Get Us Your Complete Tax Materials Now….Before It’s Too Late!
The tax filing deadline for Individuals, C Corporations, and most Trusts is quickly approaching.
Please note that Newburg & Company, LLP is working expediently on the returns for those Clients who have already provided the materials to complete the preparation of their tax returns. If you have not submitted your information, please forward it to us as soon as possible.
We will work towards the completion of returns by the deadline for those who are able to get us their complete tax materials by Sunday, April 1st. If you are unable to get us your complete tax materials by Sunday, April 1st, you should expect to have your returns put on extension.
For individual taxpayers, please note that an extension of time to file a tax return is NOT an extension of time to pay the tax due with the return. Failure to pay in the appropriate tax with the extension could result in penalties and related interest due to the respective taxing authorities.
For Individuals, an extension moves the filing due date to October 16th. For C Corporations and most Trusts, it will extend the filing due date to September 15th.
Please contact us should you have any questions related to the timing of your 2017 tax returns.
When a taxpayer purchases a vehicle for business use there are a number of important considerations to maximize deductions and tax benefit. First and foremost, the IRS allows two different methods for calculating the deduction for using vehicles within your business:
- The Actual Expense Method
- The Standard Mileage Method
The choice of method is very important as it can produce significantly different results. Typically, the best way to compare is to calculate the deduction using both methods in the first year you utilize the vehicle for business. We at Newburg & Company, LLP can help you with this analysis.
THE STANDARD MILEAGE METHOD
The standard mileage method is often considered a simpler way of calculating the deduction for business use of a vehicle. With this method, the taxpayer does not have to maintain receipts or closely track expenses related to the auto. Instead, the taxpayer tracks all miles driven for business purposes.
In order to claim a deduction for business use of a car or truck, a taxpayer must have ordinary and necessary costs related to one or more of the following:
- Traveling from one work location to another work location within the taxpayer’s tax home area
- Visiting customers or other travel connected with necessary job functions
- Attending a business meeting away from the regular workplace
It should also be noted that mileage related to a taxpayer’s regular commute is not deductible.
To calculate the deduction using this method, the total amount of business miles driven during the year is multiplied by the standard mileage rate. For 2018, the standard mileage rate is 54.5 cents. By way of example, if a taxpayer had 10,000 of business mileage during 2018 he/she would receive a deduction of $5,450 on his/her 2018 tax return.
THE ACTUAL EXPENSE METHOD
The actual expense method is calculated using the actual vehicle expense paid by the taxpayer during the year. Here are some of the major costs included in actual expenses:
- Vehicle maintenance
- Purchase of new tires
- Lease payments
- Vehicle depreciation (special IRS limits often apply)
- Vehicle excise taxes
- Title, licensing, registration fees
These expenses are combined for the year and multiplied by the business use percentage of the vehicle. This business use percentage is usually maintained by a mileage log which documents all business miles driven during the year. Business miles driven is compared to total miles driven to obtain the percentage.
RECORDKEEPING AND SUBSTANTIATION
The IRS has put additional emphasis on substantiation of vehicle deductions. Lack of adequate records and records reconstructed from invoices and other sources, after the fact, have been disallowed in their entirety. The use of reasonable estimates is not sufficient to stand up to an IRS challenge. The IRS requires substantiation of all travel deductions. To claim this deduction, the IRS requires the maintenance of a daily log outlining miles traveled, destination and business purpose.
Whether you use the standard mileage method or the actual method, a mileage log is very important to substantiate the deduction. We recommend the use of a formal mileage log book or use of an online calendar where the taxpayer enters the travel details and business purpose. You can print your online calendar monthly and tuck this away in a file in case your are ever audited. If manual recordkeeping seems too burdensome, there are also a variety of mobile apps (MileIQ, Triplog, TaxMileage, etc.) that can assist you with tracking and substantiation. We have included an example below of an excerpt from an appropriate mileage log.
|3/15||1:30pm||Prospect: J.Smith||Client Dev||Waltham||Boston||33,389.1||33,521.4||32.3|
|4/14||6:00pm||Seminar: P&C||Bus Educ||Waltham||Boston||34,489.8||34,522.1||32.3|
Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.
