpublic personal information about you that is provided to us by you or obtained by us with your authorization.  Parties to Whom We Disclose Information:  Our firm consists of various divisions and related entities which include, Doerhoff & Associates CPA, AccuPay HCM, and Aura Wealth Advisors.  Because we perform various services for common clients under each of these entities we share information between those entities on those common clients only.  All separate entities were formed specifically to protect trade names and to better serve our clients’ needs.  For current and former clients, we do not disclose any nonpublic personal information obtained in the course of our practice to any other individual or organization except as required or permitted by law.  Permitted disclosures include, for instance, providing information to our employees, and in limited situations, to unrelated third parties who need to know that information to assist us in providing services to you.  In all such situations, we stress the confidential nature of information being shared.  Protecting the Confidentiality and Security of Current and Former Clients’ Information:  We retain records relating to professional services that we provide so that we are better able to assist you with your professional needs and, in some cases, to comply with professional guidelines.  In order to guard your nonpublic personal information, we maintain physical, electronic, and procedural safeguards that comply with our professional standards.   Please call if you have any questions, because your privacy, our professional ethics, and the ability to provide you with quality financial services are very important to us.