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The Basics of the New Section 199A and How It Affects the Self-Employed

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Curcuru & Associates CPA PLCAffectionately 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 is the Pass-Through Deduction Calculated?

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,
  • any banking, insurance, financing, leasing, investing, or similar business,
  • any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A,
  • any business of operating a hotel, motel, restaurant, or similar business, and
  • any 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, for taxpayers who have income greater than $207,500 (or $415,000 for MFJ) the deduction must be calculated in a different manner. It is advised that you speak with a tax professional to determine your specific eligibility for the new Pass-Through Deduction.

Curcuru & Associates CPA PLC offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.

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 taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld 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, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

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 a tax advisor if you need to know more about the requirements.

If you have further questions, we invite you to call our office at 248-538-5331 and ask to speak with Vito J. Curcuru or Sal Curcuru. There is no cost or obligation for the introductory consultation.

2018 Tax Changes: Frequently Asked Questions

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The Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year. Below are answers to some of them.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate Single Filers Joint Filers Head of Household Married Filing Separately
0% Below $38,600 Below $77,200 Below $51,700 Below $38,600
15% $38,600-$425,799 $77,200-$478,999 $51,700-$452,399 $38,600-$239,499
20% $425,800 and above $479,000 and above $452,400 and above $239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

If you have further questions, we invite you to call our office at 248-538-5331 and ask to speak with Vito J. Curcuru or Sal Curcuru. There is no cost or obligation for the introductory consultation.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

Simple Answers to Questions About Using Your Vehicle for Business

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Michigan CPAUsing a Vehicle for Business: Q&A

IRS rules and exceptions abound, but there are some questions we can answer simply.

Next to your home, your car is probably the most expensive investment you make. And the costs of paying for and maintaining it can be considerable. Can you recoup some of your investment by claiming vehicle expenses on your tax return?

Sometimes. The IRS has many restrictions on the business use of a vehicle, and those restrictions have many exceptions. Better to know these upfront than to have to correct a tax return after you’ve filed it. Here are some questions and answers that may help you decide whether you’re eligible.

How does the IRS identify a “vehicle”?

A car, van, pickup, or panel truck.

What are transportation expenses?

These are “ordinary and necessary expenses” incurred when you, for example:

  • Visit customers,
  • Attend a business meeting held at a location other than your regular workplace, or
  • Go from home to a temporary workplace that is not your company’s principal location.

The daily commute to and from your regular office is not deductible. The IRS considers this personal commuting expenses.

What if I’m on an overnight business trip away from home?

The IRS considers these travel expenses, and they’re reported differently. Your car expense deduction, though, is calculated the same way in both situations.

What if I use my car for both business and personal purposes?

You’ll calculate the expenses incurred for each by determining how many miles you drive for business and how many you drive for personal reasons.

I work in a home office. Can I deduct any driving expenses?

Yes, you can deduct the cost of driving to “another work location in the same trade or business.”

How do I calculate my deductible expenses?

There are two options. Use the standard mileage rate. You are required to use this method for the first year you use the vehicle for business purposes. After that initial year, you can choose between the standard mileage rate and actual car expenses. These include depreciation, oil and gas, insurance, and repairs.

Depreciation? Isn’t that difficult to calculate?

Yes, especially for cars. If you plan to take this kind of deduction, please let us handle your tax preparation for you. Depreciation is very, very complex, and sometimes requires more than one calculation method.

Can I take a Section 179 deduction for my vehicle?

Possibly, if you use the car for business more than 50 percent of the time — and only for the first year.

What kind of vehicle expense records do I need to maintain?

You know the drill here. If the IRS ever wants to examine your return, it will expect evidence like receipts, canceled checks, and credit card statements. You’ll need to document the date and location where you incurred the expense. You’ll need accurate mileage records (miles driven, the purpose of the trip, etc.).

These requirements scream for some kind of organized computer log or written diary, along with a safe place for any paper receipts, bills, etc. There are numerous mobile apps that can help you with this task. We can steer you in the right direction.

If you’re planning to deduct car expenses, it’s important that you keep careful paper or electronic records.

Where will I be reporting transportation expenses?

If you are self-employed, you will report business-related vehicle expenses on Schedule C or Schedule C-EZ (Form 1040). Farmers should use Schedule F (Form 1040). You’ll also want to complete a Form 4562, which is used to report depreciation and the Section 179 deduction.

Maintaining accurate records for car and truck expenses is time-consuming and detail intensive. And that’s once you understand all of the IRS’s rules and exceptions surrounding this deduction. To avoid having to fix completed tax documents that the IRS has questioned, talk to us before you put a vehicle into business use. We’ll be happy to evaluate your transportation situation and guide you through the process.

