Tax Regulations

One of the main requirements of the Affordable Care Act’s employer mandate is that health coverage must be affordable, based on annual standards set by the IRS.

The ACA requires that employers with 50 or more full-time-equivalent employees provide minimum essential coverage that is affordable — or face a penalty for not complying. The affordability requirement is satisfied if an employee’s premium for self-only coverage does not exceed a specific percentage of their household income or a certain safe harbor amount.

Percentage increase for 2019

Each year, the affordability percentage for health coverage is adjusted for inflation. For 2018, the rate was 9.56 percent of the employee’s household income, down from 9.69 percent in 2017.

On May 21, 2018, the IRS released Revenue Procedure 2018-34, which states that for plan years starting in 2019, the affordability percentage will increase to 9.86 percent — the highest amount since the ACA’s passage. This means that employees’ premiums for the lowest-cost self-only coverage cannot be more than 9.86 percent of their household income.

Three safe harbor options

As noted, the affordability percentage threshold applies to employees’ household income. But since it’s difficult for employers to know their employees’ household income, the ACA provides three safe harbor alternatives, which can be used instead of household income. You do not have to meet all three requirements; just one will do.

1. The employee’s W-2 wages, as shown in Box 1 of the form. For plan years starting in 2019, coverage is affordable if the employee’s premium does not exceed 9.86 percent of the amount in Box 1 of the W-2. Although this method is relatively simple to apply, keep in mind that it uses current-year wages. Therefore, you won’t know whether the affordability requirement for an employee has been met until the end of the year.

2. The employee’s rate of pay. Coverage is affordable if the employee’s premium does not exceed 9.86 percent of their monthly salary or wages. To determine the monthly rate of pay for an hourly worker, multiply the hourly pay rate by 130 hours.

For instance, an employee makes $15 per hour at the start of 2019. Multiply $15 by 130, which equals $1,950. Then multiply $1,950 by 9.86 percent, which comes to $192.27. Coverage is affordable as long as the employee’s premium does not exceed $192.27. For salaried employees, affordability is based on monthly salary.

The rate-of-pay method cannot be used for employees who are paid solely by commission, nor can it be used for tip wages.

3. The federal poverty level. The employee’s premium for the lowest-cost self-only coverage cannot be more than 9.86 percent of the most recently published FPL for a single person.

You can find more information on the IRS website on their ACA Q&A section.

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If you have to report a rental activity on your tax return, you have probably wandered if you can use the new IRS Sec.199A QBI deduction. The answer is: it depends.

Three Ways To Qualify

There are 3 ways in which a rental activity may qualify for the qualified business income deduction:

• using the new safe harbor rule that the IRS just unveiled in the new Notice 2019-07.
• if the rental activity rises to the level of a trade or business as defined by Reg. 1.199A-1, Operational Rules
• if the rental activity rents the property to a commonly controlled business.

Notice 2019-07

In January 2019 the IRS published Notice 2019-07 that provides for a safe harbor rule for using the Sec.199A QBI deduction in a case of a rental activity:

• the taxpayer keeps separate books and records for each rental activity.
• the taxpayer maintains contemporaneous records of time spent.
• the owner, employees or contractors perform 250 or more hours of “rental services”.

Trade or Business

Trade or business means a section 162 trade or business other than
the trade or business of performing services as an employee.

Section 162 doesn’t really define a trade or business, but it details the rules for taking the ordinary and necessary expenses encountered in carrying out a trade or business.

Thus if a rental activity generates legitimate Section 162 deductions, the activity may use the Sec.199A QBI deduction.

Self-Rental Activity

If a rental activity doesn’t rise to the level of a section 162 trade or business but the property is rented or licensed to a commonly controlled business as defined under §1.199A-4(b)(1)(i), than the rental activity is treated as a trade or business for purposes of section 199A.

The new tax law contains many limitations and complex rules and it’s important to have a professional help you with your tax situation. Give us a call to see how we can help you.

 

The new Section 199A provides self-employed taxpayers with a new deduction. For many, this deduction will be simple to calculate – 20% of Qualified Business Income (QBI). However, Congress included a safeguard to prevent high-income taxpayers from abusing the new deduction. This safeguard can be referred to as the W-2 limitation.

W-2 Limitation

A taxpayer may only deduct 20% of QBI up to a certain limit. This limit is the greater of

1. 50% of the W-2 wages paid by the qualified trade or business, or
2. The sum of 25% of the W-2 wages paid by the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

For example, if a taxpayer has $200,000 of QBI, his pass-through deduction would otherwise be $40,000 (20% of QBI). Let’s assume that the taxpayer also has $20,000 of W-2 wages from the business. This taxpayer’s may only claim a $10,000 (50% of W-2 wages is the lesser amount) pass-through deduction.

