IRS Extends Filing Dates for Providing Certain ACA-Related Forms

Date December 5, 2018
Categories

The IRS extended the due dates for furnishing individuals with certain forms related to the Affordable Care Act (ACA).

According to a recent announcement by the agency, it will allow sponsors of coverage who file the 2018 Health Coverage Form 1095-B and companies which file the 2018 Employer-Provided Health Insurance Offer Coverage Form 1095-C an extension from January 31, 2019 to March 4, 2019. No additional extensions for provision of these forms will be permitted.

The recent IRS notice announcing the change did not include extensions for filing forms 1094-B, 1095-B, 1094-C, and 1095-C with the IRS. The deadline for those forms is still February 28, 2019, if they are filed traditionally and April 1, 2019, if they are filed electronically. However, a 30-day extension for filing these forms with the IRS is still available through submission of Form 8809, the standard Application for Extension of Time to File Information Returns form.

The IRS has also provided guidance to individuals who do not receive Form 1095-B or Form 1095-C by the time they file their 2018 tax returns due to these extensions. The agency said via their update, “Taxpayers may rely on other information received from their employer, or other coverage provider, for purposes of filing their returns, including determining eligibility for the premium tax credit and confirming that they had the required minimum essential coverage. Taxpayers do not need to wait to receive Forms 1095-B and 1095-C before filing their returns.”

In addition, the notice provides relief from certain penalties to any reporting entity that can show they have made good faith efforts to comply with IRS reporting requirements for 2018 (both for furnishing said forms to individuals and for filing with the IRS) as they relate to incorrect or incomplete information contained on tax returns/forms. This applies to missing and inaccurate taxpayer identification numbers and errors in dates of birth or other identification information required on a tax return/form. No relief is provided in the case of reporting entities that cannot prove they made good faith efforts to comply with the regulations, or which fail to file appropriate and required tax returns/forms or statements by their due dates.

Please contact Michael Walston at mwalston@hbkcpa.com, or your HBK representative with any questions on this matter or others related to filing tax forms.

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HBK CPAs & Consultants Among Fastest-Growing Great Lakes Firms

Date November 5, 2018
Authors Patricia A. Kimerer, PWE & Director of Communications

HBK CPAs & Consultants (HBK) is one of the fastest growing CPA firms in the country according to the 2018 Inside Public Accounting (IPA) magazine poll.

The survey, which calculates firm size based on reported growth in net revenue, ranks HBK as the fourth fastest-growing CPA firm in the Great Lakes region. The region includes firms in Illinois, Indiana, Michigan, Ohio and Wisconsin.

HBK has consistently been listed in the IPA’s “Top 100 CPA Firms” over the past two decades. Additionally, HBK is a perennial “Top 100 Accounting Firm” according to Accounting Today (AT) magazine rankings. In 2014 and 2017, AT also listed HBK as one of the fastest growing firms in the U.S.

HBK CEO and Managing Principal Christopher Allegretti, CPA, credits his team’s efforts to work in collaboration across specialty and industry-specific service lines and throughout widespread geographic regions.

“Our focus is collaboration, working together,” he said. “We tap the depth of our resources to their fullest extent, the collective expertise of hundreds professionals in five states.”

Allegretti added that collaboration contributes to the firm’s strength in developing all-inclusive solutions. “Developing a comprehensive understanding of a client’s financial circumstances as a basis for helping them grow and protect their wealth is a hallmark of our practice and has been a great differentiator for us.”

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Why Knowledge Management is an Important Business Process

Date October 15, 2018
Authors HBK CPAs & Consultants

Knowledge management is the process of recording and managing an organization’s mission-critical knowledge.

One way to use it is to mitigate the ill effects of turnover. How? First collect and categorize knowledge as either explicit (already documented) or tacit (only in employees’ heads).

To gather tacit knowledge, get employees’ buy-in, conduct interviews and use an intranet to facilitate online discussions.

With all this information, you can more quickly disseminate a departing employee’s know-how and more easily train new hires.

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Job Descriptions: Why They Matter

Date July 31, 2018
Authors Patricia A. Kimerer, PWE and Director of Communications

Words have power. This is especially true when it comes to defining roles and responsibilities in an organization.

Therefore, it follows that up-to-date, accurate job descriptions form the foundation of every organization’s staffing efforts. Without clear, focused documentation of what each position entails and its corresponding expectations/objectives, you may struggle to hire and retain good employees. This may drastically undermine productivity.

