An overwhelming majority of small business owners don’t understand how the Tax Cuts and Jobs Act will affect them, according to a new survey of the self-employed.
The survey, by the National Association for the Self-Employed, found that 83 percent of small business owners didn’t have a complete understanding of the impact the new tax reform law would have on their business. Over 90 percent of the 389 respondents felt the government did not adequately prepare them for the new tax system. Survey takers were split on whether they expected to pay more or less in overall taxes this year. Nearly 60 percent of survey respondents said they felt their taxes for this year would be more difficult to complete because of the new tax law. Over 90 percent believe the government should take additional measures to ease the tax burden.
Around 30.33 percent of the respondents said they had spent up to $499 on outside professional assistance to prepare for the new tax law, while 9.51 percent said they had spent $500 to $1,000 on outside assistance, and 5.14 percent spent $1,000 or more. But more than half, 55 percent, said they had spent zero on outside help.
“The tax reform package signed into law last year is based on Americans reinvesting savings back into their business operations and helping to spur overall economic growth,” said NASE president and CEO Keith Hall in a statement Tuesday. “Small business owners must first have a full understanding of how this new tax law will impact their bottom line. Unfortunately, over 83 percent of respondents still don’t understand the impact the new law will have on their businesses and over 90 percent think the government didn’t adequately prepare them for the system.”
He believes additional IRS guidance is necessary and the government can take additional steps to effectively communicate the impact of the new laws on small business owners.
Intuit released the results of a separate survey of self-employed workers on Tuesday. It found 36 percent of self-employed workers admit they don't pay taxes, and nearly 1 in 10 self-employed workers don’t know about the recent tax reform. More than a fourth of self-employed workers think the tax reform will cause them to pay more in taxes, and 14 percent of self-employed workers are currently behind on their taxes.
A third survey by a small business advocacy group, the Main Street Alliance, also cast doubt on the new tax law last week. It found the majority of small business owners surveyed said they need more customers, as opposed to tax cuts, to hire and expand, and called for stability and strong public investment as the way to grow a business.
The Tax Cuts and Jobs Act provides a 20 percent deduction to pass-through businesses such as sole proprietorships and partnerships. However, many of the benefits of the deduction are not going to small businesses, according to a government report. Congress’s Joint Committee on Taxation released a report Monday indicating that 44 percent of the benefits of the 20 percent pass-through deduction will go to around 200,000 business owners whose incomes exceed $1 million. That amounts to approximately $17.8 billion. Another 8.9 percent, or about $3.6 billion, will go to 200,000 taxpayers who make between $500,000 and $1 million. The tax deduction is expected to cost the Treasury $40.2 billion this year and $60.3 billion in 2024, when $31.6 billion will be going to business owners making $1 million or more.
More than three-quarters of the top 100 U.S. companies with the biggest lease obligations expect to see a material impact on their balance sheet from the new lease accounting standard, according to a new report.
The report, from the technology company LeaseAccelerator, analyzed a recent set of Securities and Exchange Commission filings related to the adoption of the leasing standard, also known as ASC 842, which takes effect for public companies at the end of this year. The SEC Staff Accounting Bulletin 74 requires public companies to disclose the effects of accounting standards such as the leasing standard and the recent revenue recognition standard that have been announced but not yet adopted.
LeaseAccelerator’s report includes comments issued by the 100 U.S. companies with the highest dollar value of leasing obligations. The report found that 76 percent of the top 100 reported there will be a material impact resulting from the transfer of most right-of-use assets and liabilities on to corporate balance sheets. Another 20 percent of the companies said they’re still analyzing the potential impacts of the new standard. Only 8 percent provided quantitative estimates of the material impact to the balance sheet, which ranged from $1.2 billion to $13 billion.
On the other hand, 28 percent of the top 100 said there would not be a material impact to their income statement from ASC 842, while another 66 percent said they’re still analyzing the impacts. Nineteen percent predicted there would be no impact to their cash flow statements, while 64 percent are still analyzing the impact.
Eighteen percent of the companies examined said they’re evaluating or implementing new policies and controls to support the standard.
