Author Archives: nadineriley

At the Mid-Year Mark

calculator with taxes text lying on wooden desk with place for text

{6 minutes to read} We had another wet holiday weekend on July 4th this year.  Wet days like these bring back some good vibes from my homeland — the Caribbean. On the zinc top roofing — the raindrops dance to a different and sweeter rhythm.

In spite of the wet days across the Tri-states, I hope you made the best of the holiday — Independence Day. Webster’s dictionary defines this holiday as “a holiday celebrating the anniversary of a country’s independence from another country that ruled it in the past-” As for the United States of America, this holiday was born on July 4, 1776, as a day that represents the Declaration of Independence and our independent nation.

While we are on the matter of independence — for a limited time, the IRS gives us more independence — to deduct food and drinks purchased from a restaurant. Let’s be strategic in taking advantage of this expansion to reduce our tax liability. After all, we create and develop most of our business relationships over meals.

We are officially at the mid-year mark – 

This gives us the opportunity to assess the past six months of actions and plan more intently for the next six months. 

The intent of this article is to share a few of the changes that will impact the 2021 tax year. One of these changes is related to families (with dependent – children or adults) and another is the larger deduction for certain meal expenses. However, before we begin, let’s note two of the areas for which I get the most inquiries from individuals. These happened in the 2020 tax-year but will impact 2021 tax-year filers as well.

•2020 Retirement distribution – if you withdrew money from your retirement funds in 2020 and selected to allocate the withdrawal evenly over 3 years – you are required to add/include the portion that belongs to 2021 as part of your income.

•Unused flexible spending for health and dependent care – there can be carry-over from 2020 to 2021 – so please manage your 2021 contributions.

So, what’s new for 2021?

Business meals are now 100% deductible (limited time). Under the lock-down of the pandemic, most among us were not able to break-bread with our work colleagues and business acquaintances, resulting in huge losses for the restaurant industry. In an effort to assist that industry – the law-makers temporarily increased the deductible amount for business meals. This is a win-win for restaurant owners and their patrons.

Under the Consolidated Appropriations Act, 2021, a temporary exception was enacted to the previous 50% limitation. Per the IRS, “beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

Below are new credits only available in 2021

1. Child Tax Credit – Earlier this year Congress passed the American Rescue Plan Act (ARPA) which increases the credit for dependent children and allows partial payment of the credit this year — before you file your 2021 tax returns.

Here is how the credit works: 

a. Income and Age Limitations: 

On the last day of the year, ARPA allows individual tax returns to qualify to take a child credit of $3,000 for children under the age of 18.  To qualify, the child must have a social security number and be claimed as a dependent on the 2021 return. The full amount is refundable, if income is $150,000 or less for joint filers (i.e., MFJ), and for HOH and +Single, the amount is $112,500 and $75,000 respectively. If or when the income exceeds $400,000 for MFJ, If income exceeds the above, the amount of the credit decreases until it is fully phased-out. 

Read here to see if you qualify for this credit. 

2. Child & Dependent Care Credit – Under ARPA, the child & dependent care increases/expands for 2021 only. These are expenses we pay to take care of a child or a qualified dependent while we work. Individual taxpayers qualify for a refundable credit at a rate of up to 50% for the first $8,000 of expenses for one (1) dependent and up to $16,000 in expenses for more than one dependent. There is no advance for this credit. Prior to 2021, the maximum credit was 20% of $3,000 for one dependent/child and up to $6,000 for two or more. 

3. So, how has the credit expanded or changed in 2021? 

a. The maximum credit amount refundable is $4,000 for a child or dependent.

b. Income limitations – The credit amount starts to reduce when income is $125,000, and phases out fully at $438,000.

c. Residency limitations – you must live in the United States for at least ½ of the year.

During a time of crisis (e.g. the current pandemic), more developed countries like the USA extend financial help to the people. In 2020, such help showed up in the form of stimulus checks, unemployment income, etc. At the same time, scammers, referred to by the IRS as “the Dirty Dozen,” began to crop up. In a notice (alert) dated June 28, 2021, the IRS posted a notice with the subject lineAmericans urged to watch out for tax scams during the pandemic. For your protection, please read the details from the IRS website.

In closing, in spite of the necessary boundaries that are still required due to the current pandemic – my hope is that we freely celebrate our independence. Scripture reminds us that we have free-will. Let us resolve to use our free-will to express light and love – as a way of being. 