Look at everything

The solution is relatively simple: Regularly review your job descriptions to ensure they are current and comprehensive. Check to see whether they list outdated procedures or other outmoded elements, such as software that you have since phased out.

If you do not already have written job descriptions for each position, you need not panic. Ask employees in those jobs to document their responsibilities and everyday duties. Each worker’s manager should then verify and, if necessary, help revise the description.

Turn information into improvements

After you have updated your job descriptions, you can use them to increase organizational efficiency. Weed out the marginal duties from essential ones. Eliminate superfluous and redundant tasks, focusing each position on activities that generate revenue or eliminate expenses. You may be able to make improvements in other areas, too, such as:

Workload distribution: Are workloads properly distributed among employees? If not, rearrange them. You may find this necessary when job duties change.

Cross-training: Can your employees handle their co-workers’ responsibilities? In emergencies, and as a fraud-prevention measure, having workers who can handle each other’s jobs temporarily can serve an organization well.

Recruiting: Are you hiring people with the right skills? Up-to-date job descriptions provide a better road map for finding ideal candidates to fill your open positions.

Performance evaluations: Are employees doing their best? Detailed job descriptions allow managers to better determine whether workers are completing their assigned duties and if they’re meeting — or exceeding — expectations.

Get started soon
The longer you wait to review and rewrite job descriptions, the harder it will be to revise them. Once you’ve got them up to date, the task becomes much easier from year to year.

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Are You Thinking About Selling Your Business?

Date June 8, 2018
Authors Keith A. Veres

An Open Letter to Business Owners:

Are you thinking about selling your business? Regardless of your reasons or circumstance, my first question as a professional advisor looking to help you would be, “Why do you think you are ready to sell now?” Your answer to that one question will likely give me the information I need to provide a helpful response.

Here are a few answers I’ve heard over the years of working with clients getting ready to sell their businesses:

• I was approached by a competitor who offered me a lot of money.

• I was approached by a private equity group who said they buy businesses like mine.

• My industry is changing and I don’t think I want to spend the time and money to keep up.

• My spouse has decided it is time for us to retire and start doing some things we have put off for years.

• My spouse has become ill and I need to be around to help.

• My children have no interest in taking over the business.

• I thought I’d shut the doors and sell off the assets, but figured I would see if anyone would buy it first.

• I want to use the proceeds from the sale of this business to start another business I am more passionate about.

• I just think now is the right timing for us to get a great price.

• There’s so much more that can be done with this business to benefit our clients, employees and community, but we just don’t want to risk our capital to expand at this stage of our lives.

These are just some of the answers I’ve heard, and they all provide important information, the exact reason or reasons why someone believes they are ready to sell. The sale of a business is one of the most significant transactions I can be involved in as an adviser looking to help you navigate this challenging transaction.

So what critical information will I get from your answer? Your timeline is one very important piece. Are you already talking with a potential buyer, investment banker or business broker? Or perhaps at the beginning of a two-to-three year exit plan? Regardless of where you are in the process, one of the best things I can do for you is let you know that HBK Corporate Finance will provide a no-obligation analysis of your business and talk with you about how to prepare, market, present and sell your business in a manner that keeps you in the driver’s seat.

Most of the time business owners feel they have very few, if any, people they can talk to about selling a business. In nearly every case they do not want their competitors, their customers, their employees or their community – and in some cases, even family members – to know of their plans. On top of all the financial considerations, selling a business can be emotional. Having someone to talk to about what to expect and how to lay out and implement a thoughtful plan can provide you with much-needed peace of mind.

Feel free to call me at 239-482-5522 or reach out to me at kveres@hbkswealth.com

Investment advisory services are offered through HBK Sorce Advisory LLC, doing business as HBKS Wealth Advisors. NOT FDIC INSURED – NOT BANK GUARANTEED – MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL – NOT INSURED BY ANY STATE OR FEDERAL AGENCY

HBKS® Wealth Advisors, is an affiliate of HBK CPAs & Consultants, and does not provide investment banking services. If investment banking services are needed, they will be provided through a third-party registered broker dealer properly licensed to provide such services.

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Business Interest Deduction Limitation

Date May 31, 2018
Authors Paul N. Lewis, JD

Overview

The Tax Cuts and Jobs Act (the Act) created a new Business Interest Deduction limitation, effective for tax years starting after December 31, 2017. This new provision limits the deduction for business interest for all businesses, though an exception to the limitation applies for businesses who meet the gross receipts test, discussed below.