In terms of software, 18 percent said they’re evaluating or have selected a lease accounting software application. Only 13 percent indicated they have formed a project team to address the lease accounting standard.
“As expected, the SAB 74 disclosures confirm that most companies are expecting a material impact to their balance sheets when they adopt ASC 842 and IFRS 16,” said LeaseAccelerator CEO Michael Keeler in a statement. “However, the lack of implementation progress suggests there is still a long road to compliance for many large lessees, each of which will need to implement new enterprise lease accounting systems, policies and controls.”
One of the companies that made a disclosure was Apple, which said, “While the company is currently evaluating the timing and impact of adopting ASU 2016-02, currently the company anticipates recording lease assets and liabilities in excess of $9 .6 billion on its condensed consolidated balance sheets, with no material impact to its condensed consolidated statements of operations. However, the ultimate impact of adopting ASU 2016-02 will depend on the company’s lease portfolio as of the adoption date.”
The Walt Disney Company said, “As of September 30, 2017, the company had an estimated $3 .3 billion in undiscounted future minimum lease commitments.”
The tax implications of cryptocurrency have become increasingly important as the Internal Revenue Service and other government agencies step up their scrutiny of transactions involving bitcoin or other forms of virtual currency.
Despite the fact that the IRS said everything it planned to say about the tax aspects of cryptocurrency nearly four years ago, in Notice 2014-21, there is a mismatch between the number of U.S. citizens who have bought, sold, mined, or received or spent cryptocurrency in transactions, and the number who have reported it on their tax returns.
According to Credit Karma, only .04 percent of the tax returns that they have filed for clients so far this year reported cryptocurrency transactions. Meanwhile, Coinbase, a cryptocurrency exchange, is estimated to have had 11.7 million users by the end of October 2017. And since Notice 2014-21 says that cryptocurrency is property, not currency, any transaction likely results in a reportable gain or loss.
“When you exchange currency for currency, it’s not a taxable transaction,” said Ryan Losi, a CPA and executive vice president of accounting firm Piascik. “But when you exchange property for property, it is a taxable transaction. You have to identify every piece you have, how it was acquired, was the way you acquired it a taxable transaction, and was it a taxable transaction when you disposed of it. You need to compute the gain or loss, and the character of the gain or loss. When you acquire cryptocurrency on a daily basis, this can become a nightmare.”
“And the Tax Cuts and Jobs Act made a major change to the code under Section 1031, which allows businesses and investors to exchange like-kind property tax-free,” he said. “Since 2014, many practitioners took that to mean that if you exchange virtual currency for other virtual currency, then any gain can be tax-free or deferred under Section 1031.” That possibility no longer exists as a result of tax reform, Losi noted.
On top of that, he pointed out that the largest custodian of virtual currency, Coinbase, lost a legal battle with the IRS requesting a subpoena of their records, so now they have to disclose the vast majority of their U.S. users.
“So the IRS will have data to determine if Americans are reporting gain from virtual currency,” said Losi. “Now, U.S. account holders with balances of $20,000 or higher are covered by the subpoena.”
“It’s up to the individual to keep records,” he added. “If you bought a house using bitcoin, it’s as if you sold the bitcoin and used the proceeds to buy the house. You’re liable for tax on the gain between when you acquired it and when you bought the house.”
Taxpayers who “mine” virtual currency realize gross income upon receipt of the virtual currency resulting from those activities, according to Notice 2014-21. Mining includes using computer resources to validate bitcoin transactions and maintain the public transaction ledger. Moreover, if a taxpayer’s “mining” constitutes a trade or business, and the mining activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax.
“Bitcoin miners use computing horsepower to solve complex algorithms,” Losi said. “If they do this successfully, the community reward for solving the problem and creating the block sequence of the next block in the chain is their currency, which had a value in 2017 of $8,000 to $19,000. Each algorithm gets exponentially harder to solve than the last.”
In this area, practitioners disagree with the IRS’s approach, according to Losi. “If I mine for precious metals, when I strike gold or diamonds or copper or zinc, the mere striking does not equal a taxable event. It goes into inventory and it’s not until I sell that it’s a taxable event. But when I receive a bitcoin credit to an online wallet, the IRS treats it as a taxable event. When you are credited with the coin it’s treated as service income.”
