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
{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:
- I have been freelancing for some time now; do I incorporate or form an LLC?
- 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?
{7 minutes to read} This October the curtain came down on the 2017 tax year. Now, all eyes are focused on how the Tax Cuts and Jobs Act (TCJA) will impact the 2018 tax year, and How will I be affected? (more…)
The 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?
- K–1 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
{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
{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. (more…)
*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. (more…)
“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
{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. (more…)
“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
{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. (more…)
{4:18 minutes to read} In our last article, we looked at the various types of personal insurance an individual should have in order to protect their most valuable asset: themselves. In this blog, we look at the various insurance policies we should have when we are a business owner. (more…)