What is the Business Interest Deduction?

Businesses are allowed to deduct any interest paid or accrued on debt that is properly allocable to a trade or business, and is not considered investment income. Historically, this interest deduction has not been subject to many limitations.

Scope: Then and Now

Internal Revenue Code (IRC) Section 163(j) is the code section that provides for a limitation on the deduction for business interest. Prior to the Act, this provision had a limited application and only applied to U.S. corporations or U.S. branches of foreign corporations to prevent businesses from stripping earnings and avoiding U.S. taxation. The Act changed this code section to apply to all taxpayers and all debt, even if the debt arises from a related-party transaction.

The Limitation

The deduction is limited to the sum of business interest income, 30 percent of adjusted taxable income (ATI), and floor plan financing interest. ATI is generally taxable income, computed without regard to:

  • activity that is not allocable to the trade or business;
  • business interest expense or business interest income;
  • depreciation, amortization, or depletion (for tax years beginning before January 1, 2022);
  • net operating losses under Section 172; or
  • the new 20% qualified business income deduction under Section 199A.

Floor plan financing interest is generally defined as interest paid or accrued on debt used to finance the acquisition of motor vehicles held for sale or lease, and which is secured by the inventory acquired.

If the limitation applies, the disallowed business interest will carry forward to the succeeding taxable year.

Gross Receipts Test Exemption – Small Businesses

There is an exemption from the limitation for small businesses with average annual gross receipts for the three taxable years ending prior to the taxable year at hand that is less than $25,000,000. However, taxpayers in controlled groups and partnerships may be required to aggregate gross receipts, so this should be considered when calculating whether or not the limitation should apply.

Carve Outs

Farming, real estate businesses, dealerships and certain public utility businesses successfully lobbied to avoid the application of this limitation. For dealerships, floor plan financing is fully deductible without limitation. However, these dealerships are excluded from 100% bonus depreciation on any of their assets.

Farming and real estate businesses may elect out of the new 30% limitation, but they will be required to use the Alternative Depreciation System (“ADS”) to depreciate their depreciable assets. Businesses using ADS are not eligible for 100% bonus depreciation. If the election is made, it is irrevocable, and ADS treatment will apply to all depreciable assets that are already owned or will be purchased in the future.

Real Property Business – Election Comparison

   Application of Interest Limitation Election Out of Interest Limitation
Asset Category Depreciable Life (years) Eligible for Bonus Depreciable Life Eligible for Bonus
Nonresidential Real Property 39 NO 40 NO
Residential Rental Property 27.5 NO 30 NO
Qualified Improvement
Property – under current law
39 50%
168(k)(2)(A)(iv)
40 NO
Qualified Improvement
Property – if corrected
15 YES 20 NO

So, How does it Work?

Let’s use a hypothetical company, ABC Corporation, and assume it exceeds the small business exemption. ABC Corporation is in the business of residential rental property and, for illustration purposes, will not elect out of the business interest limitation. For the taxable year, ABC Corporation has the following income statement:

Application of Interest Limitation
Gross receipts 100,000,000
Interest income 1,000,000
Cost of goods sold 0
Interest expense -50,000,000
Amortization -500,000
Depreciation -25,000,000
Taxable income before interest limitation 25,500,000
 
Adjusted Taxable Income
Taxable income before interest limitation 25,500,000
Add back: net interest expense 49,000,000
Add back: Amortization 500,000
Add back: Depreciation 25,000,000
Adjusted taxable income 100,000,000
 
Business Interest Deduction Limitation
Adjusted taxable income 100,000,000
Multiply by 30% x 30%
Business interest deduction limitation 30,000,000
 
Taxable Income AFTER Interest Limitation
Gross receipts 100,000,000
Interest income 1,000,000
Cost of goods sold 0
Interest expense -30,000,000
Amortization -500,000
Depreciation -25,000,000
Taxable income before interest limitation 45,500,000

ABC Corporation can only deduct $30,000,000 of its $49,000,000 of net interest expense. The remaining $19,000,000 of disallowed interest expense will carry forward until used in a future year. The $19,000,000 disallowance is calculated as follows:

Disallowed Deduction Carried Forward
Net Interest Expense -49,000,000
Business Interest Deduction Limitation 30,000,000
Disallowed Deduction -19,000,000