“This is wrong — when you make an exchange you need two parties,” he said. “When a bitcoin miner receives a coin, all it does is expand the number of bitcoins in circulation.”
Chuck Sockett, a managing director at UHY Advisors, agreed: “Someone who mines uses equipment to go into the ground and mine, and bring gold or diamonds to the surface. There’s no gain until the miner disposes of the mineral. If you mine virtual currency you can deduct the expenses of the computer, but the IRS considers anything you mine to be immediately taxable. That troubles me.”
A SURPRISING SUBPOENA
Investors in cryptocurrency assumed that they had complete privacy because of blockchain technology, according to Marvin Kirsner, a shareholder in Greenberg Traurig.
“But they didn’t consider that the IRS would issue summonses to get information from a virtual currency exchange, and many investors are having their information disclosed to the IRS by the exchange,” he said. “The subpoena to Coinbase will likely be the first of many subpoenas, so now the IRS knows the names and identities of investors. They will start getting audit notices as to why they didn’t report these transactions.”
“I advised my clients a year ago to file amended returns to reflect all their trading,” he added.
Kirsner believes that the IRS will eventually come out with a voluntary disclosure program, similar to the Offshore Voluntary Disclosure Program in place since 2014 (which the IRS just announced that it would wind down by Sept. 28, 2018 — see page 15).
Most transactions are likely to generate short-term capital gain at ordinary income rates, according to UHY’s Sockett. “People in the office who are buying and selling very quickly — that’s all short-term. And if it’s treated as inventory, it’s just ordinary income from the sale.”
It’s not just the IRS that has increased its scrutiny of cryptocurrency, Sockett noted, adding that both the Securities and Exchange Commission and the Commodities Futures Trading Commission have taken recent action on cryptocurrencies.
The SEC issued two investor alerts in 2013 and 2014 to make investors aware of the potential risks of investments involving bitcoin and other virtual currencies, and in July 2017 it stated that initial coin offerings can sometimes be considered securities. In February 2018, it issued 80 subpoenas to companies and promoters involved in issuing cryptocurrency. “It comes down to classification as a security,” said Sockett. “If the SEC wins out, ICOs will have to be registered as a security. Their concern is whether any of the offerings involve fraud or misrepresentation that might hurt investors.”
“After the SEC goes through the different ICOs, they will come out with a position that will likely change the playing field,” he said. “And the IRS may give additional guidance after the SEC takes a position.”
The U.S. has one of the lowest tax burdens of any developed country – and President Trump’s tax reform may push that figure even lower, according to research by international accounting network UHY, which studied 34 countries worldwide to calculate how much of each country’s GDP is taken by the government in tax.
According to the findings, the U.S. has a tax burden of 22 percent of gross domestic product, a third lower than the Group of Seven nations’ average of 31.1 percent (the G7 also includes the U.K., France, Germany, Italy, Canada and Japan). The U.S. government’s rate of tax take is more on a par with emerging economies of Brazil, Russia, India and China.
The U.S. government’s tax take is lower than the average global rate of 28.2 percent and lower than the average in Europe (43.3 percent), UHY analysis showed – and could fall further in the coming years as some commentators claim that President Trump’s recent tax plan could trim as much as $2 trillion off U.S. government tax revenues.
“The president’s recent tax cuts … are designed to help sharpen competitive advantage,” said Rick David of UHY Advisors in the U.S. in a statement. “Today, the U.S. tax position is looking compelling for many businesses compared to the rest of the G7. The U.S. government wants to create an environment for businesses to grow and reducing the tax burden will help create a solid foundation for that.”
Generally, European economies dominated the top of UHY’s table of the highest taxes, with an average tax burden of 43.3 percent. Denmark topped the rankings with the government’s tax take representing 53.5 percent of total GDP.
Emerging economies in general have seen much lower levels of government tax take, including many in the Association of Southeast Asian Nations trading bloc, such as Malaysia (16.5 percent) and the Philippines (13.9 percent).
