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.
The Internal Revenue Service said Wednesday that taxpayers can continue to deduct the interest they pay on home equity loans “in many cases,” despite the new tax law's limitations on the mortgage interest deduction.
The IRS is getting blitzed by questions from taxpayers and tax professionals alike, asking if the restrictions in the Tax Cuts and Jobs Act on the mortgage deduction also apply to home equity loans. The IRS said Wednesday that despite the newly enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, a home equity line of credit or a second mortgage, no matter how the loan is labeled. The new tax law that was passed in December suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, the IRS pointed out, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
For instance, under the new tax law, the interest on a home equity loan for building an addition to an existing house is usually deductible, although interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan needs to be secured by the taxpayer’s main home or by a second home, known as a qualified residence. But it can’t exceed the cost of the home, and the loan also needs to meet other requirements.
While the new tax law was being negotiated last year, the mortgage industry and home builders were worried that lawmakers might eliminate the mortgage interest deduction entirely. However, in the end, lawmakers decided to scale back the upper limitations on the deduction instead of getting rid of it completely.
For taxpayers who are trying to decide whether to get a mortgage, the IRS noted that the new tax law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Starting this year, taxpayers can only deduct interest on $750,000 of qualified residence loans, or $375,000 for a married taxpayer filing a separate return. That’s down from the previous limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the total amount of loans used to purchase, build or substantially improve a taxpayer’s main home and a second home.
The IRS provided a few examples to show how the new law works:
Example 1: In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home with a fair market value of $800,000. The following month, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total doesn’t exceed the home’s cost. Because the total amount of both loans doesn’t exceed $750,000, all the interest paid on the loans is deductible. But if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan wouldn’t be deductible.
Example 2: In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home. The loan is secured by the main home. The following month, the taxpayer takes out a $250,000 loan to buy a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages doesn’t exceed $750,000, all the interest paid on both mortgages is deductible. But if the taxpayer got a $250,000 home equity loan on the main home to buy the vacation home, then the interest on the home equity loan wouldn’t be deductible.
Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to buy a main home. The loan is secured by the main home. In February 2018, the taxpayer gets a $500,000 loan to buy a vacation home. That loan is secured by the vacation home. Because the total amount of both mortgages is more than $750,000, not all the interest paid on the mortgages is deductible, but a percentage of the total interest paid would be deductible.
The Internal Revenue Service warned taxpayers Tuesday to beware of a quickly proliferating scam involving erroneous tax refunds being deposited in their bank accounts, after a data breach on their tax preparers' computers gives them access to sensitive client information.
The IRS also provided taxpayers with a step-by-step explanation for how they can return the funds and avoid falling prey to the scammers.
The new alert follows up on a Security Summit alert that came out earlier this month warning tax professionals about phishing emails that can download malware onto computers if they are clicked (see IRS sees new filing season scam hitting tax pros). The IRS released the extra warning Tuesday about the new scheme after learning that more tax practitioners’ computer files have been breached. On top of that, the number of potential taxpayer victims jumped from a few hundred to several thousand in only a few days. The IRS’s Criminal Investigation division is continuing to investigate the expanding scope and breadth of this scheme.
Basically this is a new twist on an old scam, the IRS noted. After the cybercriminals steal client data from tax professionals and file fraudulent tax returns, they use the taxpayers' real bank accounts for the deposit. Thieves then employ various tactics to reclaim the refund from taxpayers.
The scam is continuing to evolve in new versions. In one version, the criminals impersonate debt collection agency officials acting on behalf of the IRS. They contact taxpayers to tell them a tax refund was deposited in error and ask taxpayers to send the money to their collection agency.
In another version, the taxpayer who received the erroneous refund receive an automated phone call with a recorded voice saying he is from the IRS and threatens the taxpayer with criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number. The recorded voice provides the taxpayer with a case number and a phone number to call to give back the mistaken refund.
