Author Archives: nadineriley

All Pass-Through Entities: Tax Planning is Imperative This Year

All Pass-Through Entities: Tax Planning is Imperative This Year by Nadine RileyThe focus of this article is to highlight how the owners of pass-through entities are impacted under the new tax rules. Though the intent of the law is to simplify your tax reporting requirement, this has not yet been achieved for businesses with pass-through entity income. Before we get into the details, this year planning is of utmost importance for all pass-through entities.

The most notable change for these entities is the IRC § 199A’s new 20% deduction. The new Qualified Business Income Deduction (QBID) provides an additional 20% deduction off the Qualifying Business Income (QBI). The deduction has a lifespan of eight years (2018 – 2025), and is subject to limitations and adjustments. One such limitation is on a Specified Service Business (SSB), “where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” In simple terms, if most of the income in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, etc. is generated based on the skill set of the owners and employees, the business may be an SSB.

Before we continue, it may be worth your while to review the last business article  from April 2018. It contains a vast amount of information on how your 2018 tax reporting will be impacted by the new tax law.

As we proceed, when a new tax rule (statute) is enacted, in theory it may be understandable, but from a practical standpoint, it may be more difficult to fathom on paper. The IRS will be meeting at the end of July to provide further direction on certain areas of the law; in the meantime, there is still a lot we know that will allow us to start planning now.

Where is the pass-through business income coming from?

  • K1 operating income from partnerships (including multi-member LLCs) and S Corporation shareholders.
  • Net Income from sole proprietorships (Schedule Cs include single member LLCs, Schedule E and Schedule F filers who are individuals, estates, or trusts).

Schedule E activity must be a trade or business (including property rentals). It should be noted that some states treat certain rental income as non-business income, in which case some may not qualify for a QBID.

A word of caution to S-Corp owners.

As a reminder, S-Corp owners are required to take a salary (reasonable compensation) from the company. The principle behind this is that most other entries with pass-through income are subject to the 15.3% Self Employment tax (SE), which creates an unfair advantage. The IRS requires that the owners/officers of the S-Corp take a reasonable salary from the profit of the business before distributing it to the shareholders. The wages an S-Corp owner takes do not qualify for the QBID, only what remains. (The word among tax professionals is that reasonable compensation may be an area of increased audits from the IRS.)

An article written by Toni Nitti a few years ago (yet still relevant) depicts this well. Read it here.

Another concern is that a large number of S-Corp’s are not making much profit.

How will this new deduction affect my overall tax reporting?

Here is a list of some of the areas to which QBID does not apply:

  • QBID does not reduce the 15.3% Self Employment Income tax liability.
  • QBID does not reduce Net Investment Income Tax (NIIT) is investment income tax on capital gains, non-business interest, dividends, etc.
  • QBID does not increase your business Net Operating Loss (NOL).
  • QBID does not reduce your Adjusted Gross Income (AGI).

What are some of the limitations of the QBID?

  • The income threshold for SSB(s) is simpler:

Most pass-through entity income is coming from an SSB and an income threshold limitation applies. If you file a joint return, your spouse’s income could limit or eliminate the 20% business deduction.

Additionally, your other income (such as investment income) could also affect your ability to take advantage of the QBID. As noted in the last article, personal taxable income exceeding $315,000 married/ $157,500 single may limit your ability to take the deduction. If your taxable income is $415,000 married/$207,500 single, you could basically lose the deduction altogether.

  • The more complex restrictions and adjustments are to the non-SSB(s):

These are other caps that could affect those businesses that are non-SSB. These caps revolve around wages and depreciable business properties. Those will not be discussed in this article due to the complexity and its uniqueness from business to business.  

Long before the law was enacted, the questions were coming in; here are three (3) of the most frequently asked questions we have received from our clients and others.

  • What business is best for me? Do I give up my S-Corp status and go back to a C-Corp?

While this question is best answered on a per taxpayer basis, here’s what I want you to understand: C-Corporation income that is distributed to the owner is double taxed. (To read full answer, click here.)

  • I am an independent contractor; do I form an LLC or S-Corp?

My response would be yes since I am looking beyond a tax viewpoint, however, let’s first make a correction. S-Corp is not a legal entity; it’s simply a tax election that the company makes. Before making a decision to form a company, consider the cost to form or organize a legal entity, to maintain and don’t forget the NYC publishing requirement, that is an added cost.