President Donald Trump’s new tax law set off a false alarm for homeowners planning to borrow against the equity in their houses.
The legislation signed by Trump in December appeared to eliminate the deduction taxpayers get for the interest owed on home-equity loans, spooking the home remodeling industry whose customers often rely on the loans for projects. But after prodding from lobbying groups, the Internal Revenue Service clarified that borrowers could still use the deduction, as long as it’s for home improvements.
The IRS guidance on home-equity debt is just the latest example of the agency’s cleanup effort in the wake of the hastily passed law. Various industries and tax professionals are still struggling to understand its provisions and interpret lawmakers’ intentions on changes including the pass-through deduction and international tax measures.
Homes in an aerial photograph taken above New JerseyCraig Warga/Bloomberg
Since the end of last year, the agency has issued press releases specifying that hedge fund managers can’t circumvent new carried interest rules with “S” corporations and that homeowners can deduct prepaid property taxes only in some instances.
Until the IRS statement late last month about the home-equity deduction, some housing groups including executives at the National Association of Home Builders said they didn’t think it was clear the home-equity deduction had survived, at least in part.
The NAHB sent Treasury Secretary Steven Mnuchin a letter at the end of January arguing that the tax law, as written, should allow interest from home-equity loans and home-equity lines of credit to be deducted as long as the homeowner used the money for home improvements. They said their interpretation was backed up by long-accepted standards in the tax code.
“As most major remodeling projects are financed using debt secured by the buyer’s home, the deductibility of interest paid on loans used to substantially improve a home is the lifeblood of the industry,” the letter said.
Eric Smith, an IRS spokesman, said the news release came in response to multiple inquiries rather than from a specific group. He said the statement clarified what the law already said rather than made new rules.
Robert Criner, a remodeler in Newport News, Virginia, said that after the law passed, he thought the deduction for home-equity loans and for so-called HELOCs was dead. The ability to deduct HELOC interest is a deciding factor for some homeowners on how big a project to undertake or whether to do a remodel at all, according to Criner.
Throughout the tax-bill process “people were waiting to pull the trigger,” said Criner, which he attributed to the HELOC issue and to broader confusion about the bill. Criner said even after the IRS clarification, only about half of his customers realize that they can still deduct the interest.
The confusion stemmed from the law saying it was eliminating interest for “home-equity indebtedness.” Some borrowers, remodelers and others in the lending industry interpreted that as any kind of home-equity loan that taps equity to provide cash. But the tax code has long defined home-equity indebtedness as any kind of debt except loans taken out to acquire, construct or substantially improve a taxpayer’s residence.
So if a borrower uses the loan to build a new bathroom, it would qualify for the deduction, but if it’s used to consolidate credit card debt, it wouldn’t qualify, according to the IRS’s clarification.
In January, LendEDU, a comparison website for consumer financial products, surveyed 1,000 Americans who were home-equity loan borrowers, about half of whom said they used the money for home improvement. The company wanted to measure how aware they were that the new law limited home-equity deductibility.
The problem: None of the survey’s answers were correct. LendEDU falsely believed the new law completely killed the home-equity interest deduction, and the survey results were reported in several mainstream and industry publications.
LendEDU CEO Nate Matherson said the company would put a clarification at the top of the survey. Noting that the IRS hadn’t yet issued its guidance at the time of the survey, Matherson said, “At the time the survey was conducted, the methodology was accurate.”
The NAHB, a lobbying group that represents small home builders, believed it had a good case but still wasn’t completely sure that the IRS would agree with its interpretation, said David Logan, the association’s director of tax and trade policy analysis.
The home-equity interest deduction wasn’t a focus for the group last year when it was lobbying lawmakers on its bigger concerns with the bill — such as the doubling of the standard deduction. Still, once the law came out, there was concern that eliminating home-equity interest deductions would have a “massive detrimental effect on remodelers,” Logan said.
When the IRS agreed with the NAHB’s interpretation, Logan said the group’s remodelers were “exuberant.”