One last thought before you go, if you have not filed your 2019 or 2020 tax returns you may not be able to receive some of these credits. As always, you can freely contact us if you need assistance to file your returns. 

With gratitude, 

Nadine.

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

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors

Let’s Turn Over the Last Stone Before 2020 Ends!

Hand lettering 'Happy New Year' for greeting card or poster

Three – Two – One 

Happy New Year!

{5 minutes to read}  In just a few hours America will be joining many other nations as we welcome 2021 and echo the words above. Twenty-twenty — what a year! A year that will forever remain in plain view many years after it has passed. May you and I choose to glean from the lessons learned — and use them as a contribution to a better good for all.

Moving along — The long-awaited Coronavirus Relief Bill was passed on December 21, 2020. There is a plethora of provisions for individuals and businesses. Some individuals could see another $600 check, while businesses could get more money to pay their employees (including Schedule C earners) from the second funding of a PPP loan. The Tax Foundation provided a list of various provisions that are part of the $900 Billion Coronavirus Relief Bill.

IMPLICATIONS OF UNDER-PAYMENT OF TAXES (Mitigate the effect by acting before January 15, 2021)

In recent years, both the IRS and the state taxing agencies have been more rigid in their enforcement of penalties related to underpayment of taxes. According to the IRS, the United States income tax system is a pay-as-you-go tax system — taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, and/or prizes and awards, you may have to make estimated tax payments.

Generally, for most tax agencies, taxpayers may avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller, is paid through withholding and estimated tax.

While most of us are already familiar with this requirement, the pandemic and remote working could create a greater concern with state tax liabilities. Keep in mind that most states collect tax on money that is earned within their borders. Though there is some semblance of unity among some states, each state wants a piece of the tax pie. Multi-states reporting could be triggered by remote working that was and continues to be, necessary due to the pandemic. 

For an employee — the state or tax jurisdiction is handled by your employer and is reflected on your pay-stub and W-2. Please check directly with your employer regarding your taxing jurisdiction. If there are permanent changes in address, it is the employee’s responsibility to inform their employer. 

Word of caution to individuals who have “temporarily” moved to a different state for working remotely due to the pandemic: These individuals may still have tax obligations to their state of primary residence (home state); some states are taking a closer look at individuals who temporarily moved from their primary home.

However, Johnny is an NYS resident, and during the pandemic (as of April 1st) he moved to Florida and has not returned to NYS, so it would be fair to say that Johnny is a resident of FL from April – Dec 2020 where there is no state tax. NYS, however, would see this differently and will consider Johnny a resident for all 12 months. As such, Johnny would have a tax obligation to NYS for the full year.

Other areas where underpayment of taxes may show up – A vast majority of us received income from multiple sources other than our regular earned income source in 2020; here are two (2) income sources that seem to be more common in 2020:

  • Unemployment income — Most states withhold 10% of the income for federal taxes. This is often not enough since an individual may not be in a 10% tax bracket when all income is combined. 
  • Withdrawal of retirement savings — including those related to CARES Act. The early withdrawal penalty may be waived, but the tax is still due.

So considering we are exiting 2020 — is there still time to mitigate the penalty on the 2020 tax liability?

Yes. The taxing authorities allow most taxpayers to pay their final 2020 estimated tax by January 15, 2021 (must be received by this date).

Please reach out if you would like to schedule an estimated tax consultation next week.

In closing, as I listen to babblings with words like “I can’t wait to say goodbye to 2020,” I trust that we will remember the words of Walt Disney, “…the past can hurt. But the way I see it, you can either run from it or learn from it.

Which one will serve you (and me) better, running from it or learning from it? Let’s choose wisely.

With gratitude, 

Nadine.

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

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.

Is a Roth Conversion the Right Move for You?

Cropped view of senior woman writing in notebook with roth ira and traditional ira words

Let’s Welcome the Season of Hope!

Many believe that Thanksgiving Day opens the doors to welcome the “Season of Hope.” There is often a sense of vibrancy in the atmosphere between this day and the end of the year.

Maybe this is partially due to the Christmas lights and the flames from the menorah at Hanukkah. Regardless of your faith or lack thereof, I think you may agree with me that there is some joy from the brightness at this time of year.

Moving along — There’s much we can do before the year ends; I hope to shed some light on what you may already know. 

As a result of the 2020 pandemic — a vast number of taxpayers in 2020 are faced with lower taxable income and low tax liability.