But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.
Higher education breaks 101
While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So first you need to see which breaks you’re eligible for. Then you need to determine which one will provide the greatest benefit.
Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.
Two credits are available for higher education expenses:
- The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
- The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.
Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.
Be aware that the tuition and fees deduction was extended only through December 31, 2017. So it won’t be available on your 2018 return unless Congress extends it again or makes it permanent.
Maximizing your savings
If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2017 tax returns — and which will provide the greatest tax savings — please contact us.
SPOTLIGHT ON TAX REFORM
This is the first in a new series of articles we will be sending you addressing several major areas of Tax Reform. Newburg & Company LLP’s SPOTLIGHT ON TAX REFORM articles take a deeper dive into certain sections of Tax Reform to help unravel some of the intricacies.
Section 179 and Bonus Depreciation
SNAPSHOT OF DEPRECIATION CHANGES:
- Code Sec 179- election to “expense” qualifying property (new and used- placed in service)
- For property placed in service after December 31, 2017, the maximum amount that may be expensed is $1 million (up from $500k).
- Non-residential improvements for roofs, heating, ventilation, and air conditioning are now allowed under Section179.
- Phase-out of this threshold is increased to $2.5 million of qualifying property placed in service.
- First Year Bonus Depreciation is now 100% deductible (formerly 50%) for qualified property in service after September 27, 2017 (and before Jan 1, 2023) – phase down by 20% each year thereafter.
- Now allowed for NEW and USED (formerly only NEW property qualified) – Bill removes the requirement of “original use of qualified property with the taxpayer” .
- The definition of “Qualified Improvement Property” eligible for Bonus Depreciation has been simplified by Tax Reform. See below for additional details.
- NOTE: Many states do not allow bonus depreciation (e.g. Massachusetts). Hence Section 179 approach is often preferred. Also note that only Bonus Depreciation can drive a company loss.
- Code Sec 179- election to “expense” qualifying property (new and used- placed in service)
- Luxury Auto Depreciation Limits Increased
- Annual caps on luxury auto depreciation limits have nearly tripled.
- For the first year the vehicle is in service $3,160 to $10,000
- Second year $5,100 to $16,000
- Third year $3,050 to $9,600
- Annual thereafter $1,875 to $5,760
BONUS DEPRECIATION & FULL EXPENSING:
The most impactful change in depreciation deductions is the idea of “full expensing.” Before TCJA, taxpayers received a bonus depreciation deduction limited to a percentage (at the highest, 50%) of the acquisition cost of new, qualifying assets in the year of purchase. But now, full expensing is allowed.
The bonus depreciation deduction limitation has been raised from 50% to 100%. Further, the deduction can now be claimed with the acquisition of both new and used assets. Bonus depreciation requires the asset to first be capitalized and then depreciated and is only available for property which meets the definition of “Qualified Improvement Property.” Fortunately, Tax Reform simplified the definition of “Qualified Improvement Property.”
Definition of “Qualified Improvement Property” from Section 168(e)(6):
- Any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.
- The following types of improvements are not included:
- Enlargement of a building
- Any elevators or escalators
- Internal structural framework of a building
The definition generally includes any property with a useful life of 20 years or less.
For planning purposes, it is important to know that deductions on assets purchased after 2022 will be subject to phase-out limitations.
The new law also allows the election for 50% bonus depreciation in lieu of the 100% available, and repeals the election to claim prior year minimum tax credits in lieu of bonus depreciation.
Tax Reform increased the maximum section 179 depreciation expense allowed from $510K to $1M and increased the phase-out threshold from $2.03M to $2.5M. Further, the definition of qualifying section 179 assets has been modified to exclude references to specific qualified property (such as leasehold, restaurant, and retail improvements) and instead references the new, all-encompassing and broad category of qualifying improvement property.
The new definition of property eligible for Section 179 expensing is included here:
- Tangible personal property
- Computer software (as defined under Section 197(3)(3)(B))
- “Qualified Improvement Property” from Section 168(e)(6) – See definition above
- Roofs, heating, ventilation, fire protection, alarms, security systems
The definition generally includes any property with a useful life of 20 years or less. Special rules and limits apply when taking Section 179 on automobiles.
