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The Basics of the New Section 199A (The Pass-Through Deduction)

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Affectionately being referred to as the Pass-Through Deduction, the new tax law will allow partnerships, LLCs, S corporations and sole proprietorships (in other words, pass-throughs) to deduct up to 20% of their Qualified Business Income under revised provisions of IRC § 199A.

How Do You Calculate the Pass-Through Deduction?

The Pass-Through Deduction usually will be whichever is smaller between 20% of the household’s Qualified Business Income or 20% of the household’s taxable ordinary income. For example, assume a self-employed plumber has $50,000 of Qualified Business Income in 2018, with no other sources of income. If the plumber is a single filer he may claim a $12,000 standard deduction, resulting in $38,000 in taxable income. Therefore, 20% of the plumber’s Qualified Business Income is $10,000 ($50,000 x 20%), while 20% of his taxable income is $7,600 ($38,000 x 20%). The plumber may claim a $7,600 Pass-Through Deduction, the smaller of the two amounts.

What is Qualified Business Income?

In general, Qualified Business Income is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners must be excluded.

What is a Qualified Trade or Business?

In general, a Qualified Trade or Business is any trade or business that is not a “Specified Service Trade or Business” or the trade or business of performing services as an employee.

The IRS Defines a Specified Service Trade or Business as any:

    • trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners,
    • banking, insurance, financing, leasing, investing, or similar business,
    • business of operating a hotel, motel, restaurant, or similar business,
    • trade or business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,
    • business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

Income Based Exception for Specified Service Trade or Business Owners

An income-based exception exists for owners of a Specified Service Trade or Business which will allow them to take the Pass-Through Deduction as long as their income is below a certain amount. For 2018, that amount is $207,500 (or $415,000, for MFJ) to be eligible for a partial deduction and $157,500 (or $315,000, for MFJ) to be eligible for the full deduction. Therefore, even if a taxpayer owns a Specified Service Trade or Business if her income is below $157,500 (or $315,000, for MFJ) for the year she may still take the full 20% pass-through deduction. While, if her income is greater than $157,500 (or $315,000, for MFJ) but below $207,500 (or $415,000, for MFJ), she may take a partial deduction.

Phase Out Provisions and other Requirements for Certain Taxpayers

The New Pass-Through Deduction is very complex. While we have discussed the basics here, the new law contains numerous nuances. For example, the taxpayers who have income greater than $207,500 (or $415,000 for MFJ) have to calculate the deduction in a different manner.

You can find more information on the IRS website.

Give us a call if you need help  in determining your specific eligibility for the new Pass-Through Deduction!

Group-Term Insurance – A Perk to Attract Talent

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Employers know that the employees of a business will effectively determine whether the venture will be a success or not. Committed employees who are satisfied with their jobs, and the rewards their jobs bring, are a significant asset of any successful business. That is one of the reasons employers seek out ways to reward employees for their hard work and loyalty.

At the same time, of course, employers have to consider the bottom line — and the cost of keeping it healthy. That means staying within a reasonable budget for compensation and benefits. If costs are not kept under control, the overall financial status of the business could be threatened. One particular employee benefit generally meets the necessary requirements and provides advantages for both employees and employers. That benefit? Group-term life insurance.

Essentially, group-term life insurance is a program of low-cost renewable term life insurance that covers the lives of a group of individuals, such as the employees of a business. A formula that may be based on age, years of service, compensation or position is used in determining how much insurance coverage is provided. Coverage valued at twice an employee’s salary might be offered, for example.

Group-term plans are popular with employees for a number of reasons:

  • Employees receive the insurance coverage at no (or little) cost, depending on whether the plan is contributory.
  • Employees can secure coverage, in most cases, without any physical examination. This can be a substantial benefit for an individual who might otherwise be unable to obtain coverage.
  • The cost of the first $50,000 of life insurance coverage provided to an employee is not included in income for tax purposes. If coverage above that level is provided, the taxable cost to the employee is determined at very reasonable rates.
  • Employees may be permitted to convert their group coverage into individual policies when they leave their employer’s workforce.

Advantages for employers:

  • A high level of insurance protection for employees can be secured at a reasonable cost, and the insurance premiums paid for the coverage are income-tax deductible by the employer.
  • Employees who are satisfied with their benefits are less likely to leave. That means lower turnover and fewer resources spent locating and training new employees. In addition, having a group-term plan in place may make it easier to attract and retain employees as a business grows.
  • Group-term life insurance programs are relatively easy and economical to administer, further easing the burden for employers.

For more help with individual or business taxes, connect with us today.

Missed the Tax Deadline? Filing a Past-Due Tax Return

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You missed the April filing tax deadline. What now?