Earlier this year Jay Charles’s twice-a-month paycheck jumped by $65, a result of the new U.S. law that cuts taxes almost $1.5 trillion over the next decade. Then he did the math.
It turns out Charles, a 48-year-old software developer in Blythewood, South Carolina, may not get a tax cut at all. He and his wife don’t have children and won’t be able to benefit from an enhanced child tax credit—and they’ll be losing some benefits including unlimited state and local tax deductions. An online calculator showed Charles he’ll break even, and his wife, a professor who files separately, will probably see a tax increase.
For many Americans, the most noticeable effect of the tax law so far is a jump in their take-home pay. After the law passed, the Internal Revenue Service issued new withholding tables, directing employers to adjust how much tax money they take from workers’ paychecks starting in February. Those withholding amounts are effectively a guess at what employees’ tax liabilities will be for 2018.
Some taxpayers are finding the tables are a blunt tool. When 2018 taxes are due in April 2019, millions of Americans could find themselves owing the government far more than was withheld. Millions of others could find they paid too much in 2018, resulting in unusually large refunds. Which category you fall in could come down to whether you have any dependents and how old they are, if you itemize deductions, and whether you’re a two-income family.
In the meantime, the tax withholding amounts could have political consequences. Control of Congress is at stake in November’s elections, and the tax law is on track to become a top issue. Voters’ opinions may depend on whether they think they’re personally getting a fair share of benefits from the law signed by President Donald Trump in December.
Withholding is based on W-4 forms, typically filled out by workers when they start a job and rarely adjusted afterward. After the tax overhaul made parts of the old W-4 obsolete, the Treasury Department and the IRS issued a new form on Feb. 28, and unveiled an online calculator to help workers get their withholding right. Workers won’t be required to submit new W-4s, however, and many are unlikely to bother.
“This year it’s more critical than ever for all taxpayers to assess their personal situation, to make sure they have withholding at the right level,” said Stephen Dombroski, senior payroll tax compliance manager at payroll company Paychex Inc.
The taxpayers most likely to get a nasty surprise when filing taxes next year are those who have typically itemized on their returns and claimed large deductions. That’s especially true if those deductions were for state and local taxes, which are limited to $10,000 by the law, or for unreimbursed employee expenses, which are eliminated entirely. The IRS also urges couples with two incomes, workers with multiple jobs, and taxpayers with lots of dependents to re-check their W-4s.
The bottom line: The more complicated your situation, the more likely your withholding is out of whack, in positive or negative ways.
Take, for example, a double-income couple with two teenagers living in California, one of the high-tax states where SALT deduction limits could throw off withholding calculations. They earn a combined $300,000 and deducted $29,000 in SALT, $16,000 in mortgage interest, and $7,000 in charitable contributions on their 2017 tax return.
Though this family gets hurt by the SALT limit, they benefit from changes to the alternative minimum tax, or AMT. Under the old withholding rules—under which the family withheld a relatively high amount, claiming no personal allowances—they’d still end up writing a check of almost $4,000 to the IRS each year, because they were hit by $6,500 in extra taxes from the AMT.
In 2018, the new withholding tables should boost this family’s take-home pay by $8,426, according to estimates by the Tax Institute at H&R Block—a noticeable $702 more per month. They also no longer need to worry about the AMT, which was sharply limited, though not eliminated, by the new law.
Their final bill next April, however, could vary widely based on a factor not reflected on their old W-4s and also unrelated to the SALT and AMT changes—the age of their children.
The former W-4 counted all dependents equally, reflecting a $4,050 personal exemption for every person on a tax return, from toddlers to college-age kids and elderly relatives. The tax revamp eliminated personal exemptions, so the new W-4 must make distinctions between children under the age of 17, who are eligible for an increased $2,000 tax credit, and other dependents who only get a $500 credit. For withholding purposes, then, a child is worth four times the value of other dependents. The law also made the child tax credit available to more upper-income taxpayers.
If the California family’s children are 15 and 16 years old, H&R Block estimates, they’ll get to April and find they owe the IRS $2,758, 30 percent less than last year. However, if their kids are 17 and 18—ineligible for the child tax credit—they’ll need to write a check for $5,773, almost 50 percent more than last year. They’ll even need to pay the IRS a small underpayment penalty of $15.