Please keep in mind that proper books and record should be maintained for the company. You should consider using the service of an accountant to track the financial stability of the company.

If you are interested in forming a legal entity, we can help you to form one that is right
for you and assist you with your accounting needs, so please contact us. (To read full answer, click here.)

  • I get a W-2 from my employer, however my role is one like that of an independent contractor, I pay my own health insurance and take care of my own job expenses.

The response to this question is not clear-cut. Some industries require that you are classified as an employee. I would first ask that you evaluate your role with your employer and if you strongly believe you are an independent contractor, consider forming a legal entity. (To read full answer, click here.)

Here is our two cents about each tax status!

C-Corps are great if they are profitable and you are an employee of the corporation. The company can pay for your health insurance, retirement matching, profit-sharing, reimburse you for tuition, and a plethora of other benefits, if they can afford it. There is also a great death benefit. Consider the long-term impact, and if you plan to take the company public in the future, then C-Corp is the choice to make.

S-Corp election is a great way to capitalize on your expenses; however, keep in mind that your financial health is beyond tax reporting.  As mentioned in the previous article, if your intent is to rent or buy a home in the future, underwriters and landlords look unkindly on low income. It may be seen as a sign of poor cash flow, thus the question is raised about your “ability to pay.” Also poor cash flow is not attractive to other types of lenders and investors.

S-Corp also has another layer of reporting, that is payroll reporting. Last, but not least, not everyone can qualify for S-Corp status.

LLC & Partnerships: Single member LLCs are viewed as sole proprietorships and are reported as a part of your personal tax returns, unless you elect S-Corp status. All your expenses are exposed and in plain view to the IRS, so proper record keeping is imperative. It is also one of the most scrutinized areas by the IRS. Don’t let this deter you, it still remains one of the more easy to “manage” legal entities; and more flexible than S-Corp.  

What’s next? Planning!!

There are no two ways about it — all pass through-entities should consider a tax planning consultation. This will allow you to get a better sense of your 2018 tax liability and plan in advance, to reduce the possible negative effect of the new tax laws.  ​

And, if your total income exceeds $315,000 married/ $157,500 single, you may need a comprehensive tax planning analysis.

Don’t Wait! It is URGENT that every client with a pass through entity or total income in excess of $315,000 married/$157,500 single, contact us by August 10th, 2018 to set up a time to meet so we can  create a tax plan that will allow you to mitigate any possible adverse effects from the new tax law.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

Don’t Wait! Get the Tax Guidance You Need Before It Is Too Late!

Don’t Wait! Get the Tax Guidance You Need Before It Is Too Late! by Nadine Riley{5 minutes to read}  We are already in the heat of summer; yet the atmosphere surrounding the unknown impact of the new tax law still creates a chilly feeling. While you may just want to wait to see, that is, be more reactive in nature, we don’t suggest you do that as the new tax law will impact almost everyone, some more than others. This article is geared towards providing guidance to taxpayers with withholdings, whether from a W-2 job, retirement, or Social Security.

Recap: The 2017 Tax Cuts and Jobs Act (TCJA) that overhauled the Tax Reform Act of 1986 has significantly changed the way we view taxes. For the most part, the provisions will be effective for eight years, from 2018-2025. (Please refer to our previous article Welcome to 2018 Tax Season sent in January. The article details the areas that will be impacted on your 2018 tax return.)

What has changed since the last communication?

The tax rules continue to evolve, at least from a practical tax reporting viewpoint. In the last article, we reported deductibility of home equity mortgage interest. The IRS took a stand to clarify what interest can be deducted. In IR-2018-32, Feb. 21, 2018, the IRS said that “despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled.” However, as under the prior law, if the money is/was used to pay for personal debt, it is not deductible. (Read more from the IRS here. Also, here is the 2018 Tax Brackets Flyer from Edward Jones. See which bracket will apply to you in 2018.)

What was then, is not now!

In prior years, many Americans who paid their Federal income tax through withholding taxes taken out of their paycheck, found at the end of the year that they had overpaid and received a nice Federal tax refund. The law change this year is structured so that most people will see less tax withheld every pay period resulting in increased “take-home” pay, rather than a refund check at the end of the year.