By now you should be wondering how anyone could take the full 20% deduction. Naturally, attached to this provision is an exception that makes the W-2 limitation only applicable to high-income taxpayer’s. See below.

Taxable Income Exception

The new law contains an exception to the W-2 limitation rule discussed above. This exception states that if a taxpayer’s taxable income is below a certain threshold the taxpayer can ignore the W-2 limitation rule.

For 2018, the threshold amount is $157,500 (or $315,000 if married filing joint). This threshold figure will be indexed for inflation in future years. Also, please note that taxable income should be factored without including any potential pass-through deduction.

Phase-ins and Phase-Outs

The taxable income exception threshold discussed above is not absolute. The taxpayer is afforded an additional $50,000 (or $100,000 if married filing joint) to phase-out the deduction. Therefore, taxpayers may still receive a partial deduction if their taxable income is above the threshold amount, but within the phase-out range.

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Before starting your taxes, make sure you have all the necessary information to prepare your return. Here’s a sampling.

Work income.

Your income might include your salary, bonuses, commissions, and payments for freelance or part-time work. Having a list of all your income sources allows you to check off each Form W-2 or 1099 as you receive it. Even if you didn’t receive a form, you still need to report the income you received.

Rental income.

Account for all the rental payments you received from your tenants and for all the expenses you had to pay, including mortgage interest and real estate taxes. Be aware that the house payment portion that goes toward the loan principal is not deductible. Do not forget to take into account the real property depreciation.

Investment income.

Collect documents showing interest, dividends, and investment trades, such as 1099-INT, 1099-DIV, K1 schedules or composite 1099 forms from your broker. Be aware that often times brokers issue amended 1099 forms and it is advisable, before filing your return, to check with your broker that the 1099 you received is the final one.

Business interests.

Maybe you are a partner or a co-owner in a business, set up as a flow through entity and, regardless if your participation is active or passive, you must report your share of the business activity.

Expenses.

You should have all your receipts for property taxes, mortgage and home equity loan interest, childcare expenses, medical bills, tuition, charitable contributions and other potentially deductible or credit-eligible expenses. You’ll also need records of any estimated tax payments.C

Don’t deal with tax issues on your own. Contact us right now to find out how we can provide you with the answers you need. You can also go to the IRS website for more information about tax rules and regulations.

What is the Kiddie Tax?

In 1986 the lawmakers added the Kiddie Tax to the tax code in order to prevent high wealth parents from shifting income-producing investment assets to their children who were in lower tax brackets.

How Did The Kiddie Tax Work in Prior Years?

In prior years, the law taxed all unearned income from a child in excess of a predetermined amount ($2,100 for 2017). You had to add the unearned income of your child to your taxable income to determine the tax rate. Then you used this tax rate on your child’s return to calculate the tax owed. This applied to all children under age 19 (or 24 if a full-time student and the parents provide more than half support).

What is Unearned Income?

Generally, unearned income is income from all sources not considered earned income. Earned income comes from employment or self-employed business activities. The most common form of unearned income is from dividends or interest from investments. For example, your child may have unearned income from dividends on stocks that you purchased in the child’s name.

How Does The New Kiddie Tax Work?

Beginning with tax year 2018, The Tax Cuts and Jobs Act modified the Kiddie Tax in two main ways. First, you don’t add your child’s unearned income to your income to determine the tax rate. Second, you use the rates that apply to trusts and estates.

You can find more information, including the tax rate tables in the instructions for form 8615, Tax for Certain Children Who
Have Unearned Income.

These changes will benefit most children who have modest unearned income. For those in multi-sibling households the benefits are even greater. For example, in prior years all of the siblings’ unearned income would be aggregated to the parents return to determine the tax rate. All of the siblings would be subject to this tax rate irrespective of their actual amount of unearned income. Now, each child will be subject to the tax rate applicable only to his or her unearned income.

While most will benefit from these changes, for some with high amounts of unearned income their tax bill may end up being higher. Given this, it is important to discuss your tax situation and strategy with a qualified tax professional and we are here to help. Give us a call!

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016, the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or non-qualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018 and 2019).

These are just some of the potential tax issues that may arise. Consult your tax adviser regarding your specific situation.

Connect with us, right now, for additional tax advice and planning.