The new tax reform relative to deprecation has expanded tax benefits to business owners providing more flexibility to accelerate depreciation and write-off new and used asset purchases as well as luxury vehicles. As noted above, the expansion of both bonus depreciation and section 179 may increase or accelerate the generation of NOLs. The election to use such deductions will depend on the specific context and whether or not the acceleration will generate an 80 percent limited NOL. Further, the expansion of “qualified” property may increase the desire of buyers to purchase assets as opposed to stock in scenarios where the result is a step up in tax basis based on purchase price which can then be immediately deducted. For the same reason, there may also be an increase in deemed asset sale elections under sections 336(e), 338(g), and 338(h)(10) in scenarios where the structure of the acquisition is a qualified stock disposition or purchase.
Disclaimer: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Newburg & Company, LLP would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
As anticipated, we now have clarity that the bill caps the deduction for real estate taxes and state taxes at $10,000 starting in 2018. Depending on your income level and tax situation, we had been recommending that clients pre-pay their real estate taxes before year end. In addition, we recommended factoring in a generous 2017 state fourth quarter estimated tax voucher and mailing it in with payment before year-end to hopefully work in your favor. While the tax reform does contain language to disallow prepayments for 2018 state tax, the mechanics and enforcement behind the potential limitation is still a bit unclear. Please note that if you are anticipated to be in Alternative Minimum Tax (AMT) for 2017, pre-payment of real estate tax and state tax will not benefit you.
The new tax reform is quite extensive, impacting not only individuals in a variety of ways, but sole proprietors, flow-through business entities and C corporations as well. We can help you navigate these changes and maximize any potential opportunities going forward.
Below are bullets to highlight some of the more significant elements of the tax reform bill:
- The new tax bill will not affect your 2017 income taxes. Almost all aspects of the new tax laws will not be effective until you file you 2018 taxes.
- The new tax bill maintains seven tax brackets but the percentages and income ranges have changed. Here is a comparison of the old and new rates for single and for married filing joint:
- The standard deduction has essentially been doubled. For single filers, the standard deduction has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.
- The personal exemption is gone. Previously, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents, which lowered your taxable income. This deduction is now gone.
- The Child Tax Credit has been expanded. The child tax credit has doubled to $2,000 for children under 17. It’s also now available, in full, to more people. The entire credit can be claimed by single parents who make up to $200,000, and married couples who make up to $400,000.
- New tax credit for non-child dependents, like elderly parents. Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.
- Fewer people will have to deal with the alternative minimum tax. The alternative minimum tax, a parallel tax system that ensures people who receive a lot of tax breaks still pay some federal income taxes, remains in place for individuals. But fewer people will have to worry about calculating their tax liability under the AMT moving forward. The exemption has been raised to $70,300 for singles, and to $109,400 for married couples. These exemptions begin to phase out at $500,000 for individual filers and $1,000,000 for married filing joint.
- The mortgage interest deduction has been reduced. Current homeowners are in the clear. But from now on, anyone buying a new home will only be able to deduct the first $750,000 of their mortgage debt. That’s down from $1 million. In addition, interest on home equity loans will no longer be deductible.
- Eligibility to use Section 529 Education Savings Accounts has been expanded. Previously the earnings on a 529 savings account could be taken out tax-free as long as they were used for qualifying educational expenses. Now, up to $10,000, per student, can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.”
- The deduction for alimony and the corresponding inclusion of alimony in gross income have both been repealed. Alimony payments, which are codified in divorce agreements and go to the ex-spouse who earns less money, are no longer deductible for the person who writes the checks. In addition, the recipient in no longer required to include the alimony in gross income. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018.
- The current deduction for miscellaneous itemized deductions has been repealed. This deduction included items like investment expenses, tax preparation fees, and unreimbursed employee business expenses which were over 2% of the taxpayer’s AGI. This deduction will no longer be available for 2018 and after.
- The deduction for moving expenses by a non-military individual has been repealed.
