What are clients’ biggest questions about reform?

Tax reform’s dizzying array of changes seemed to confuse preparers, lawmakers and the IRS alike. But amid all the new laws, which one stands out to clients?

As with the Tax Cuts and Jobs Act itself, answers can vary widely.

“Many are concerned with the non-deductibility of unreimbursed employee business expenses, along with other expenses that were subject to the 2 percent [AGI rule],” said Chris Hardy, an Enrolled Agent at Georgia-based Paramount Tax and Accounting.

“For individuals, it’s the lack of exemptions and particularly how that will affect taxpayers such as college students whom parents would normally claim but [who] still need to file their own return,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.

Burbank, California, CPA Brian Stoner finds clients chiefly concerned about two things. First, SALT limitations: “In California, almost every homeowner has way, way over $10,000 in real estate, state income taxes and personal property taxes,” he said.

And second, personal exemptions: “Especially if they have two or three dependents,” Stoner said, “but many will qualify for the Child Tax Credit because of a much higher income limitation or family credit on a lot of the dependents – so I have some good news for them.”

Client professions key

Many of Stoner’s clients are also in entertainment, paid by some of the large entertainment payroll companies. “Some are going to lose $30,000 to $60,000 in itemized [deductions] because unreimbursed employee business expenses are no longer deductible, plus financial advisor and tax preparation fees are also not deductible,” he said. “Many entertainment clients are looking into forming corporations as production companies to continue to deduct many of these expenses.

New York EA Phyllis Jo Kubey likewise has many clients in the performing arts. “While they’re freelancers, because of union contracts with many venues they’re treated as employees for some work, receiving a W-2, and as independent contractors, receiving a 1099-Misc for other work,” Kubey said. “Since they’re doing the same thing, they’re tremendously confused about what’s an employee business expense – no longer deductible under TCJA – and what’s a business expense related to their [self-employed] income [that is] deductible under TCJA.”

Another wrinkle: Some clients think that they can deduct nothing anymore. “I have to keep reminding them what is and isn’t deductible for 2018,” Kubey said. “My clients are also confused, even with detailed explanations and 2018 tax projection worksheets I’ve provided, about whether they’ll still itemize deductions.” In New York City, where real estate carrying costs are dizzying, “even with the SALT limitation many will still itemize their deductions on what used to be Schedule A,” Kubey said.

Define ‘specified’…

Another major confusion for clients remains one pivotal detail of reform’s pass-through income deduction. “Lots of clients have expressed concern and confusion with the new 199A deduction,” said Jake Alexander, an EA and owner of Alexander Financial in Largo, Florida. “There’s been a lot of confusion for them establishing who qualifies for it, what it means if they do and how it will affect them.”

“Certainly for my small businesses, it’s 199A,” Ziegler added. “There are so many questions about how it works and who it includes, especially in light of the exclusion for certain professions.”

Recently proposed regs do attempt to narrow the scope of service businesses ineligible for the deduction. “Ineligible consulting business” has been limited to businesses that provide advice and counsel, for example. Experts say tricky areas remain when an activity rises to the level of a trade or business, and possibly banking when banks provide multiple services beyond lending and paying interest on deposits.

John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado, sees the most questions over the definition of a “specified service, trade or business,” which is key to the new pass-through income deduction. “The proposed regulations are less than fully clear, and many industries are not addressed or incompletely addressed,” he said. “As an example, the practice of law is deemed to be an SSTB, but what if all the lawyer did was trust administration, work that does not require a law degree? Is that lawyer performing duties [that are] an SSTB? Many think not.”

Post-reform, no matter their questions, “clients will need a lot of hand-holding from their tax pros as we go into the 2019 filing season for 2018 returns,” Kubey said.

IRS offers guidance on meals and entertainment deduction after tax reform

The Internal Revenue Service released guidance Wednesday on the business expense deduction for meals and entertainment in the wake of the Tax Cuts and Jobs Act, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation.

The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.

Before 2018, a business was able to deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if they’re incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That changed, however, with the passage of the tax code overhaul last December.

