Tuesday, January 30, 2018

IRS to open filing season Monday with some extra warnings

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.
In addition, victims of last year’s hurricanes, especially those who lived in areas affected by hurricanes Harvey, Irma, and Maria may also qualify for the EITC.
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!”

Source: Accounting Today

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.

Wednesday, January 24, 2018

Tax reform and cash management considerations for clients

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.

Tuesday, January 16, 2018

Chart illustrating charitable giving for 2016

Tax reform leaves private foundations in a strong position

While the Tax Cuts and Jobs Act made some changes to the charitable giving provisions in the Tax Code, the climate for giving to private foundations is as strong or stronger than it has ever been, according to Jeffrey Haskell at Foundation Source.

Haskell, who heads a team of accountants and attorneys providing services to private foundations, noted that there had been talk during the long tax reform process of flattening the foundation excise tax rate.
“Under the current regime, the full tax rate is 2 percent,” he explained. “Under certain conditions that rate is cut in half, to 1 percent. It’s cut when the foundation makes grants to a certain level, as a reward. There was a proposal to simplify this by having a flat rate of 1.4 percent, but that didn’t make it into the final bill. And the other thing that might have impacted private foundations was a narrow exception to the excess business holdings rule, which generally puts a limit on the stake that a foundation and insiders collectively have in a business enterprise. That would have relaxed the rules, but it didn’t happen either.”
The fact that the final bill contained no negative targeting of private foundations was reassuring to his private foundation clients, according to Haskell. And in a positive move, the TCJA increases the adjusted gross income limit on cash contributions to public charities from 50 percent to 60 percent.
“To the extent that an exempt organization or charity pays more than a million dollars in compensation to one individual, there will be an excise tax, but this generally applies to only the biggest charities like hospitals and universities,” he said. “None of our private foundation clients – which number over 1,400 – pay compensation anywhere near those levels.”

A private foundation is a Section 501(c)(3) organization other than a public charity. It typically manages its own investments, which are normally funded by an initial donation from an individual or business.
“High-income individuals who tend to fund private foundations with significant donations are probably not itemizing their deductions,” noted Haskell. “But when they contribute, they will itemize. The tax rate is still high for high-income people at 37 percent. And the charitable deduction has not been impaired or limited in any way. There were past proposals that would have capped the charitable deduction, but they were never enacted. And the Pease limitation, which had the potential to erode up to 80 percent of itemized deductions [by reducing their value as the taxpayer’s income rose], has been repealed. So the climate for making donations is stronger than ever.”
To be sure, people are motivated by non-tax considerations, Haskell noted. “In many cases, a family has a commitment to their local community to build a park or a skating rink or a food pantry. Those people won’t care, at the end of the day, about the tax ramifications. They have a commitment to society and want to set an example for their children.”
Large public charities are typically supported by private foundations, Haskell noted. “To the extent that they are hurting because of a downturn in donations from the public, private foundations can step up and fill that gap,” he said. “The need for private foundations is stronger than ever to make up any shortfall that public charities experience in receiving donations. Private foundations are committed to supporting charities in their community or regions, or in their area of interest.”
“Moreover, some corporations are seeing the lowering of the corporate tax rate as a possible opportunity to give back more to their community,” Haskell said. “There are lush years and lean years, and charities expect to receive more support from corporations in lush years. The lowering of the corporate tax rate will make for more lush years, and generate a more favorable climate for charitable giving by corporations.”