For whatever reason, you didn’t file an income tax return by the April tax deadline. Don’t wait until next year, and don’t think that the IRS won’t notice. You need to do something about it now. If you didn’t file because you didn’t think you’d have enough money to pay your tax bill (or you waited too long and simply couldn’t complete your tax preparation), you could have applied for an extension. The IRS still expects you to send in what you think you’ll owe, but if you pay at least 90 percent with the extension, you may avoid some penalties. You’ll then have six months to pay all taxes due and turn in your tax return.

At the very minimum, complete and send in the Form 4868 by the April deadline with some payment if this happens again. The IRS wants to hear from you at filing time.

Making Good

File and pay as quickly as you can, whether or not you can pay the entire amount due. That’s what the IRS says to taxpayers who missed the tax deadline. This will minimize penalties and interest charges (the agency charges interest, a failure-to file penalty, and a failure-to-pay penalty if you owe). You may be able to avoid these if the agency accepts your reason for being delinquent.

There’s no penalty if you’re due a refund, but you must file for it within three years. How do you file? You cannot file electronically after the extension deadline in October, either on the IRS servers or through commercial software or websites. You’ll have to file a paper return. You can either send a check along with your return or use the IRS’ online payment options.

What if you can’t pay the total due? The IRS offers options here, including applying online to make installment payments and requesting a temporary delay.

Warning: Remember that the IRS will not send you an email or make a phone call demanding immediate payment. Such a request is part of a phishing scam.

Planning Ahead, Always

How do you keep this from happening again? Our suggestion is that you start doing tax planning year-round. Tax planning should really be a part of your overall financial planning, and it’s something you need to be thinking about all year.

We can help you in several ways here, by:

  • Working with you to understand what you should be doing every month and quarter to increase your understanding of your ongoing income tax obligation.
  • Make recommendations when your company is planning to make large purchases. We can advise you on timing and on how you should be claiming the acquisition on your tax return.
  • Going over your business expenses with you. Do you know what items should be recorded, categorized, and included when you file?
  • Creating reports that will help you calculate your quarterly estimated taxes.
  • Preparing your income taxes when the time comes.

By always considering the tax implications of your income and expenses, you accomplish three things. You make smarter purchases. You’re less likely to get a big, ugly surprise at filing time. And you may well be able to minimize your obligation to the IRS.

Still sitting there with a pile of receipts and forms from an unfiled return? Let us help you get back on track.

Don’t Forget – You are Responsible for Payroll Taxes

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Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare (FICA) taxes. The business has to forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld  payroll taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty. The IRS assesses the penalty on individuals classified as “responsible persons.” The amount of the penalty equals to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person for Payroll Taxes?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third party payer
  • Payroll service providers

The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working with the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to us if you need to know more about the requirements. We can also help you analyze your business’s cash flow so you’ll be in a better position to meet your obligations to the IRS.

Keep Your S Corporation Safe from the IRS

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Like many business owners, you may have structured your business as an S corporation because of the tax benefits it offers. An S corporation provides the same limited liability as a traditional C corporation, but it generally avoids the double taxation associated with a C corporation. You and the other shareholders (if any) pay income taxes on corporate income directly.

Once you have an S election in place, it’s important to make sure you avoid taking any action that would put the election in jeopardy. Your corporation’s failure to meet certain tax law requirements on an ongoing basis could result in the IRS’s termination of its S corporation status.

Ownership

An S corporation generally may not have a corporate shareholder. (Exception: An S corporation may be wholly owned by another S corporation.) All shareholders generally must be individuals, estates, certain trusts, or tax-exempt 501(c)(3) charitable organizations. However, a partnership may hold S corporation stock as a nominee for an eligible shareholder. Nonresident aliens may not be shareholders. A foreigner, non-citizen, resident alien may be an S shareholder, but you need to be careful because there are special qualification requirements, including  requirements regarding physical presence in the United States.

Number of Shareholders

An S corporation may not have more than 100 shareholders. For purposes of this limit, the IRS treats a husband and wife as one shareholder, as it treats certain other related individuals.

S Corporation Stock

An S corporation may have only one class of stock. Generally, a corporation has only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds.

Many small business owners have troubles with this requirement, by not making distributions to owners according to the ownership percentages.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

A S Corporation Loss Equals a Personal Tax Deduction

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Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside — the corporate loss may give rise to a personal tax deduction.

S Corporation Basis

Standing between an S shareholder and the loss deduction is a tricky tax computation known as “adjusted basis.” Under the tax law, you have to limit your loss deduction to your adjusted basis in your corporate stock and in any debt the company owes you.

Adjusted basis, essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss. The order in which you increase or decrease the stock basis is very important. You can find out more information about how to calculate the S corporation basis on the IRS website.

S Corporation Loss

If you anticipate an S corporation loss for the year, as an S shareholder you should find out whether you will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end. In the case you have loss and deduction items in excess of stock and/or debt basis you have to suspend them and carry them over to next year. You also need to be mindful that a distribution in excess of stock basis represents a capital gain. When you give us a call today, our tax professionals can offer guidance so that the transaction will pass IRS muster.