This is one of two (2) pandemic-specific articles; in this article, I will discuss tax planning surrounding Roth retirement conversion. In the next article, I will discuss the implications of under-paying taxes.

RETIREMENT SAVINGS: ROTH CONVERSION

A Roth IRA (“Roth”) is a type of retirement savings that allows individuals to withdraw their savings tax-free; it is widely used and often recommended by financial advisors. Roth allows our retirement savings to grow tax-free since contributions are made with after-tax dollars, unlike the traditional IRA retirement savings option that defers the taxes — ie, the tax is due in the future. In summary, with Roth, we pay the taxes now and with Traditional, we pay the taxes later. Before I continue, each option has its benefits from a tax-planning viewpoint; and can be uniquely beneficial to the saver.

Roth conversion in its simplest form consists of moving money from the tax-deferred savings bucket to the taxable savings bucket (in so doing we tell the government to tax us now using the current tax rate and allow our savings to grow tax-free).

Roth conversion can be a great tax-planning strategy in a period of low income and low taxes. For most taxpayers, 2020 is a lower-income year. 

So, who are the individuals who are most likely to benefit? 

The individuals who are most likely to benefit are taxpayers in a low tax bracket in 2020, and those who may foresee earning much more income in future years.

I discussed conversion from traditional IRA to Roth IRA; that is switching your past contribution from one bucket to the next. New contributions to a Roth may also benefit in a year with low income and a low tax rate.  

For self-employed and/or pass-through income earners, consider making a Roth IRA contribution rather than a traditional IRA for 2020 — this may be possible if you generally make your contributions later in the year or before you file your tax returns (note, the account must be set up or open in 2020 in order to delay contribution) — this is common with SEP retirement savers. Please check with your financial advisor to discuss your Roth savings options.

401K Retirement savers – Please check with your employer’s selected administrator to find out if your plan offers you the ability to convert or contribute to a Roth IRA.

Tax implications of Roth Conversions — work with your financial advisor:

•Once you convert, you can’t undo – Roth conversion is permanent.

•Once you convert, the tax bill is due.

•You must leave the traditional IRA account by December 30, 2020, to qualify for the tax conversion.

On a related topic — RMD taxpayers who are generally required to take a distribution each year (i.e. RMD) can also benefit if one is in a lower tax bracket than in previous years. Consider a withdrawal from your RMD in 2020. Yes, you read that correctly — It is true that, under the CARES Act, no RMD is required in 2020. However, this does not mean you are not allowed to withdraw. If your 2020 income is very low and you are likely to fall in a much lower tax bracket (after the withdrawal), why not consider a withdrawal of the 2020 RMD and pay a lower tax on it, rather than paying a higher tax debt in the future? 

 So how do I get started? 

First, you would need to have a close estimate of your total income for 2020. If your income is from multiple sources you may want to consider using the service of a financial advisor and tax professional to prepare a tax liability projection.

Next, in order to assess your tax rate — you can use the 2020 tax brackets table enclosed to see which tax bracket your income may apply to you — there are still four (4) tax brackets from 10% to 25% with relatively low tax rates. For example, if your taxable income is approx. $40K and $80K (single and MFJ, respectively) your tax rate is as low as 12%.

Please see all tax brackets and status in the enclosed link from Kiplinger, here.

If you want to consider at least one of these options, act on it now. The great King Solomon reminds us that timing is important — In the Good Book, he penned (Proverbs 6:4), “Don’t put it off; do it now! Don’t rest until you do.”

In closing, I hope I was able to shed some light that will allow you to choose the savings option that is better for you. As always, the ultimate decision is yours.

Thank you for reading.

With gratitude,

Nadine.

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

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors

 

Remembering Ruth Bader Ginsburg

September 25, 2020 Drawing portrait of United States Supreme Court Justice, Ruth Bader Ginsburg, vector illustration.

Remembering Ruth Bader Ginsburg

“Don’t be distracted by emotions like anger, envy, resentment. 

These just zap energy and waste time.

(5 Minutes to Read)  On Friday, September 18th our fellow Jewish Citizens commenced another new year, Rosh Hashanah. This sacred time is marked with prayer and other ceremonial events. On the said day they also lost one of their (and our) own. Supreme Court Judge Ruth Bader Ginsburg (aka “Notorious RBG”), a woman whose shoulders many of us stand on, fought relentlessly for gender equality. 

In all honesty, I didn’t know much about her, but after I learned of her passing I spent a few days watching some of her interviews to learn more about her. Through perseverance and a steadfast commitment from women like Ruth, we have come a long way, haven’t we?