Section 274 of the tax code now generally disallows a deduction for expenses with respect to entertainment, amusement or recreation after passage of the new tax law. However, the Tax Cuts and Jobs Act doesn’t specifically address the deductibility of expenses for business meals.

The Treasury Department and the IRS plan to publish proposed regulations that will clarify exactly when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.

Source: accountingtoday.com Written by: M Cohn

Corporate America ‘in limbo’ as IRS punts on foreign tax issue

U.S. companies anxiously awaiting guidance on how hard they’ll be hit by a new foreign levy in the tax overhaul will have to stay tuned for at least another two months.

The Internal Revenue Service proposed regulations on Thursday spanning 157 pages that provide some details on which assets are subject to the tax on GILTI, or global intangible low-tax income, and how to calculate it. But one of the most pressing questions — to what extent multinational companies can use foreign tax credits and business expenses to offset the levy — remained unanswered.

“It’s a very big deal that the FTC and expense allocation issues have been left out,” said Andrew Silverman, a Bloomberg Intelligence analyst who focuses on tax policy. The regulations are “not a great answer for companies who are essentially left in limbo.”

The rules provide a starting point for how to calculate what they owe, but without the additional information companies still won’t be able to get to a level of comfort to complete tax returns and file documents with the Securities and Exchange Commission, Silverman said.

Corporations don’t want to underestimate their GILTI liability because they could be hit with a penalty if they pay too little in their quarterly tax installments to the IRS. The deadline for two portions has already passed and the next payment is due Sept. 15. Treasury officials said during a call with reporters Thursday that the additional guidance will be coming in about 60 days.

The Republican tax overhaul slashed the corporate rate to 21 percent from 35 percent, and shifted the U.S. to a system of taxing its companies on their domestic profits only. Those changes required guardrails — like the tax on GILTI — to ensure multinationals pay at least something on their future overseas profits.

The piecemeal guidance process, and the lack of understanding about the ultimate amount of tax that will be paid until all the parts are finalized, underscore the complexity of the tax law’s international provisions.

Tax advisers have been modeling the effects of the new law for their multinational clients, but because many of the new provisions are interconnected, and implementation may be governed by old tax regulations still on the books, they’re only able to estimate the amount of tax due.

That’s been a frustration for many publicly traded companies and their investors, who are anxious to understand how the new tax law affects them.

Companies are hesitant to record a tax hit for GILTI that they don’t think they should pay, so they’re waiting for the clarification in the regulations, said Brent Felten, managing director of international tax at accounting firm Crowe.

‘Taxpayer Friendly’

Still, Thursday’s regulations signal some good news could be ahead for multinationals. The rules indicate that companies can “gross up” their foreign income by the amount of foreign tax paid, a move that would result in a lower GILTI bill, said Mitch Thompson, a tax partner at Squire Patton Boggs.

“It’s taxpayer friendly,” Thompson said.

The GILTI levy effectively sets a 10.5 percent rate to apply to a company’s “excess” profits earned overseas through some of its foreign subsidiaries.

GILTI was intended to prod American technology and pharmaceutical companies into holding their valuable intellectual properties in the U.S. Currently, many hold their patents in subsidiaries in Ireland or other low-tax countries. The tax is intended to apply only in cases where a company’s cumulative overseas tax bill is below 13.125 percent, or 16.4 percent after 2025.

However, tax lawyers and accountants say quirks in the way the tax is calculated mean it will likely hit other companies, such as big banks with offshore operations, even when they already pay effective foreign tax rates above the threshold.

Bank lobbyists have urged the Treasury to come up with a fix that would lessen the pain from GILTI, saying an adjustment is needed to make the tax consistent with the intent of Republican lawmakers who wrote the legislation.

Repatriation Refunds

Pass-through entities such as partnerships and limited liability companies could fare even worse than corporations under the GILTI tax, but they won’t want to restructure their business without knowing how the foreign tax credit guidance will work, said David Shapiro, a partner at the law firm Saul Ewing Arnstein & Lehr.

