Tax Regulations

Obtaining financing can sometimes be difficult. If your child or another relative is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.

Have a Written Agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues. Having written documentation is also important in case the borrower fails to repay all or part of the loan.

Charge Adequate Interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest or no interest at all, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you, as if you received it. In addition it becomes a gift to the borrower, as if you transferred it back, thus possibly generating gift tax reporting.

You can avoid the below-market loan issues and the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, this month, July 2019, the annual AFR (using a monthly compounding assumption) is:

• 2.11% for a short-term loan (three or fewer years)
• 2.06% for a mid-term loan (more than three but no more than nine years)
• 2.47% for a long-term loan (more than nine years)

Term Loans

For a term loan (a loan other than a demand loan discussed below), the rate can remain fixed for the life of the loan. In order to avoid he below-market loan issues, you should charge at least the AFR in effect on the day the loan was made, based on the term of the loan.

Demand Loans

For a demand loan (one that gives you the right to demand full repayment at any time or a loan with an indefinite maturity), in order to
avoid imputed interest issues, you have to charge a floating AFR that is at least equal to the short-term AFR in effect for each semi-annual period that the loan is outstanding.

If you want a fixed rate of interest on a demand loan and you don’t want the loan to become a below-market loan, the terms of the loan should provide that the rate at any given time is the higher of the stated fixed rate or the minimum rate required by the regulations.

Exceptions

When you lend your child or a family member no more than $100,000, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.

There are a lot more considerations and complexities regarding the below-market loan rules and we are here to help. Give us a call to see how we can help you and your particular situation.

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

• No deduction is available until the business becomes active.
• You may deduct up to $5,000 of accumulated start-up expenses in the tax year in which the active business begins. You have to reduce this $5,000 limit (but not below zero) by the excess of total start-up costs over $50,000.
• Any remaining start-up expenses, you may deduct them ratably over the 180-month period beginning with the month in which the active business begins.

Example:

Gina spent $20,000 on start-up costs before her new business began on July 1, 2019. In 2019, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2019 ($15,000/180 × 6 = $500), a total of $5,500. She may deduct the remaining $14,500 ratably over the remaining 174 months.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

You can find out more information about the destructibility of start up and organizational expenses in IRS Publication 535, Business Expenses.

If you opened or thinking of opening a new business and have questions about what expenses you can deduct, how you should set up your entity for tax purposes, how to set up your QuickBooks, how to use QuickBooks, what other reporting might be involved, such as payroll reporting, sales tax reporting, we are here to help. Give us a call!

Everyone knows about income taxes and sales taxes, but we tend to forget about excise taxes, because they’re not obvious.

Excise taxes are paid when purchases are made on specific goods or activities, such as wagering or highway usage by trucks. The producers or merchants pay the tax and typically include the additional tax in the price to the end consumer. Governments levy excise taxes on goods and services that have a high social cost, such as cigarettes, alcohol and gambling. Excise taxes are also referred to as selective sales or differential commodity taxes.

Here are six key facts regarding common, little-known excise taxes:

1. The tax reform bill exempted certain payments made by an aircraft owner or sometimes a lessee, related to the management of private aircraft, from excise taxes imposed on taxable transportation by air.
2. To support the use of alternative fuels, fuel tax credits are allowed on certain types of fuel including the following: biodiesel, including renewable diesel and mixture; alternative fuel credit and mixture; and second-generation biofuel producer.
3. Indoor tanning service providers may need to file a federal excise tax return. These services are subject to a 10 percent excise tax under the Affordable Care Act. This is an example of how excise taxes are often levied on goods and services that are considered unnecessary.
4. Taxpayers who engage in certain specified activities related to excise tax must be registered by the IRS before engaging in the activity. This is known as the 637 registration program. The taxpayer can go online to confirm whether they or a specific company has a valid IRS registration.
5. You may be surprised to know that there is an archery federal excise tax, including the importation and manufacture of archery and fishing products. These, of course, affect relatively few people, but are good examples of how a product or service may be subject to a particular excise tax that is not necessarily obvious.
6. The Environmental Protection Agency’s list of devices to reduce high tractor idling may be exempt from the 12 percent retail excise tax. This shows that a major component of the excise program is motor fuel, and different rates may apply to different types of fuel — gasoline, diesel and gasohol.

The idea is to limit the use of certain products, such as alcohol and tobacco. States also levy excise taxes. Some people say that excise taxes are stopgap measures to solve short-term problems. In fact, some note that discriminatory excises on the consumption of specified products is a step back in development of fiscal systems, postponing a more proper reform for the country or state.

You can find out more about excise taxes on the IRS website.

If you have tax questions, give us a call! We are here to help.

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.

We are here to help you with your tax questions. Call us!

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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