- Individual provisions in the new legislation technically expire by the end of 2025, though many people expect that a future Congress won’t actually let them lapse.
- Pass-through Income Deduction – Starting in tax years after 2017, there will be a new deduction for which many business entities will be eligible. The deduction will be for 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. There are several exceptions and specialized rules which apply to this deduction. Here are two of the major items:
- If the taxpayer has income above a certain threshold, a limitation on the amount of this deduction is based on the business owner’s share of W2 wages the business paid. This income threshold for phase out is between 157,500 and $207,500 for singles and $315,000 to $415,000 for married filing joint. Alternatively, capital intensive businesses may yield a higher deduction as there is a secondary, relatively complex, formula to weigh against the 20% deduction.
- A special limitation applies to businesses defined as “special service businesses.” “Special service businesses” include any business involving the performance of services in the field of health, law, accounting, consulting, athletics, financial services and any trade or business the principal asset of which is reputation or skill of one or more of its owners. These businesses are phased out of the deduction between $157,500 to $207,500 for singles and $315,000 to $415,000 for married filing joint. Architects and engineers are specifically excluded from this limitation.
This new deduction for 20% of “qualified business income” will likely be one of the most highly utilized and beneficial deductions within the new tax bill. It is also one of the most complicated new rules and will take careful consideration to apply correctly.
- The new tax bill reduces the corporate tax rate for C-corporations. Here is a comparison of the old rate to the new rate:
- Corporate Alternative Minimum Tax (AMT) – The corporate AMT has been repealed by the new tax law. Similar to the individual AMT, the corporate AMT required calculation of a corporation’s tax liability based on an alternative set of rules. This calculation will no longer be required for tax year 2018 and beyond.
- Full Expensing for Qualified Property – One hundred-percent expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. Qualified property includes (1) property to which MACRS applies with an applicable recovery period of 20 years or less; (2) water utility property; (3) computer software other than computer software covered by section 197; or (4) qualified improvement property. “Full expensing” is similar to Section 179 in that it allows deduction of the full cost of the property in the year acquired.
- Limit on Deductible Interest Expense – The deduction for net interest expense incurred by a business will be limited to 30% of the sum of the business’s adjusted taxable income, business interest income and the floor plan financing interest. Adjusted taxable income is taxable income computed before net interest expense or income, net operating losses, and depreciation expense. Any disallowed interest expense can be carried forward indefinitely. There is an exception for small businesses with average gross receipts of $25 million or less. These businesses are not subject to the limitation. In addition, certain businesses within the real estate field are exempt from this limitation.
- The rules for carryover of net operating losses have been modified. Losses generated in tax years beginning after December 31, 2017, can only be carried forward to offset up to 80% of taxable income in future years. In addition, the rules allowing carryback of net operating losses to 2 years back have been repealed.
- The current tax law allows a special deduction for businesses who are manufacturing and producing goods within the United States. This deduction called the “Domestic Production Activities Deduction” has been repealed.
- Entertainment Expense Deduction: Under the current law, businesses are allowed to deduct 50% of entertainment, amusement, and recreational expenses paid for employees or for other purposes. The new law reduces this allowance to 0%. 100% of these expenses will be non-deductible. Meals expenses are still allowed at 50%.
- Loosening of Restrictions for Use of Cash Basis: Permits businesses with average gross receipts of $25 million or less to use the cash method of accounting even if the business has inventories as long as it treats inventory as non-incidental materials and supplies or the method of accounting conforms to the taxpayer’s applicable financial statements. Under current law, average gross receipts must be under $5 million. This could offer a valuable tax planning opportunity for businesses under the threshold with high accounts receivable and prepaid expenses at year-end.
- Unlike the individual tax provisions, most of the business tax provisions have no set expiration date and will be permanent unless new legislation is passed to change or repeal the provisions.
- The estate tax exemption per person doubles from $5.6 million to $11.2 million. This expires on December 31, 2025. The exemption will increase inflation.
- International taxation-various changes beyond the scope of this article inclusive of transitioning to a territorial corporate tax system (vs. current worldwide)