$50,000,000 interest expense – $1,000,000 interest income = $49,000,000 net interest expense

$49,000,000 net interest expense – $30,000,000 interest expense limitation = $19,000,000 disallowance

ABC Corporation will have taxable income of $45,500,000 if they do not elect out, but will have taxable income of $25,500,000 if they do elect out. Therefore, the election out is most beneficial in the current year where there is high business interest expense. However, electing out will likely decrease the depreciation deduction for the current year and future years, thus slightly increasing taxable income. The decision of whether or not an election out should be made should therefore take into account the impact on current and future depreciation.

Effect of Depreciation, Amortization, and Depletion on ATI and the Deduction

The larger the ATI, the larger the deduction. Starting in 2022, ATI will be reduced by depreciation, amortization, and depletion. Therefore, the deduction will likely decrease for many businesses at that point. Looking at our example above, if depreciation and amortization were included in the calculation of ATI, ABC corporation would have $52,150,000 of taxable income. The following shows this calculation:

ABC Corporation YR 2022 Interest Limitation & Taxable Income
ATI $74,500,000.00
2022 Limitation $22,350,000.00
Taxable Income $52,150,000.00

ATI would be $74,500,000 because depreciation and amortization amount are not added back. ATI of $74,500,000 is then multiplied by 30%, which results in a limitation for business interest in the amount of $22,350,000. Taxable income ($74,500,000) is then reduced by the limitation amount ($22,350,000) to equal $52,150,000 of taxable income.

Conclusion

The new business interest expense limitation can be complicated, depending on the type of business and the business’s average gross receipts. For businesses that qualify to elect out of the limitation, it is important to compare the effects of the deduction limitation and the depreciation adjustments on overall taxable income for the current and future years. For businesses that will be subject to the limitation, planning should focus on the method of providing future financing since the limitation may restrict cash flow.

Please consult your tax advisor or a member of the HBK Tax Advisory Group to determine whether or not this limitation applies to your business.

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South Dakota v. Wayfair: Will Quill Survive?

Date April 25, 2018
Authors Cassandra Baubie, JD
Categories

A look at the Supreme Court case that could mean major taxation changes for many business owners.

History of the Case

In 1992, the Supreme Court made a decision that has, so far, stood the test of time and shaped how states impose sales tax on businesses. Quill v. North Dakota involved Quill Corp., a company distributing ads, catalogs, flyers, and floppy disks into North Dakota, and North Dakota’s attempt to impose sales tax on Quill Corp. for their “regular or systematic solicitation” of consumers within the state. The Supreme Court’s decision in Quill cemented what we now know as the “physical presence test,” which requires a physical presence, or a tangible connection, between a state and a business in order for that state to impose taxing obligations. For more than twenty years, states have modeled their taxing systems around the limitations imposed under Quill, and anyone engaged in e-commerce knows that understanding where their physical presence or “nexus” lies is critical in determining their tax collection and filing requirements within a state.

Since Quill, many states have attempted to broaden their taxing authority while still meeting the requirements set forth under Quill’s physical presence test. Quill was decided before the boom of e-commerce and large internet retailers, in a time when mail order catalogs were often used for interstate sales. An e-commerce business without physical presence in a state cannot be required to charge sales tax on purchases within it since they lack sufficient nexus. Arguably, this has created a large deficit in a state’s taxing ability and the revenue that states are able to generate as e-commerce continues to grow and deepen in the marketplace. South Dakota, intent on challenging Quill, has now forced the Court’s hand into making a determination as to whether Quill should be overturned now that e-commerce is common.

In March of 2016, South Dakota passed S.B. 106, which imposed sales tax registration and collection obligations on sellers that lacked physical presence within a state if the seller in the current or previous calendar year had gross revenue from sales of tangible personal property (TPP) and services delivered within the state exceeding $100,000, or sold TPP and services for delivery into the state in 200 or more separate transactions. Following this bill, South Dakota sued four out-of-state retailers seeking to affirm the validity of S.B. 106. One of the retailers registered and chose to collect sales tax, and the remaining three moved for summary judgment, which was granted by the Supreme Court of South Dakota under the restrictions imposed by Quill. The U.S. Supreme Court granted certiorari of this case in January of 2017, agreeing to look at whether the precedent set under Quill should be called into question, or even potentially overturned.

