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Tax reform: what is proposed?

There is now a ton of media chatter about the recently introduced federal tax reform package being passed around in Washington, D.C. While it’s still early in the process, here are some of the key elements of the current proposal.

For individuals:

  • Individual tax rate brackets trimmed to three rates of 12, 25 and 35 percent, down from the current seven brackets.
  • Nearly doubling the standard deduction, to $12,000 for individuals and $24,000 for joint filers.
  • Eliminating all but two itemized deductions: home mortgage interest and charitable deductions.
  • Eliminating personal exemptions for dependents, but increasing the Child Tax Credit.
  • Repealing the estate tax.
  • Repealing the Alternative Minimum Tax (AMT).

For businesses:

  • Cutting the top corporate tax rate to 20 percent from 38 percent.
  • Capping at 25 percent the tax rate for pass-through corporations including sole proprietorships, partnerships and S corporations (down from the current 39.6 percent max).
  • Shifting international taxation to a territorial system, encouraging U.S. corporations to repatriate earnings from foreign subsidiaries.
  • Allowing full expensing of business investments, rather than the standard depreciation model.

It’s not official yet

Please recall that much needs to occur before any tax reform proposal makes its way into law. There is sure to be much discussion over a few points, including:

  • The current proposal does not account for how any federal revenue shortfall created by this reform will be addressed, nor how it will impact government spending.
  • Many constituents will battle to retain their deductions. For example, being able to deduct state and local taxes on a federal return is very important for residents of high-tax states such as New York and California.
  • With the elimination of so many deductions and the increase in the standard deduction, fewer taxpayers may decide to use itemized deductions if this reform is passed. This could impact the value of the home mortgage interest and charitable contribution deductions.
  • Taxpayers in the lowest income bracket see their rate rise to 12 percent from 10 percent. The proposal authors say this will be offset by the higher standard deduction.

Action required?

Given the Republicans’ slim margin of seats in both the House and the Senate, any defection within their ranks could derail this legislation. This was the fate of the health care reform bill earlier this year. Because of this, the best course of action is to wait and see. Whatever ends up happening in Washington, rest assured that you’ll be informed of what you need to know, and help will be available to review any of the changes as they impact your situation.



Employee meals: 50 or 100 percent deductible?

Everyone loves a free meal – especially employees. However, your business tax return will be affected differently depending on the circumstances of the mealtime experience.

While you can generally deduct only half the cost of meals related to your business activities, the tax code includes specific exceptions that allow a deduction of 100 percent of what you spend on food and beverages in certain situations. Here are three examples:

  • Social gatherings and parties. That once-a-year holiday party qualifies for 100 percent deductibility as long as it is primarily for the benefit of all your employees.
  • Food with nominal cost. Do you supply morning-meeting donuts, meals for overtime work or special occasion treats for your staff? “De minimis” employee benefits — those small items your business pays for that are not considered taxable income to your employees— are typically 100 percent deductible.
  • Employees on emergency calls. If you provide food for your employees during working hours so they can be available for emergency calls, the meals will likely be able to be deducted 100 percent.

Remember that you’ll still need to keep detailed records to substantiate your deductions for meals and food served under these exceptions.

We’ll be happy to help you review your expenses and set up a system to account for items that qualify for a more generous deduction.



4 smart ways to cut business costs

Keeping costs under control is crucial in today’s challenging business environment. Without a doubt, one of the quickest ways for a business to cut costs is through staff reduction. But cutting jobs is not always the best cost-cutting strategy. Drastic job cuts can lead to a vicious cycle of reduced productivity, followed by even slower growth and decreased profitability. Replacing skilled workers when times improve may be difficult, leaving your company to struggle longer still.

Take a look at some alternative cost-control strategies:

  1. Review your facility costs. If your company owns expensive office space, consider moving to a less costly location that will not mean losing clients or business. If a move is out of the question, consider sharing office space with a compatible company. What you save in shared operating costs goes directly to the bottom line.
  2. Determine if sale-leaseback arrangements are right for your company. These enable your company to generate funds for operations and transfer the burden of ownership to the buyer, from whom you rent back the office space.
  3. Recalculate the cost of supplies and inventory. Analyze the cost of materials and supplies. Are you stocking too much material too far in advance? Can you arrange to have products shipped directly to customers by your suppliers? Periodically conduct a competitive review of suppliers, and select those who can deliver good quality and service at the lowest cost possible. Also, you may not have to pay full price; inquire about volume discounts.
  4. Consider outsourcing. Outsource certain activities that either consume a great deal of time and resources or are prone to errors. For example, you may be able to have payroll processing done by a vendor at a fraction of your current costs.

For help in finding the best cost-control strategies for your business, give us a call.



Considering leasing your business real estate?

If your business is incorporated, it may be a good idea for you to own the business real estate and lease it to your corporation. That’s because there are a number of tax and nontax concerns relating to real estate ownership. Before you acquire new business property or change the ownership of property you already have, give us a call. We can discuss tax considerations.



Beware of email hacks

One of several identity theft scams IRS Commissioner John A. Koskinen spoke about at a recent IRS Nationwide Tax Forum is a client email hack scam. This happens when a thief uses a taxpayer’s email address to send an email to a tax preparer with instructions to redirect refunds into a different bank account.