The IRS repeated its warning from last week for tax professionals to increase the security of their sensitive client tax and financial files. The IRS is also asking taxpayers to follow the established procedures for returning an erroneous refund to the Service. The IRS wants taxpayers to discuss the issue with their financial institutions because there may be a need to close bank accounts. Taxpayers who get erroneous refunds also should contact their tax preparers immediately.
As this is now peak season for filing returns, taxpayers who file electronically could find their tax return has been rejected because another return with their Social Security number is already on file. If that happens, taxpayers should follow the steps detailed in the Taxpayer Guide to Identity Theft. Taxpayers who can’t file electronically should mail a paper tax return along with Form 14039, Identity Theft Affidavit, telling the IRS they were victims of a tax preparer data breach. Taxpayers who receive the refunds should follow the steps in Tax Topic Number 161 - Returning an Erroneous Refund. It includes the mailing addresses in case they to return paper checks to the IRS. By law, the IRS noted, interest may accrue on erroneous refunds.
The National Association of Enrolled Agents asked its tax experts the best practices clients should follow when working with a tax professional, and gave some helpful advice from an online survey whose results were released Monday.
Twenty percent of the enrolled agents surveyed by the NAEA strongly agreed with the notion that all clients should sort their documents using an organizer or organizing system provided by their tax professional, while 21 percent agreed with the statement that “it is impractical to expect new clients to organize their materials using the system with which I am most comfortable.”
However, 47 percent strongly agreed with the statement, “I work more effectively with clients who are willing to learn and adjust the way they organize their documents so that I can serve them better.” In addition, 51 percent strongly agree that taxpayers should schedule an appointment with tax professionals early in the filing season to avoid undesirable outcomes.
“Your willingness to adapt the way you organize your tax documents will help you get the best result from your work with a tax professional, often at a lower cost,” said NAEA President James Adelman in a statement. “Have a conversation with your tax professional at the outset to clarify expectations and preferences on all sides.”
Eighty-three percent of tax pros said clients should use separate bank accounts for business and personal funds, while 81 percent recommended clients should keep their receipts in case their tax returns are examined, and 75 percent said clients should use a mileage log or smartphone app to record the business miles they have driven.
Identifying preferred communication channels and technologies is crucial, along with respecting deadlines and sharing time-sensitive information promptly are also essential. Ninety-six percent of the enrolled agents polled said clients should notify tax pros as soon as they receive a letter or notice from the IRS, while 82 percent said they should tell tax pros about significant life changes such as a retirement or divorce. Eighty percent said clients should consult with tax pros before starting a side job, while 78 percent said clients shouldn’t respond to notices from the IRS without consulting a tax pro.
Enrolled agents prefer to maintain a professional relationship with clients. The survey found 83 percent of the enrolled agents polled agreeing with the statement that advice from tax pros may be quite different from the tips that clients get from friends. Seventy percent of tax pros said their clients should not expect to get the same refund that a neighbor or coworker told them they had received, while 69 percent said “same as last year” is not an acceptable answer to questions from tax pros. In addition, 60 percent said tax pros cannot tell clients how the new tax bill impact their 2018 taxes until they run the numbers, while 52 percent agreed that a “quick question” a client asks a tax pro rarely has a quick or simple answer.
President Donald Trump’s corporate tax cuts are already having a big impact.
The main takeaway at the halfway point of earnings season is that corporations are going to make more money—lots more—as their statutory tax rate gets axed to 21 percent from 35 percent. Corporate chiefs already are making plans for the windfall, with some detailing specific investments in infrastructure or technology along with their one-time charges and benefits.
So far a record 75 percent of companies have raised their profit guidance, according to strategists at JPMorgan Chase & Co. Taking into account the benefits of lower corporate taxes, Wall Street expects U.S. firms to increase capital expenditures by as much as 6.8 percent this year—more than five times the projected growth in 2017.
There are other needs too beyond capital spending: Higher pay for workers in a tight labor market, balance-sheet repair and returns to investors through buybacks and dividends. Many of the big announcements so far represent multiyear plans with big headline numbers but only broadly sketched details.