South Dakota’s Argument

While it wouldn’t be unprecedented to see the Supreme Court overturn Quill, this is not an easy argument for South Dakota to win. Under the principle of stare decisis, overturning a prior precedent set by the Court requires a demonstration of “special justifications.” The Court will consider whether their prior decision is inconsistent with other decisions, and whether the holding in Quill was harmful, important, or detrimental to the doctrine at issue. The court will also determine whether Quill should be overturned due to a change in circumstance, and will analyze the distinguishing factors between Wayfair and Quill, focusing on any statutory or constitutional interpretations that may factor into the facts of these cases.

On Tuesday, April 17, 2018, the Supreme Court began hearing oral arguments in South Dakota v. Wayfair. Among some of the more frequent concerns raised by the Justices is the concern over the immense administrative burden that making such a “binary” decision to overturn Quill would have on both states and small businesses. Immediately, the Attorney General for South Dakota was met with questions from the Justices voicing these concerns. Justice Sonia Sotomayor, stating she was “concerned about the many unanswered questions that overturning precedents will create,” indicated that this would ensure an influx of lawsuits surrounding such a massive change. Justice Sotomayor also vocalized concerns over retroactive liability for sellers if the Court were to change the physical presence standard, which would only increase the administrative burden on small businesses.

While these administrative concerns are immense, South Dakota also has a strong argument that states could lose billions in revenue over the next decade if they are unable to fully tax retailers within the e-commerce marketplace. Chief Justice John Roberts noted that, as a country we may be past the point in our history where major e-commerce-based retailers are refusing to collect and remit sales tax. He noted that the major five players in this field already comply across the board (Amazon, for instance, has long charged sales tax appropriately throughout the country). His statements highlighted the fact that these large retailers are still successful, even while complying with varying state taxing liabilities. Chief Justice Roberts noted that large e-commerce retailers no longer refuse to collect sales tax in order to enjoy a price advantage over brick and mortar stores. He said, “…if it is, in fact, a problem that is diminishing rather than expanding, why doesn’t that suggest that there [is] greater significance to the arguments that we should leave Quill in place?” The Justices noted that these larger players in the marketplace that are not of any state’s primary concern at present nor will they will necessarily feel an increased burden if Quill is overturned. Rather, small businesses will feel the impact first.

Many of the arguments have come down to whether the Supreme Court should be deciding this issue, or whether action by Congress would be more appropriate. While South Dakota argued that Congress has had more than twenty years to act, thus allowing the Court to step in, the Justices were prompt to point out that “this is something [Congress is] going to leave the way it has been for, whatever it is, 25 years.” The Court also noted that “it would be very strange for [the Supreme Court] to tell Congress it ought to do something in any particular area.” Chief Justice Roberts brought up the possibility that this is an area that Congress has simply decided to avoid. On the other hand, Justice Elena Kagan cautioned that Congress’s inaction is reason enough to proceed carefully in overturning Quill. This inaction may have the effect of raising the bar as to what would be necessary to overturn another such monumental case.

Decision Expected this Summer

While it is unclear what the fate of Quill and Wayfair will be, it is certain that no decision from this Court will be entered into lightly. The Justices are rightly concerned with the practical impact that such a massive decision would have on small retailers, specifically the increased procedural burden e-commerce vendors would face if states were permitted to impose tax on businesses lacking physical presence. Many states are struggling to increase revenue and balance their budgets, especially after the passage of the Tax Cuts and Jobs Act (TCJA). The impact of TCJA makes it clear why South Dakota is attempting to broaden its taxing authority. However, it is wise to keep in mind what overturning Quill could mean for all sides. We are in an age where the law and technology are in a constant race against each other. If Quill remains, the Wayfair case could spark a flood of new laws from states attempting to define and re-define what digital touches to a state are consistent with Quill.

A decision from this case is expected around the end of June. HBK will continue to monitor this case and its potential affect on our clients, associates and colleagues. Please contact Cassandra Baubie at cbaubie@hbkcpa.com or 330-758-8613 with any questions.

This is an HBK Tax Advisory Group publication.

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Reminder about Requirements for Foreign-Owned U.S. Disregarded Entities

Date March 30, 2018
Authors Sarah Nicole Gaymon, CPA

The Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) issued final regulations on December 13, 2016 for the Internal Revenue Code (“IRC”) Sections 6038A and 7701. These regulations take effect for tax years beginning after January 1, 2017 and make way for additional filing requirements for domestic disregarded entities (DREs) that are wholly owned by foreign persons.