As previously mentioned, if you have deducted any of the expenses below in the past, you may be faced with an unwelcome increase in your tax bill next spring, since some of these expenses will be limited or eliminated, thus increasing your tax liability:

  • Property tax on your primary or secondary home;
  • State and local taxes paid from your income (most states have income tax reporting);
  • Mortgage and home equity interest (new mortgages, which included refinances will be  affected if the loan exceeds $750,000). Existing (before 2018) mortgages under $1M are not affected;
  • Employee and job expenses – This can be a game changer for many. There may be more tax advantages for some individuals to work as independent contractors. However, there are other hoops to jump thru in order to authenticate your classification as an independent contractor. Employers may be faced with other tax issues from the Department of Labor.

People often counted on their tax refund check to help ease their financial situation in some way. With the new tax law, you may go from a history of receiving refund checks to a balance due to the government at tax time.

We are quite concerned about the unwelcome surprise you may receive at tax filing time next spring. The good news is that we still have time to change the year-end result if we act soon.

How can you mitigate any surprises next spring?

  • If you are an employee with withholding (whether from a W-2, retirement, or Social Security), we very strongly suggest that you set up a Withholding consultation with us.
  • If you have types of income other than the types mentioned above, we suggest you set up a tax planning consultation with us.

Don’t be reactive! It is URGENT that every client with withholding, whether from a W-2 job, retirement, or Social Security, contact us by July 31, 2018 to set up a time to meet so we can calculate your 2018 tax situation and withholding, and then make changes if needed.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

2017 Tax Year is Almost Behind Us. How Will the New Tax Laws Affect You and Your Business in 2018?

2017 Tax Year is Almost Behind Us. How Will the New Tax Laws Affect You and Your Business in 2018? by Nadine Riley{8:24 minutes to read}  The chatter seems to have decreased regarding the new tax laws, but the uncertainty still seems rather high. The Tax Cuts and Job Act (H.R.1), which is now enacted, affects each of us and our businesses. The intent of the law is explicit in its title, however, in practicality some areas are still too complex to see how they tabulate on paper. For the most part, the effective date for enactment of the law is January 1, 2018, but some parts of the law (such as depreciation) do affect items purchased in 2017. Continue reading

Welcome to 2018 Tax Season!

Welcome to 2018 Tax Season! by Nadine Riley

{7:12 minutes to read}  ​It has been said this is the biggest tax overhaul of the last seven decades; most of us may not have experienced the last one.

From a high level overview, notwithstanding the fact that certain individual itemized expenses will be increased, combined & capped, or eliminated, lower income individuals will have a reduced tax bill. The intent of this article is to quiet some of the noise surrounding the recent Tax Cuts and Jobs Act Bill and highlight some of the advantages and disadvantages. Continue reading

2017 Year-End Tax Guide for Businesses

2017 Year-End Tax Guide for Businesses by Nadine Riley*Due to the weekly changes and updates to the proposed tax law, some of this article’s content may have changed. Once the law is passed, we will update you.

{7:06 minutes to read} Now that each chamber of Congress has met, i.e. the House and the Senate, we now await the final verdict regarding how they will reconcile their differences and decide what will be the new tax law. Continue reading

Year-End Tax Planning for Employees and Families

Year-End Tax Planning for Employees and Families by Nadine Riley{8:48 minutes to read} There’s something different about entering the month of November, in my opinion. I believe it is due to how close November is to the end of the year. It’s that penultimate month. November allows us to pause and rethink where we have been and where we would like to be before the year ends:

  • Some of us will pause to focus on the things we should have done and dwell there (do nothing).
  • Others will look back and choose to act and make a change that could be beneficial.

Continue reading

Where Are We With Tax Reform? (Business/Entrepreneur)

“Planning is a process of choosing among those many options.

If we do not choose to plan, then we choose to have others plan for us.”

–  Richard I. Winwood   

Where Are We With Tax Reform? (Business/Entrepreneur) by Nadine Riley{4:42 minutes to read} Hope you are enjoying the warm sunny days of the season.