Curcuru & Associates CPA PLC, offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.

Last Minute Tax Strategies

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Although there are only a few weeks left in the year, it’s not too late to implement some planning moves to reduce this year’s taxes.

Save Bunches by Bunching

Beginning in 2018, many taxpayers who used to itemize in prior years will no longer do so because of the substantial increase in the standard deduction.

Example: In 2017, Fred and Wilma have charitable contributions of $5,000, mortgage interest of $12,000, property and property taxes of $6,000 for total itemized deductions of $23,000.  Since their total itemized deductions of $23,000 exceed their $12,700 standard deduction, they will itemize.

In 2018, the standard deduction for a married couple is increased to $24,000.  If they have the same itemized deductions in 2018, they will claim the standard deduction of $24,000 since this exceeds their itemized deductions of $23,000. 

The bunching strategy involves incurring itemized deductions every other year rather than annually.  The benefit of this strategy is more easily explained with an example:

In 2018, Fred and Wilma double their normal charitable contribution of $5,000 and make a $10,000 charitable contribution.  They will not make a charitable contribution in 2019 (they are bunching two years of charitable donations in 2018).  Their itemized deductions are:  $10,000 of charity, $12,000 of mortgage interest, and $6,000 of property taxes for total itemized deductions of $28,000.  Since this exceeds the $24,000 standard deduction, they will itemize.  In 2019, they will take the $24,000 standard deduction.  The total deductions over the two years is $52,000 ($28,000 itemized deduction in 2018 plus $24,000 standard deduction in 2019).  If they continued to make $5,000 charitable contributions per year, then their itemized deductions would always be less than their standard deduction of $24,000 per year. 

The benefit of this strategy is that they deduct $52,000 over two years with the bunching strategy rather than claiming the standard deduction of $24,000 per year (i.e., deducting $48,000 over two years).  The additional $4,000 deducted over two years is roughly a $1,000 reduction in tax.  They will once again bunch their charitable donations in 2020 and skip the donation in 2021.

Combine Bunching with Qualified Charitable Distributions

Taxpayers who have reached age 70½ who own IRAs and are thinking of making a charitable gift should consider making the donation through a qualified charitable IRA distribution—this is a DIRECT transfer from the IRA trustee to the charity.  Such a transfer (not to exceed $100,000 per year) will neither be included in taxable income nor allowed as a deduction.

The benefits of this strategy are:

  • AGI is not increased for purposes of the phaseout of any deduction, exclusion, or tax credit
  • The distribution qualifies as a required minimum distribution
  • It is not subject to the AGI phaseout of charitable contributions
  • the taxpayer does not need to itemize to claim the charitable deduction (which is now more difficult due to the increased standard deduction)

To qualify, the distribution must be a direct transfer from the IRA trustee to the charity.  If a taxpayer first takes an IRA distribution and then contributes it to a charity, the donation will not qualify as a qualified charitable distribution.  It is also important that the taxpayer NOT receive anything in exchange for the contribution from the charity as this could also disqualify qualified charitable distribution treatment.

Make HSA Contributions

If you have a high deductible health insurance policy, you may qualify for deductible contributions to a Health Savings Account.  A deductible above-the-line deduction of $3,450 for individual coverage and $6,900 for family coverage can be made as late as the original due date (generally April 15) of the tax year.  For example, you can deduct an HSA contribution on April 15, 2019 on your 2018 tax return.  If you are age 55 or above, you can contribute an additional $1,000 per year.

Nail Down Investment Losses

If you have paper losses on stocks it may make sense to sell the investments before year end to generate a deductible capital loss.  The same investment can then be re-purchased at least 31 days later.  This way, the taxpayer can realize her investment loss for tax purposes but still retain the same, or approximately the same, investment position.  It is critical to wait at least 31 days before re-purchasing the stock to avoid the wash sale rules.  These rules disallow losses on investments if the same or substantially similar investment is purchased within 30 days of the loss sale.

Capital losses reduce capital gains and can offset up to $3,000 of ordinary income per year.  Excess capital losses are carried forward to future tax years.

Source/Disclaimer:

This communication is not intended to be tax advice and should not be treated as such. You should contact your tax professional to discuss your specific situation.

Curcuru & Associates, CPA PLC, offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.

Don’t Forget – You are Responsible for Payroll Taxes

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Michigan CPA FirmAny business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld 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, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

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 a tax advisor if you need to know more about the requirements.

Curcuru & Associates, CPA PLC, offers a variety of tax planning services to both businesses and individuals. Proactive tax planning now can save you money and make tax time a breeze. Call us at 248-538-5331 and request a free initial consultation to learn more.