Citing the lower tax rate, AT&T Inc. said free cash flow this year will surge almost 20 percent to $21 billion, giving the phone carrier more financial flexibility.
The telecom giant had already announced it would invest an additional $1 billion in the U.S., helping the company prepare for the transition to a new fifth-generation mobile network, and give $1,000 bonuses to workers, thanks to reforms that Chief Executive Officer Randall Stephenson called “capital freeing.”
Chief Financial Officer John Stephens also made clear the company sees reform strengthening AT&T’s financial position. “We see a significant boost to our balance sheet, reducing $20 billion of liabilities and increasing shareholder equity by a like amount,” he said last week on a call.
Lockheed Martin Corp., the world’s largest defense contractor, is earmarking some of its expected windfall for pensioners. The company plans to contribute $5 billion in cash, satisfying its required obligations until 2021.
The company is also increasing its commitment to initiatives like employee training, charitable contributions for education in science and math, and the Lockheed Martin Ventures fund by $200 million, CEO Marillyn Hewson said on a call.
Lockheed projects earnings will more than double this year to $15.50 a share, buoyed by the U.S. tax cuts and higher deliveries of its F-35 Lightning II fighter jet.
Merck & Co. expects its tax rate will fall to about 20 percent from 35 percent, providing added flexibility for major capital expenditures, in addition to research and development.
The drugmaker expects to spend $12 billion over five years, including $8 billion in the U.S., with oncology, vaccines and animal health targeted for investment, CFO Rob Davis said on a call. Merck will also pay one-time bonuses to some of its 69,000 employees.
Priorities also include the dividend, business development deals and repurchases, to the extent possible.
Merck finished the year with $21 billion in cash, and plans to repatriate about $17 billion over time. The proceeds will be invested in the company, its dividend, and remaining money will go toward deals and share repurchases.
AbbVie Inc., maker of the top-selling drug Humira, plans to spend $2.5 billion on capital projects in the U.S. as a result of tax reform and is evaluating expansion of its U.S. facilities, according to CEO Richard Gonzalez. The drugmaker also will accelerate pension funding by $750 million and increase non-executive pay, though it didn’t provide details.
AbbVie said on Jan. 26 its tax rate will plummet to 9 percent this year. It was 19 percent in 2017. As a result the company boosted its annual profit guidance to as much as $7.43 a share, a 13 percent jump.
“U.S. tax reform enables more efficient access to our foreign cash, and the ability to deploy it in the United States,” Gonzalez said on the call.
Roche Holding AG’s tax rate will drop from 26.6 percent last year to the low 20 percent range. The tax cut means core earnings per share will rise by a high single-digit rate this year; without the reduction, earnings might have been little changed. The drugmaker didn’t announce any increase in investment.
“We do benefit from the U.S. tax reform,” Severin Schwan, CEO of Roche, said in a conference call. “We have been one of the biggest taxpayers in the United States.”
Diageo Plc, British American Tobacco Plc and Societe Generale SA also said the tax law would lower their rates. Lenovo Group Ltd. posted a surprise loss after taking a $400 million charge related to the tax-law changes, while adding that its U.S. operations may benefit from a lower rate in the longer term.
The Big Gorilla
The company with the biggest decision to make is Apple Inc., with a net cash position of $163 billion—the sum of its $285 billion cash hoard and debt of $122 billion. Apple’s aim is to reduce that to zero and will announce more specific plans when it reviews results for the current quarter ending in March, Chief Financial Officer Luca Maestri said on a call.
“When you look at our track record of what we’ve done over the last several years, you’ve seen that effectively we were returning to our investors essentially about 100 percent of our free cash flow,” Maestri said. “And so that is the approach that we’re going to be taking.”
Last quarter, Apple paid $3.34 billion in dividends and repurchased more than $10 billion of its stock.