As I reflect on Ruth Bader Ginsburg’s life and legacy, and this sacred time period — I envision a society (a world) of shared responsibility; in which each individual’s sole responsibility is to make a contribution to the better good of mankind as a whole, not just self… Can you visualize that? I can.

Moving along — Taxes

 All extensions due to the Covid-19th impact have expired. 

In this article, I will discuss the CARES act relief for Coronavirus-related distributions (CRDs).

The next income tax filing due date for C-Corporations and Individuals who filed an extension is October 15, 2020. Please remember to file on time to avoid unnecessary penalties and fines; this penalty is an additional penalty and separates from the failure to pay imposed by the federal and states.

As I continue, I would like to address one of the most frequent inquiries that were made during the pandemic; retirement withdrawals (RMD withdrawals are not required for 2020). Unfortunately, many among us have been furloughed, lost our jobs, or have seen our compensation drastically reduced, so the need to tap into retirement savings may be inevitable.

The coronavirus-related distributions (CRDs) allow for a significant amount to be withdrawn from certain qualified retirement savings, during the calendar year 2020 (i.e. between January 1 and December 31, 2020). 

How can this be done wisely?

1.Take advantage of the waiver of the 10% penalty for early withdrawal of up to $100,000 under the CARES Act if you experienced hardship during the pandemic. (Generally, if a withdrawal is made from certain retirement savings before an individual reaches age 59½, a 10% early withdrawal penalty is imposed.)

2. Consider withdrawals for basic necessities only. Withdraw just for what you need; forget the nice-to-haves. There is no waiver of taxes — federal and state taxes will be due on the money taken from retirement.  

3. Consider withdrawals from gains that have accumulated over time. While this may not be possible for some individuals, consider withdrawing from the amounts that exceed your contribution. By doing so, withdrawals are made from gains only. This is most likely doable for individuals who have been saving for a long time.

4. No required 20% federal tax withholding is necessary, but consider withholding if you don’t plan to repay or replenish the retirement savings account.

5. Consider taking advantage of the three-year payback period. The CARES act offers an option to pay back funds withdrawn from a qualified retirement plan over a three-year period, and without having the amount recognized as income for tax purposes. This option may be possible if there is a certainty in one’s ability to repay. Furthermore, the full financial impact of COVID-19 still remains a mystery. 

6. Other options are available to 401(k) participants (savers). The CARES Act also allows qualified individuals to take a loan from the participant’s vested account balance. You will not owe income tax on the amount borrowed from the 401(k). Please discuss this option directly with your fund administrator.

In closing, a $100,000 withdrawal from savings is a rather hefty amount. Before you act, consider this wise quote penned by Saint Luke as he recapped the words from his Teacher — “don’t begin until you count the cost. For who would begin construction of a building without first calculating the cost to see if there is enough money to finish it?” We are still in a relatively high tax era; and the tax impact will be a factor of your overall income. 

As you and I reflect, let’s contemplate our next best move; then resolve to choose wisely. Let’s remember our shared responsibility to each other and contribute to the better good of another. Envision that!

Stay hope-filled and healthy,

Nadine 

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

It’s All About Hope

Child on a beach with hands cupped holding stone pebble with the word hope engraved concept for faith, love, spirituality and religion

{3 minutes to read}  Hope … Such a simple and yet powerful word. Wikipedia defines it like this:

Hope is an optimistic state of mind that is based on an expectation of positive outcomes with respect to events and circumstances in one’s life or the world at large. As a verb, its definitions include: “to expect with confidence” and “to cherish a desire with anticipation.” 

The Oxford dictionary gives us three definitions of Hope:

  1. A feeling of expectation and desire for a certain thing to happen.
  2. Grounds for believing that something good may happen.
  3. A feeling of trust.

Saint Paul summarizes hope like this, “Hope that is seen is no hope at all. Who hopes for what they already have? But if we hope for what we do not yet have, we wait for it patiently.” (Romans 8:24-25)

The 2020 celebrations/gatherings are different in light of the uncertainties and losses due to COVID-19. Many among us may be searching for answers. Whether you are affiliated with or subscribe to any faith-based groups, my guess is that you, too, are hoping this unwelcome interruption from COVID-19 will end sooner rather than later. Though difficult to believe right now, something good may yet come out of this pandemic.    