I can’t help but wonder, is it just me, or is it becoming a challenge to stay on track with what’s going in Washington with regards to federal tax reform? The uncertainties are evident. The Trump administration released a report on July 28, 2017 regarding the status of all the proposed changes. As it relates to tax reform, the most current report that we are aware of was released on September 27th, 2017. If what’s promised is implemented, individuals/families and businesses will be affected. Continue reading

Where Are We With Tax Reform? (Personal)

“Planning is a process of choosing among those many options.

If we do not choose to plan, then we choose to have others plan for us.”

–  Richard I. Winwood   

Where Are We With Tax Reform? (Personal) by Nadine Riley{5:12 minutes to read} Hope you are enjoying the warm sunny days of the season.

I can’t help but wonder, is it just me, or is it becoming a challenge to stay on track with what’s going in Washington with regards to federal tax reform? The uncertainties are evident. The Trump administration released a report on July 28, 2017 regarding the status of all the proposed changes. As it relates to tax reform, the most current report that we are aware of was released on April 26, 2017. If what’s promised is implemented, individuals/families and businesses will be affected. Continue reading

Insurance Policies Part 1: Personal

Insurance Policies Part 1: Personal by Nadine Riley{4:54 minutes to read} Oftentimes, the demands of everyday living make us forget about protecting our most valuable asset, ourselves. We protect our identity, our homes, vehicles, phones, appliances, etc. without thinking twice about it. Our day is filled with the to-dos of today, the plans for tomorrow and the regrets of yesterday, but when was the last time we slowed down to think about life’s what-ifs?

  • I am the main breadwinner of my home. What if my employer decides to downsize (i.e. your service is no longer needed)?
  • What if I lose my largest client?
  • What if that pain is not related to gas, heartburn, sciatica, migraine, etc., but related to a rare disease that scientists are still researching?

These are just a few of the challenges we may face on this side of life.

Insurance is an essential and integral part of our finances. It provides protection if something happens to us. In this article, we will explore some common (but often overlooked) types of insurance in an effort to help you understand why they are necessary and which may apply to you and/or your business. We will also provide some real life examples in the hope that you may be able to relate.

Personal Insurance Policies

Disability Insurance – If someone is unable to work (in a full or partial capacity) due to a sickness or injury, a disability insurance policy will provide dollars to help them continue their lifestyle and pay their bills. Most employees are covered under a group policy; however, the policy may not be enough. A decent disability insurance policy should cover at least 60% of your income. The payout is generally tax-free if you have paid the premium with after-tax dollars.

Real Life Example: An OB-GYN hurt his back while at the hospital and could no longer practice. Through his disability insurance, he received an equivalent, tax-free salary with a yearly cost of living adjustment and has been able to move on to create a charity for young mothers in Haiti.

Life Insurance Life insurance, though not the most sought after type of insurance, is still one of the key insurances. Life Insurance provides a tax free sum of money to your family to help them replace you as the essential income producing part of the family. In the past, life insurance was seen solely as a protection for your loved ones after you die, but in recent years, it has been used as a savings vehicle. This makes it more attractive for single individuals.

Real Life Example: A dentist in midtown Manhattan passed away in 2016. His family and kids received over $5 million in cash because he had the proper coverage. Even with all of the emotional anguish, they have been financially self-sufficient because of his foresight and planning.

Long Term Care – Long Term Care is an insurance that helps provide dollars in case you or a loved one needs extended care, either in a facility or through an in-home health care worker. Medicare only provides coverage for a short period of time, so any additional care costs fall on the family. The ideal time to think about Long Term Care is when you are young or in your mid 50s. If you are financially responsible for a member of the older generation, you can obtain a policy for your parents.

Real Life Example: I have a client whose father has been in a medical facility for 6 years at a rate of $14,000 per month. Without LTC coverage, his family would be shouldering this burden.

In our next article, we will cover the types of insurance one should have when they are a business owner. As an employee, we had a steady stream of income and protection through our employer’s group policies. Now both income and insurance coverage are up to us.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

Taxes: So What’s Next?

Taxes: So What's Next? by Nadine Riley{3:36 minutes to read} What will my tax bill look like in 2017 under the new president? In the past weeks, I have been asked this question many times.

If you are also pondering this question, let’s recap in more detail some of the tax changes Mr. Trump proposed. In addition to Trump’s plan, we will also examine the blueprint delivered by the Ways and Means Committee Republicans (in June 2016) regarding the proposed rebuilding of America. (You can read more about Ways and Means here.) Continue reading