The company had no difficulty financing acquisitions before tax reform, he said, and doesn’t see any now, either. Apple made 19 acquisitions last year.
“It’s always the customer experience in mind, right, that we make acquisitions,” Maestri said. “We look at all sizes and we will continue to do so.”
—With assistance from Jing Cao, Mark Gurman, Blaise Robinson, Jared S. Hopkins, Julie Johnsson, Caroline Chen, Brandon Kochkodin, Phil Serafino and Scott Moritz
The Internal Revenue Service is getting ready to open the tax filing season on Monday, Jan. 29, as it gears up to handle the new tax law.
This year, tax season will close on Tuesday, April 17, when individual tax returns and payments are due to the IRS.
The IRS advised tax professionals in an email Friday to bookmark the link to Basic Tools for Tax Professionals for filing instructions, access to forms, publications and reference materials, and information on power of attorney, transcripts, representation, due diligence, professional responsibility and more.
On Friday, the IRS marked the 12th annual Earned Income Tax Credit (EITC) Awareness Day with more than 250 total outreach events and activities promoting EITC Awareness around the country. The campaign aims to reach millions of low- and moderate-income workers who may be missing out on this significant tax credit.
The IRS is particularly encouraging tax professionals who have clients with disabilities, or whose clients are parents of children with disabilities, to let them know they may be eligible for the EITC. Help them claim it if they qualify. Publication 4808 contains additional information.
Like last tax season, the IRS is also planning to delay refunds for tax returns claiming the EITC or the Additional Child Tax Credit, subjecting them to extra scrutiny to safeguard against identity theft and tax fraud. Clients who are claim the EITC or ACTC can expect their tax refunds to arrive starting Feb. 27. A new YouTube video provides more details.
The IRS is also warning tax professionals that wage statements and independent contractor forms must be filed with the government by Jan. 31. The date applies to both electronic and paper filers. Federal law requires employers file their copies of Form W-2 and Form W-3with the Social Security Administration by the end of January and others who paid compensation file Form 1099-MISC with the IRS to report non-employee compensation.
In addition, the IRS plans to warn tax professionals Monday to safeguard data security this tax season. “Filing season has now arrived and we thank you for all you will do for taxpayers and tax administration,” said the IRS. “Over the last two months, we have shared information about the importance of protecting your systems and client data from cyber intruders and identity thieves. Today, we want to provide a little information on what to do if the worst happens— your client information is compromised or your data system is breached. “We hope you never experience a data compromise—whether by cybercriminals, theft or accident—but if it happens there are certain steps you should take. These include notifying law enforcement, your local IRS stakeholder liaison, the Federation of Tax Administrators (who will assist in notifying all the states in which you prepare state returns), your clients, your insurer, the credit bureaus, and others. (For those who have employers or hold franchises, please ensure you know what is required by your employer or your contract.) For a complete list of who to contact, visit IRS.gov, keyword: Data Theft Information for Tax Professionals. For a list of local stakeholder liaison contacts, search: Stakeholder Liaison Local Contacts. Wishing you a productive, successful and safe filing season!”
The New Year is here and the Tax Cuts and Jobs Act bill is now law, the most significant reform of the U.S. tax code since 1986.
The first few months of 2018 are a critical time for tax, legal and accounting advisors to speak with business clients regarding how the new law will affect their cash flow. This year it will be extremely important for businesses to keep their tax advisors in the loop regarding transactions to ensure they are structured in a way that will save money.
If ever advisors needed to use their emotional intelligence and listening skills, this year would be a good time. Tax organizers and checklists can only disclose but so much. Advisors will have to hone in on what clients and business management want to accomplish throughout the year, in the near future and next seven years, and truly understand what keeps them up at night and what they are passionate about.
Casual advice will not work, as people often dismiss and do not act upon free, informal advice given during the tax preparation process. Advisors will have to be proactive and get engaged to prepare new tax plans, strategies and positions for business management.
With so many changes and factors, where do advisors start?