Under the new rules, foreign-owned Disregarded Entities (DREs) are required to file Form 5472, Information Return of a 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. For many foreign-owned DREs, this new requirement has added implications. In order to file Form 5472, these entities are now required to obtain an Employer Identification Number (EIN) if they have not yet established one. When applying for an EIN, the foreign-owned DRE must identify the owner or name of a responsible party. If the foreign owner or responsible party does not have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) potential complications can arise.

Another nuance under these regulations is a requirement for foreign-owned DREs to maintain books and records that would allow them to accurately file Form 5472 and follow US tax treatment with respect to reportable transactions. Reportable transactions under these regulations include sales, assignments, leases, licenses, loans, advances or any other transfer that constitutes a right to use property or money in addition to the performance of any services for the benefit of or on behalf of another taxpayer. In addition, contributions and distributions are also considered reportable transactions under IRC 6038A.

To facilitate compliance with the additional requirements of Section 6038A and the required reporting under Form 5472, a foreign-owned DRE that has a U.S. filing requirement is required to have the same taxable year as the foreign owner; and similarly, if the foreign owner has no U.S. filing requirement, the taxable year of the entity is the calendar year unless otherwise indicated.

The penalties for failure to file are steep. Not filing Form 5472 could cost a taxpayer $10,000. This penalty can also be assessed for failure to maintain proper records. In fact, filing a substantially incomplete Form 5472 would constitute a failure to file Form 5472 and the $10,000 penalty can be assessed. However, there is no guidance provided by the IRS or any other regulatory agency as to what constitutes filing a substantially incomplete Form 5472. Criminal penalties may also apply for failure to submit information or for filing false or fraudulent information. Lastly, foreign-owned DREs cannot electronically file Form 5472.

If you have any questions regarding the new filing requirements, please reach out to a member of the Tax Advisory Group (TAG) at HBK.

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Key Deadlines for Businesses, Employers

Date March 28, 2018
Authors HBK CPAs & Consultants

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 2

• Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

April 17

• If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

• If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

April 30

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

May 10

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

• If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

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Tax Cut and Jobs Act – New Tax Legislation May Pass Before Year End

Date December 18, 2017
Authors James M. Rosa
Categories

The Senate and House Conference Committee agreed on the provisions of the Tax Cut and Jobs Act at the end of the day on December 15. The House is expected to vote on Tuesday this week and the Senate on Wednesday. If the law passes, President Trump will sign it into law.

Passage of the Act is not a slam dunk as there are a few Senators who are non-committal and Senator McCain will not be in Washington for the vote. Vice-President Mike Pence has delayed a planned trip to the Middle East in case his vote is necessary to break a tie.

Here are the major provisions of the bill, which for the most part apply after 2017, and sunset after 2026. This means that the tax law before these changes would go back to the law before the law changes:

