January 2018

IRS Releases New Withholding Tables: Employees Will See Changes Soon

Posted on January 31, 2018July 22, 2024 by Debra Barcuch

On January 11, the IRS released updated 2018 income tax withholding tables, which reflect changes made by the new Tax Cuts and Jobs Act. This is the first in a series of steps that the IRS will take to help improve the accuracy of withholding following major changes made by the new tax law, the IRS stated.

The updated withholding information, shows the new rates for employers to use during 2018. Employers should begin using the 2018 withholding tables as soon as possible, but not later than February 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

To view the tables in Notice 1036, click here: https://www.irs.gov/pub/irs-pdf/n1036.pdf

Many employees will begin to see increases in their paychecks to reflect the new law in February. According to the IRS, “the time it will take for employees to see the changes in their paychecks will vary depending on how quickly the new tables are implemented by their employers and how often they are paid — generally weekly, biweekly or monthly.”

The new withholding tables are designed to work with the W-4 forms that workers have already filed with their employers to claim withholding allowances. This minimizes the burden on taxpayers and employers, the IRS stated. At this time, employees don’t have to do anything.

Why the Changes Are Needed

The new law makes a number of changes for 2018 that affect individual taxpayers. The new tables reflect:

An increase in the standard deduction,
A repeal of personal exemptions, and
Changes in tax rates and tax brackets.

For people with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding. The revisions are also aimed at avoiding over- and under-withholding of tax as much as possible.

To help people determine their withholding, the IRS is also revising the withholding tax calculator on IRS.gov. The tax agency anticipates this calculator should be available by the end of February. Taxpayers are encouraged to use the calculator to adjust their withholding once it is released.

The IRS is also working on revising Form W-4. The revised Form W-4 and the revised calculator will reflect additional changes in the new law, such as:

Changes in available itemized deductions,
Increases in the child tax credit, the new dependent credit and repeal of dependent exemptions.

The calculator and new Form W-4 can be used by employees who wish to update their withholding in response to the new law or changes in their personal circumstances in 2018, and by workers starting a new job. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4.

In addition, the IRS announced it will help educate taxpayers about the new withholding guidelines and the calculator. The effort will be designed to help workers ensure that they aren’t having too much or too little withholding taken out of their pay so that when they file their tax returns they don’t get a surprise.

Some Expressing Concern

Two Democratic congressmen are questioning whether enough taxes will be taken out of the checks of employees under the IRS’s 2018 withholding tables. In letters sent to federal tax officials, Senator Ron Wyden (OR) and Representative Richard Neal (MA) expressed concern that the new withholding tables would “result in millions of taxpayers receiving larger after-tax paychecks this election year but ultimately owing federal income tax when they file in 2019.”

More Changes Next Year

For 2019, the IRS anticipates making further changes involving withholding. The IRS will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.

Acting IRS Commissioner David Kautter noted: “Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes.”

If you have questions about whether you will have enough taxes taken out of your paycheck for 2018, consult with your Cornwell Jackson tax advisor.

Let’s Take a Closer Look at New Business Tax Reforms

Posted on January 30, 2018July 22, 2024 by Debra Barcuch

The Tax Cuts and Jobs Act (TCJA) provides businesses with more than just lower income tax rates and other provisions you may have heard about. Here’s an overview of some lesser-known, business-friendly changes under the new law, along with a few changes that could affect some businesses adversely.

Good News for New Business Tax Reforms

Many of the new law’s provisions will reduce the amount of taxes your business will owe, starting in 2018. Here are four examples that you might not be familiar with:

1. Faster Depreciation for Certain Real Property

For property placed in service after December 31, 2017, the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are eliminated. Under the TCJA, those items are now lumped together under the description of qualified improvement property, which can be depreciated straight-line over 15 years.

2. Faster Depreciation for New Farming Machinery and Equipment

The TCJA shortens the depreciation period from seven years to five years for new machinery and equipment that is placed in service after December 31, 2017, and used in a farming business (other than grain bins, cotton ginning assets, fences or other land improvements). In addition, the faster double-declining balance method can be used to calculate annual depreciation deductions for these types of machinery and equipment.

3. New Credit for Employer-Paid Family and Medical Leave

For wages paid tax years beginning after December 31, 2017, and before January 1, 2020, the TCJA allows employers to claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while they’re on family or medical leave. There’s a hitch: You must pay the employee at least 50% of his or her normal wage while on leave.