Protect your tax returns this tax season by ensuring your email accounts and important data is kept safe with strong passwords, malware protection and other security measures.



Debt forgiveness and taxes

Did you know that any amount of canceled debt is typically taxed as ordinary income? If you receive debt forgiveness for home, car or student loans, or credit card interest and debt, you may create a tax liability. There are some exceptions, like when debt is forgiven as part of a Chapter 11 bankruptcy, or when a person’s total debt is more than the value of the assets he or she owns.



Are you withholding enough for taxes?

Don’t leave it up to chance – check your 2017 tax withholdings while you still have some time to make changes. You can use the withholding calculator on the IRS website to see if you are paying too much or not enough. To make a change, fill out a Form W-4 and give it to your employer. You’ll end up filling out another form in early 2018 to adjust your withholding schedule.



You’re getting audited – here’s what to do

Most of us will never be audited. But when it does happen, it might feel a little scary. The truth of the matter is IRS auditors do audits every day. They know what to look for and can ask questions that you may easily answer incorrectly. Here’s how you can be more prepared if it happens to you:

  • Respond to the IRS in a timely manner. Do not let it get to a point that a face-to-face examination is required.
  • Ask for help. Do this right away. Too many clients think the problem is easy to resolve, but inadvertently say the wrong thing or open another audit issue inadvertently.
  • Know what is being asked. Clearly understanding the core question can simplify the solution. Why is the auditor asking to see your 1099s? Is it regarding a form you don’t have? Is the auditor asking about your small business profits because he/she thinks your business is a hobby?
  • Understand how the auditor has been trained. The IRS has certain areas in which it focuses training for its auditors. These are published in Audit Technique Guides (ATGs) and are available for review on the IRS website. The ATGs can be helpful in identifying areas for potential audits, as well as help you understand what the IRS likes to question.

Even if there’s only a small chance that you’ll be audited in your lifetime, it can be helpful to know how you can prepare for it if it happens to you.



Fair market value (FMV): What is it and how to defend it

So what is fair market value (FMV)? According to the IRS, it’s the price that property would sell for on the open market. This is the price that would be agreed on between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts.

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation.

Understand when FMV is used

Fair market value is used whenever an item is bought, sold or donated and has tax consequences. The most common examples are:

  • Buying or selling your home, other real estate, personal property or business property
  • Establishing values of other business assets like inventory
  • Valuing charitable donations of personal goods and property like automobiles
  • Valuing bartering of services, business ownership transfers or assets in an estate of a deceased taxpayer

 

Know how to defend your FMV determination

If the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but also penalties. Here are a few tips to help defend your FMV in case of an audit.

Properly document donations. Fair market value of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt confirming your donations.

Get an appraisal. If you sell a major asset such as a small business, collections, art or capital asset, make sure you get an independent appraisal of the property first. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.

Keep pricing proof for similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim.

Take photos and keep detailed records. The condition of an item is often a key consideration in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount. And keeping copies of invoices for major purchases is also a good idea.

With proper planning, establishing FMV of an item can be done in a reasonably defendable way if ever challenged.



Your receipts are important: save them

When it comes to taking qualified deductions on your federal tax return, three things must happen:

  • Recognize that an expense might be deductible on your tax return.
  • Keep a record of the expense in an organized fashion.
  • Obtain the proper (and timely) documentation to support your deduction.

This might be obvious to most people, but here are some typical areas where taxpayers often fall short. In the long run, these items could end up costing you plenty during tax filing season, and trigger IRS audits.

  1. Cash donations to charity. To deduct and support your deduction to a qualified charity you must have valid support. Donations of cash are no longer deductible if they are not supported by a canceled check or written acknowledgement from the charity. A donation deduction of $250 or more needs to be supported by documentation created at the time of the donation. A canceled check and bank statement are not sufficient. If you get audited, having the charity issue documentation after the fact may not be enough.
  2. Non-cash contributions. You need documentation for these donations as well. This includes a detailed list of items donated, the condition of the items and their estimated fair market values. While this level of detail is not required for small donations, keeping good records and taking photos is a good practice.
  3. Investment purchases and sales. If you bought or sold an investment you will need to know your cost basis. Today’s regulations require brokers to report to the IRS the cost basis of investment sales. Review your broker accounts and correct any errors. It’s very difficult to defend yourself in an audit when records reported to the IRS are in error.
  4. Copies of divorce decrees, alimony and child support agreements. There are often conflicts between two taxpayers taking the same child as a deduction. Do you have the necessary proof to defend your position? The same is true with alimony and child support. Keep these documents in a safe place and be ready to use them if necessary.
  5. Copies of financial transactions. Keep copies of documents from any major financial transaction. This includes real estate settlement statements, refinancing documents and any records of major purchases. These documents are necessary to ensure your cost basis in the property is properly recorded. The documents will also help identify any tax-related items like mortgage insurance, property taxes and possible sales tax paid.
  6. Mileage logs. Lack of tracking deductible miles is probably one of the most commonly overlooked documentation requirements. Properly recording charitable, medical and business miles can really add up to a large deduction. If the record is not available, the IRS is quick to disallow your deduction.

If you are not sure whether a document is needed, retain it. Then you can always retrieve it if needed.