Individuals Provisions

  • Tax rates: The highest individual tax rate would drop from 39.6% to 37% with seven brackets 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top bracket would apply for single filers at $500,000 and $600,000 for joint filers.
  • Kiddie tax: Unearned income over $2,100 of dependent children under age 24 will be taxed at trust and estate income tax rates rather than the parent’s tax rates. This will generally result in higher income taxes.
  • Capital gain rates: The current 0%, 15% and 20% capital gain rates would not change.
  • Inflation adjustments: The tax brackets and other provisions of the tax law are adjusted each year for inflation. The new law would use a chained CPI index, which is the lower rate of growth than CPI. This would be a permanent law change.
  • Standard deduction: The standard deduction would be increased to $12,000 for single filers, $24,000 for joint filers and $18,000 for head of household filers.
  • Personal exemptions: Would be repealed.
  • Passthrough income deduction: Individuals would be allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. A limitation on the deduction will be based on the greater of 50% of W-2 wages paid by the business, or 25% of W-2 wages paid plus 2.5% of the cost of property used in the business. Most service businesses will have additional limitations.
  • Loss limitations: Business losses in excess of $500,000 on joint returns and $250,000 on single returns would not be allowed to offset other sources of income. The excess loss amount would carryover and allowed in future years.
  • Mortgage interest: The limitation on the amount of acquisition debt would be reduced from $1.1 million to $750,000. Mortgages in existence before December 16, 2017 would not be subject to this change. The deduction for interest on home equity debt would be repealed. In addition, mortgage interest on a principal residence and a second home would continue.
  • State and local taxes: Individuals would be allowed to deduct up to $10,000 of state and local income taxes and property taxes. The new law prevents taxpayers from prepaying 2018 state and local income taxes in 2017, but that restriction does not apply to property taxes.
  • Charitable contributions: The current 50% limitation for cash contributions to public charities would be increased to 60%. Donations for college athletic event seating right would be disallowed.
  • Medical expenses: The threshold for the deduction of medical expenses would drop from 10% of adjusted gross income to 7.5% beginning in 2017.
  • Miscellaneous itemized deductions: All miscellaneous deductions subject to the 2% floor would be repealed, including tax return preparation and planning fees, investment advisory fees, employee business expenses and many others.
  • The reduction of itemized deductions for high-income taxpayers would be repealed.
  • Alimony: Alimony received would not be taxable and alimony paid would not be deductible for divorce and separation agreements entered into or modified after December 31, 2018.
  • Moving expenses: Would no longer be deductible and if reimbursed by an employer would be taxable to the employee.
  • Child credit: The allowable child credit would be increased to $2,000 with up to $1,400 being refundable. The income thresholds for the phase-out of the child credit would be increased significantly. Also a new nonrefundable $500 credit for qualifying dependents who are not qualifying children.
  • Section 529 tuition savings plans: Up to $10,000 would be allowed to use for private elementary and secondary school tuition.
  • Alternative minimum tax (AMT): AMT would not be repealed, but the exemption amounts would be increased.
  • Individual health insurance mandate: The mandate would be repealed along with the subsidies.
  • Estate, gift and generation skipping tax: The exemptions would be doubled, so in 2018 the exemptions would be $11.2 million per person.

Business Tax Provisions

  • Corporate tax rate: The corporate tax rate would be reduced to 21% for years beginning after 2017. This would be a permanent law change.
  • Domestic Production Activity Deduction: This deduction, which has amounted to 9% of taxable income from production activities in the U.S., would be repealed. The deduction is repealed for all businesses, regardless of how organized, including C corporations, S corporations, partnerships and proprietorships.
  • Corporate AMT: Would be repealed.
  • Business interest expense: Every business, regardless of form, would be limited by the amount of interest expense it can deduct to 30% of its “adjusted taxable income’. Adjusted taxable income is defined as the business’ taxable income computed without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and depletion. Any disallowed interest expense carries over indefinitely subject to the same limits. Certain businesses are exempt from the limitations, including: (i) any business with less than $25 million in revenue, (ii) dealers of automobiles and trucks, farm equipment, recreational vehicles, motorcycles and boats, (iii) real property businesses, (iv) regulated public utilities
  • Bonus depreciation: Businesses would be allowed to immediately expense 100% of qualified property placed in service after September 27, 2017 and before January 1, 2023. New and used property would be qualified. After 2022, the bonus depreciation amount be reduced by 20% each year thereafter and terminate in 2026. Businesses not subject to the interest expense deduction limitations (other than those with less than $25 million in revenue) would not be allowed bonus depreciation.
  • Section 179 expensing: The current $500,000 expensing limit would be increased to $1 million. Eligible property would also include improvements to nonresidential real property such as roofs, HVAC, fire protection and alarm and security systems.
  • Automobile depreciation: Depreciation deductions for automobiles used in business would be sharply increased.
  • Net operating losses (NOL): For losses arising after 2017, an NOL deduction would be limited to 80% of taxable income. The current 20-year carryover period would be made indefinite and the two-year carryback period would be repealed. NOLs arising in years before 2018 would not be subject to these changes.
  • Like-kind exchanges: After 2017, like-kind exchanges would only be available for real estate, not tangible personal property.
  • Entertainment expenses: No deduction would be allowed for any entertainment, amusement or recreation and membership dues. Currently, 50% of these expenses have generally been deductible.
  • Research and experimental expenses: For years beginning after 2021, these expenses would have to be amortized over a five-year period.

The Conference agreement includes many other provisions and is easily the most significant tax legislation since 1986. There are many opportunities to take advantage of the tax law changes and take action before the end of 2017 to secure certain tax benefits that may no longer be available.

Please contact a member of HBK to discuss how these changes may affect you.

This is an HBK Tax Advisory Group publication.

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