That could create a rush of companies looking to reform as corporations after the regulations come out and before the end of 2018, Shapiro said.

Even after all of the GILTI questions are answered, companies will still be trying to figure out how they fare under the new international tax regime.

Treasury officials have said they plan to issue proposed regulations later this year on the other two major international provisions in the tax overhaul — a tax break encouraging companies to export U.S.-made goods, known as the foreign derived intangible income deduction, and the base-erosion and anti-abuse tax on payments corporations make to foreign subsidiaries.

The need to pay estimated taxes before receiving guidance has already caused headaches for some corporations that overpaid their repatriation taxes on profits accrued offshore since 1986. Some companies had overpaid to avoid penalties and were hoping for a refund. Instead, the IRS said in August it wouldn’t send the excess funds back and would apply them to a future installment of the repatriation tax bill.

“The more guidance you get from IRS and Treasury, the better, and the sooner you get it the better,” said Joe Calianno, a tax partner and international technical tax practice leader in BDO’s Washington office.

— With assistance from Isabel Gottlieb

Source: Bloomberg News Via:Accountingtoday.com 

Small businesses need major tax help

Despite the widespread belief that small businesses are a target for IRS audits, nearly a third of small-business owners think they overpay their taxes, according to a survey by B2B research firm Clutch of over 300 small-business owners and managers.

“If they think they’re paying too much, they’re questioning the accuracy of their tax return,” said Roger Harris, president of Padgett Business Services. “They’re somehow missing a deduction, or there are parts of the code they just don’t know about. If a business owner did their own accounting and bought a piece of equipment in October 2017, what’s the chance they knew the rules for the new 100 percent bonus depreciation?”

The small businesses in the survey listed unforeseen expenses (35 percent) as their top financial challenge, followed by the mixing of business and personal finances (23 percent) and the inability to receive payments on time (21 percent). Clerical errors in financial records, and outdated financial records, were both listed by 11 percent of respondents.

The majority of small businesses in the survey said they use the accrual method for tracking finances, although the smallest businesses, with fewer than 10 employees, were more likely to use the cash basis method.

“Actually, use of the cash method versus the accrual method has nothing to do with number of employees but with revenue,” said Harris. “In fact, the Tax Cuts and Jobs Act increased the ability to use the cash method for businesses with up to $25 million in annual revenue. Cash accounting is available to many businesses, and many small businesses prefer it because it’s simpler. They like taxable income to track as closely as possible to their checkbooks. In fact, most of our clients would be happy with a simple profit and loss financial statement: Money in minus money out equals money left, or what some of them call ‘my money.’”

“But the accrual method creates expenses that sometimes aren’t yet paid and sometimes defers costs that are already paid, and defers them into the future,” he continued. “In that case, taxable income can vary dramatically from using the cash method.”

“The cash method is easier for everyone to understand,” he said. “Money in is income, money out is expense, and what’s left is your money, which is what you pay taxes on.”

Most use a hybrid method — accrual for income because they have inventories, and cash for expenses, according to Harris.

“If I asked what method of accounting they use, most small-business owners would just stare at me,” Harris said. “But if I explained it to them and they made a pick, most would choose cash. I would be stunned if I asked a small-business owner without giving a choice, and anyone said ‘accrual.’ Most of them wouldn’t even know the term. If you go to the coffee shop in your building and ask the owner what method they use, they won’t know what you’re talking about.”

“In a classroom or to an accountant, the accrual method is favored,” said Harris. “But in the eyes of most owners, if they don’t have the money it’s not income, and if they haven’t paid money, it’s not an expense.”

Surprisingly, the survey found that more than a quarter — 27 percent — of small-business owners and managers said they do not have a separate bank account for their business. Naturally, established businesses are more likely to have separate bank accounts than start-ups. Nearly 80 percent of small-business owners of five years or more said they have separate accounts, compared to 68 percent of small-business owners of two years or less.