I hope you continue to be well in light of the coronavirus. My sincere condolences to those among us who have lost loved ones and may have been robbed of the opportunity to hear the last words of those loved ones, or were not able to see the last breath those loved ones took.

Though we cannot see the end, may we find new strength and practice self-care as we wait patiently for our hopes to come true. Let’s be gentle with ourselves — and manage our intake of the news we digest across all the various information platforms.

Before I close, I want to acknowledge that there is another side of hope, not yet discussed, yet we often experience it. That is hope deferred. In the good book, the wise King Solomon penned it like this in Proverbs 13:12, “hope deferred makes the heart sick, but a desire fulfilled is a tree of life.” Many of us are feeling sick in our hearts and our consciences ache due to cruelty we sometimes imposed on another; one is the death of George Floyd. Let us take comfort knowing God sees. Let’s remain hopeful, trusting that there is an aspirational good that will manifest out of this intense cruelty. 

In closing, though certain life-changing experiences are better understood in retrospect, yet, 

Hope is being able to see that there is light despite all of the darkness.” – Desmond Tutu. 

Here is how  Martin Luther King, Jr. envisioned it: “We must accept finite disappointment, but never lose infinite hope.”  

Remember…hope is still a good thing, maybe the best of things.

I remain hope-filled and I hope you do, also. 

Be encouraged,

Nadine 

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

Another Tax Year Is Now History

Tax filing in progress...

{8 minutes to read}  Before getting into the article, I would like to remind readers that enrollment season is now open. It’s this time of the year when you have the opportunity to enroll for your health care insurance and other employer-offered benefits. Now let’s continue.

Continue reading

How Do I Begin Creating a Financial Budget Based on My Lifestyle?

How Do I Begin Creating a Financial Budget Based on My Lifestyle? by Nadine Riley{8 minutes to read}  In an era of so many uncertainties, individuals and companies are becoming more mindful of their bottom lines. The question is, are we addressing these concerns wisely?

We often talk about how much we need to save, but how closely are we monitoring our spending? Swiping that card and clicking on the “Pay” icon are now second nature and can become costly habits if they are not managed. Every purchase, however small, takes a bite out of our savings — yes, every one. Continue reading

NYS Cut the Cord with the IRS: You May Be Able to Itemize on Your NYS Tax Return

NYS Cut the Cord with the IRS: You May Be Able to Itemize on your NYS Tax Return by Nadine Riley

By now most of us are aware that the new tax rules will impact our Federal tax returns; a large portion of expenses have been reduced OR disallowed under the new tax law (known as TCJA).

Since the law has been enacted, lawmakers of various states with personal income tax obligations have continued to lobby to make them more favorable, and many believed the battle was lost. However, NYS chose to “sever its ties with the IRS” in an effort to help its individual taxpayers.

Generally, most states have their own tax rules that taxpayers are required to follow; they often treat certain transactions in the same manner that the IRS does.

For 2018 tax year and after, New York State will not follow the same tax rules as the IRS (Federal) as is customary. NYS chooses not to follow (to “decouple”) the IRS with disallowing the federal itemized deduction changes made by the TCJA for tax years 2018 and after. As a result, you may be able to claim certain deductions that are limited or disallowed for Federal tax purposes.

Here are some of the deductions you are allowed to claim:

  • State and local real estate taxes paid, including amounts over the $10,000 federal limit
  • Casualty and theft losses, including those incurred outside a federally declared disaster area
  • Un-reimbursed employee business expenses
  • Certain miscellaneous deductions that are no longer allowed federally (e.g. tax preparation fees, investment expenses, and safe deposit box fees)

There are some other areas that will be allowed by NYS:

  • Alimony or separate maintenance payments
  • Qualified moving expenses reimbursement and moving expenses

Please see here to learn of all the areas.

Often as humans we do our best to meet on common ground for a common goal; however, whenever there are few or no commonalities, it may to best to “cut the cord” and stop following the leaders.

Hope you find this information useful. As always, please reach out with any questions.

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

Considering the New Tax Laws, Is Starting a Business the Right Choice for Me?

Considering the New Tax Laws, is Starting a Business the Right Choice for Me? by Nadine Riley{6 minutes to read}  During tax season we are often questioned about starting a small business. However, throughout 2018, the two most asked questions we received were:

  1. I have been freelancing for some time now; do I incorporate or form an LLC?
  2. Since I will lose most or all of my deductions as an employee, I am considering having a conversation with my employer about paying me as an independent contractor rather than as an employee. Do you think this is a wise move?

Continue reading

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