Legal and accounting firms, bar and state accounting associations, continuing education providers and publishers have been busy providing articles, webinars and training. Advisors will have to pay attention to the individual facts and circumstances of each party they serve and determine what additional services they can provide on a periodic basis to add value to and save clients and business management tax money. In any planning, cash management and cash flow must be taken into account, to ensure there is enough money to cover ongoing expenses and operations and to fund any additional expenses taxpayers chose to incur in order to take advantage of tax changes.
Looking at the bottom line is not enough in times of change; one must also make sure on a monthly basis that basic necessities are met and the lights stay on. Additionally, advisors will have to take into account which changes are permanent, temporary and due to increase or decrease between now and 2025.
How will the states react to tax reform?
In the past, many states piggybacked on the federal tax regulations. Some states such as New York have already announced plans for changes in the state tax laws. In due time, we will learn more about what states plan to do. Any additional differences will have to be taken into consideration when preparing estimated tax payment calculations and projections. With some states increasing the minimum wage and providing paid family leave, there will be a lot of changes.
How will the alternative minimum tax enter the equation?
The AMT has to be taken into account in planning for individuals and corporations. The individual phase-out threshold has increased to $1 million. For individuals who prepaid real estate taxes for 2018 that were already assessed in 2017, the AMT exemptions from 2017 may yield less or no tax savings.
Should advisors be consulted before couples get married?
Some advisors may be hopeless romantics, happily married, etc. Being an advisor does not make one immune from feeling compassionate when clients say they are getting married or divorced. With alimony no longer being deductible and caps on itemized deductions, advisors may take this opportunity to speak up and help clients save heartache and money down the road.
Legal advisors and others can assist clients in preparing prenuptial agreements, setting up simple trust funds to set aside assets for young children and aging parents, and setting up retirement accounts and plans that can make fair resources available to each spouse. Additionally, advisors can advise engaged couples on how to time their home and investment property purchases to maximize deductions before marriage, and set up joint ownership for real estate ventures.
What business do advisors have discussing medical procedures with clients?
We have all heard the saying that health is wealth. Advisors often know personal information about the people they work with. People love to save money. This can be a good opportunity to suggest clients consult their doctors and see if major medical procedures that require large out of pocket costs, such as dental work, be performed in 2018. The threshold for the itemized deductions for medical expenses will stay at 7.5 percent in 2018 but will increase to 10 percent thereafter.
How can advisors help maximize business expense deductions and ensure employees are not adversely affected by loss of deductions?
Advisors are often consulted when companies want to update employee handbooks and other policies. With some taxpayers losing their ability to itemize deductions due to the increased standard deduction, unreimbursed employee expenses and professional development out-of-pocket expenses may not yield a tax savings benefit to some employees. Additionally, employees will no longer be able to deduct home office expenses.
Employers should review their employee reimbursement plans and make sure these plans are fair and cover all expenses that employees are expected to incur on behalf of the company. Companies should consider either paying outright for uniforms, safety gear, professional development materials and workshops, or giving employees pay increases to make these out of pocket expenses more affordable to employees. Additionally, companies can use this as an opportunity to make sure expense reimbursement processes are fully automated and that polices require employees to make prompt reimbursement requests. Employers should make sure reimbursement plans are accountable, so that reimbursements do not end up being reported as wages on form W-2.
What are some things that advisors should discuss with parents?
Parents will benefit from the $400 increase in the refundable child tax credit. The standard deduction was increased and personal exemptions were eliminated. This change may be confusing to some parents. Parents will be able to use 529 plans to send children to elementary school.
Advisors can help families leverage caps on real estate and tax deductions with education expenses. Some parents purchase homes in counties they can barely afford in order to send their children to schools in better school districts. Some of these parents will no longer benefit from the tax savings they were accustomed to when they were able to deduct their real estate and state taxes. Advisors can help parents determine how contributions to educational savings accounts can lower their taxable income and save them money on taxes.