Source: accountingtoday.com Written by: R. Russell

House passes repeal of medical device tax

The House approved a repeal of the Affordable Care Act’s medical device tax, along with a bill that prohibits the IRS from rehiring any employee who was fired for misconduct.

Implementation of the 2.3 percent excise tax has repeatedly been delayed by Congress ever since the passage of the ACA in 2010, in part thanks to lobbying by medical device manufacturers. The Senate isn’t expected to take up the bill before the end of the year, according to The Wall Street Journal. However, the latest moratorium on the tax means it won’t take effect until at least January 2020.

Repeal of the tax was supported across party lines, with a vote Tuesday of 283 to 132. Joining those in favor of repealing the tax were 57 Democrats.

“Minnesota’s innovators can breathe easier since we’re one step closer to ending the medical device tax for good,” said Rep. Erik Paulsen, R-Minn., who sponsored the bill, in a statement Tuesday. “Today’s vote shows strong bipartisan support for lifting this burden on innovators in an industry so important to Minnesota. I’m more optimistic than ever we’ll be successful in giving these job creators the certainty and predictability they need to thrive.”

Another bill passed by the House on Tuesday, the Ensuring Integrity in the IRS Workforce Act, would prohibit the IRS from rehiring any employee who was “involuntarily separated” from the agency for misconduct. The bill was passed unanimously by the House. It was sponsored by Rep. Kristi Noem, R-S.D. “South Dakota taxpayers shouldn’t have to worry that someone who has already been fired for mismanaging their hard-earned dollars will be hired again,” Noem said in a statement Tuesday. “We need to know there is integrity in the IRS, and when they rehire people who have already mishandled our most sensitive data, that integrity is broken. This bill puts commonsense oversight provisions on the agency handling our personal information and makes sure people who don’t respect taxpayer resources don’t work at the IRS. I am hopeful the Senate will move quickly to put these practical protections in place.”

The House is also expected to take up legislation this week allowing taxpayers to pay for gym memberships, fitness classes, nonprescription over-the-counter drugs and menstrual care products with their health savings accounts and flexible spending accounts, as well as roll over money from an FSA from one year to another.

Source: Accountingtoday.com Written by: M. Cohn

Bitcoin is property, not currency

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.”

MINING TROUBLE?

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.”

WIDER INTEREST

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.”

Source, accountingtoday.com 

Top tips for working with tax pros

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. 

Source: accountingtoday.com,  Michael Cohn

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.

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.

Source: Accountingtoday.com

News of Note - Supreme Court Decision On Obamacare

Supreme Court Decision – the New York Times Opinion
The Times called the decision confusing in an OpEd contributed by Richard Epstein, who said “It is not good for the court or the country that the chief justice’s position in such an important case is confused at its core.” Read more

Supreme Court Decision – the Wall Street Journal Opinion
“It's also hard not to notice that people now extolling Justice Roberts for rescuing the court's integrity are largely the same ones who have been impugning it,” the Journal said. Read more

Supreme Court Decision – the Journal of Accountancy
“Roberts concluded that the individual mandate must be construed as imposing a tax on those who do not have health insurance, if such a construction is reasonable, because "every reasonable construction must be resorted to, in order to save a statute from unconstitutionality," Hooper v. California, 155 U.S. 648 (1895).” Read more

So You Think You Have Problems?

The Tax 'Miseducation' of Lauryn Hill
Singer and actress Lauryn Hill, who captured five Grammy awards for her critically acclaimed 1998 album The Miseducation of Lauryn Hill, has been charged with failing to pay taxes on income totaling $1.8 million. Read more

IRS Prescribes Rules for Health Care FSAs
A new IRS ruling (Notice 2012-40) provides guidance on a pending limit for flexible spending accounts (FSAs). Read more

Is Your Business Headed in the Right Direction? Are You Sure?

If you're like most business owners, your days are filled by efforts to make your company successful. Those tasks might be focused on making a great product, generating sales, or building customer relationships. And you might be great at those things. But how great are you at making money? And how well are you managing your resources? Click here to read more.

Questions? Contact us at Neikirk, Mahoney & Smith CPAs.