The vast majority of U.S. workers will see some tax cut as a result of the law, at least initially. Though the law’s benefits for individuals fade over time, 65 percent of American households can expect a tax cut in 2018 and 6.3 percent will see a tax hike, according to estimates from the Tax Policy Center.
Democrats deride the law, which they’ve branded the “tax scam,” as a giveaway to the wealthy and corporations that offers relatively small, temporary benefits to middle-income taxpayers. In a January letter to the IRS, top congressional Democrats raised concerns that the IRS’s withholding tables might be intentionally skewed to boost workers’ pay now and leave them owing money in 2019, after the midterm elections.
Treasury Secretary Steven Mnuchin said worries about political motives were “ridiculous.” In a letter obtained by Bloomberg News to Senator Ron Wyden, an Oregon Democrat, the IRS said it would “help workers ensure they are not having too much or too little withholding taken out of their pay.”
There’s no evidence that the IRS’s new withholding tables boost paychecks overall by more than they should to reflect the new law. The IRS acknowledges, however, that for individual taxpayers, paychecks could end up being a poor guide to how they’ll ultimately fare under the new law.
Mnuchin encouraged taxpayers to use the withholding calculator unveiled last week. “The majority of Americans don’t need to do anything, but we always encourage people to have the ability to check their specific situation,” he said.
For many taxpayers in more complex situations, however, the online calculator might not work. The IRS warns that self-employed taxpayers, people with capital gains and dividends, and others might need to wait for more guidance, expected from the agency in “early spring.” In the meantime, they may need to pay a tax adviser to determine their best withholding strategy for 2018.
When Charles realized his situation, he said he adjusted his withholding to erase the boost to his paycheck. He’s not a fan of the new law, which he worries is going to spike the national debt. The windfall from the tax code changes, he said, “is going to fall on a lot of wealthy people and corporations, and none of it is going to me.”
States may receive a major boost in their corporate tax revenues as a result of the Tax Cuts and Jobs Act, according to a new report.
The report, prepared by EY’s Quantitative Economics and Statistics unit on behalf of the Council On State Taxation’s State Tax Research Institute estimates the nationwide overall increase in state corporate income tax bases is 12 percent over the next 10 years, although it predicts significant variations between the states by year. The report estimates the average expansion in the state corporate tax base to be 8 percent from 2018 through 2022, increasing to 13.5 percent for 2022 through 2027.
The growing increase in later years is mainly thanks to the impact of research and experimentation expense amortization starting in 2022 and the change in the interest limitation that same year.
Another important factor behind the projected increase in corporate tax revenue is because states usually conform to federal provisions that broaden the corporate tax base, but not to provisions that reduce corporate tax rates. The magnitude of increased corporate tax collections for each state will depend on how it chooses to conform to the changes in the federal tax code from the new law, the composition of its economy, and the way in which specific provisions within the Tax Cuts and Jobs Act are implemented at the federal level. In some “rolling conformity states,” which conform directly to the federal tax code as it is amended, the changes in the TCJA are already part of that state’s tax law. In others, known as “fixed” or “static conformity states,” the changes from the new tax law will only be incorporated when the state’s legislature enacts legislation to conform.
“This analysis provides estimates of the potential magnitude of the state corporate tax base expansions that could occur with state conformity to provisions of the TCJA,” said EY principal Andrew Phillips in a statement.
The states that are expected to get the greatest estimated percentage change in state corporate tax base from the new tax law are mainly those that tax certain types of foreign income. The impact will also vary by industry based on the tax and financial profiles of companies in each industry sector. The study estimates the change in the state corporate tax base expansion by sector: manufacturing: (12 percent), capital intensive services (17 percent), labor intensive services (9 percent), finance and holding companies (8 percent) and other industries (13 percent).
Pennsylvania and Vermont are expected to see the largest increase, at 14 percent, in the estimated percentage change in the state corporate tax base from the Tax Cuts and Jobs Act, according to the report. The state with the lowest estimated boost, of 4 percent, is Mississippi.