How can advisors help clients with retirement-related issues?
Advisors will have to help clients access their current and future earnings and tax expectations, to ensure a Roth IRA conversion is best for them. Roth IRA conversions will no longer be reversible.
What's the story with estate planning?
Advisors may have a challenging time discussing complex trusts that have become irrelevant, yet are irrevocable and still incur fees. They say the only certain things in life are death and taxes. The new tax law has doubled the estate and gift tax exemptions to an inflation-adjusted $11.2 million for descendants dying and gifts made in 2018. These exemptions will be adjusted annually for inflation until 2025, when they sunset and revert to an inflation-adjusted $6.5 million.
How will the gig economy make out with tax reform?
Since some people may lose their ability to deduct professional development expenses as itemized deductions due to the higher standard deduction, some taxpayers may decide to be more active in their side gigs and form an LLC to build a business while maximizing business deductions. Advisors can help clients set up businesses they actively participate in.
How can advisors help clients with real estate investment issues?
With the caps on deduction of property and real estate taxes, mortgage interest, business interest expenses, advisors can help clients figure out what the best structure is for real estate investments. Some clients who have previously shied away from partnerships may find such entity structures more favorable or feasible.
How will entrepreneurial business owners make out with tax reform?
Business owners should be open with their advisors on what their strategic plan for the year is, how much they plan to grow and what their operating budget includes. Discussions should include which entity type is most beneficial, how the business owner can receive compensation and benefits to save taxes, and how much money the business owner needs to cover basic operations and living expenses on a monthly basis.
As of 2018, tax preparation fees will no longer be deductible as an itemized deduction on Schedule A, so small business owners should ensure their advisors or tax preparers provide detailed and/or separate bills for personal and business-related tax return preparation to obtain the amount that is business related.
How can advisors help pass-through entities that are service providers?
Advisors can assist high-earning service-providing businesses set up compensation and benefits that can reduce income and increase tax savings, yet provide future benefits to business owners.
How will tax reform affect nonprofit organizations?
With the increased standard deduction, some people will no longer be able to itemize, and will no longer see a tax savings from making charitable donations. People may become more particular about which organizations they will support. With some nonprofits struggling financially, advisors will be able to provide input to both donors and nonprofits.
Executive compensation changes will particularly be something nonprofits will have to address. The tax reform calls for a 21 percent excise tax on compensation of any covered employee in excess of $1 million. Donors, funders, boards and other stakeholders will look at compensation in a new light. With potentially decreasing donations, stakeholders would prefer to see more money going to causes and programs as opposed to executive pay.
Endowments will be affected by tax reform as well, with a new excise tax of 1.4 percent on the net investment income of applicable educational institutions. Investment and other advisors will have to work with educational institutions that have large endowments to ensure the organizations strategize about what to spend and what to save for the future. Additionally, large donations will have to be structured or timed in ways that save on taxes and extend the benefits to the educational institutions.
Will corporate tax cuts actually create jobs?
The tax cuts sure will create work (at least for accountants). Advisors of large privately held and publicly traded corporations will have their work cut out for them.
However, net operating loss carrybacks are no longer allowed and losses carried forward are now limited to 80 percent of taxable income. The domestic production activities deduction (section 199) has been eliminated.
The corporate alternative minimum tax has been eliminated. Net interest expense deduction will be limited to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) for four years and 30 percent of earnings before interest and taxes (EBIT) thereafter.
Financial analysts will have some extra work to do when analyzing results. Investors may benefit from corporations potentially having more earnings, EBIT or free cash flow.
What advice would you give to advisors?
Advisors should quickly learn about the changes and educate their clients, business management and owners as to which changes apply to them specifically and what services advisors can provide during this time of change and on a continuous basis. Finally, advisors should assess their personal circumstances and determine what changes they should make to make sure they save money on taxes due to their service providing business and to the increased revenue and salaries that they will earn as they help clients and business management save money on taxes and grow their businesses, portfolios, families and cash flow.