Additionally, the credit rate increases by 0.25% for each percentage point that the wage rate paid while on leave exceeds 50% of the normal rate. However, the maximum credit rate is 25%. For example, if you pay an employee 60% of her normal wage rate while on leave, you could qualify for a general business credit equal to 15% (12.5% + (10 x 0.25%)), if all other conditions are met.

Important: To be eligible for the credit, the employer must provide all qualifying full-time employees at least two weeks of annual paid family and medical leave. Part-time employees must be given proportional leave time.

4. Accounting Change for Long-Term Construction Contracts

Under prior law, construction companies were generally required to use the less-favorable percentage-of-completion method (PCM) to calculate annual taxable income from long-term contracts for the construction or improvement of real property. However, construction companies with average annual gross receipts of $10 million or less in the preceding three tax years were exempt from this requirement.

The TCJA expands this exemption to cover contracts for the construction or improvement of real property if they:

Are expected to be completed within two years, and
Are performed by a taxpayer with average annual gross receipts of $25 million or less for the preceding three tax years.

This beneficial change is effective for contracts entered into in 2018 and beyond.

Bad News for New Business Tax Reforms

The tax breaks provided by the TCJA will cost the federal government a significant amount of revenue. As a result, the bill needed to raise revenue through other tax law changes. Here are two examples:

1. Less Favorable Treatment of Carried Interests

Historically, private equity funds and hedge funds have been structured as limited partnerships. Under prior law, carried interest arrangements allowed private equity fund and hedge fund managers to give up their right to receive current fees for their services and, instead, receive an interest in future profits from the private equity/hedge fund partnership. These arrangements are called “carried interests” because a private equity/hedge fund manager doesn’t pay anything for the partnership profits interest. To add to the appeal, the private equity/hedge fund manager isn’t taxed on the receipt of the carried interest (because it’s not considered to be a taxable event).

The tax planning objective of carried interest arrangements is to trade current fee income for partnership profits interest. Current fee income would be treated as high-taxed ordinary income and subject to federal employment taxes. But a partnership profits interest is expected to generate future long-term capital gains that will be taxed at lower rates.

For tax years beginning after 2017, carried interest arrangements face a major hurdle: The TCJA imposes a three-year holding period requirement in order for profits from certain partnership interests received in exchange for the performance of services to be treated as low-taxed, long-term capital gains.

2. Self-Created Intangible Assets No Longer Treated as Capital Assets

Effective for dispositions in 2018 and beyond, the TCJA stipulates that certain intangible assets can no longer be treated as favorably-taxed capital gain assets. This change affects:

Inventions,
Models and designs (whether or not patented), and
Secret formulas.

The change will cover the above types of intangibles that are 1) created by the taxpayer, or 2) acquired from the creating taxpayer with the new owner’s basis in the intangible determined by the creating taxpayer’s basis. The latter situation could happen if the creating taxpayer gifts an intangible to another individual or contributes an intangible to another taxable entity, such as a corporation or partnership.

Need Help?

If you’re feeling overwhelmed by the new tax law, you’re not alone. The TCJA is expected to have far-reaching effects on business taxpayers. Contact your Cornwell Jackson tax advisor to review the substance of the bill and how your company can manage the impact.

New Law Revamps the Kiddie Tax

Posted on January 30, 2018July 22, 2024 by Debra Barcuch

Congress enacted the so-called “kiddie tax” rules to prevent parents and grandparents in high tax brackets from shifting income (especially from investments) to children in lower tax brackets. Congress recently revamped this tax under the Tax Cuts and Jobs Act (TCJA).

Trust and Estate Tax Rates for 2018

Use the following tax rates to compute the kiddie tax for 2018 to 2025:

2018 Ordinary Income Tax Rates for Trusts and Estates

10% tax bracket	$0 – $2,550
24% tax bracket	$2,551 – $9,150
35% tax bracket	$9,151 – $12,500
37% tax bracket	$12,501 and above

2018 Long Term Capital Gains and Qualified Dividends Tax Rates for Trusts and Estates

0% tax bracket	$0 – $2,600
15% tax bracket	$2,601 – $12,700
20% tax bracket	$12,701 and above

What changed? The TCJA only revises the kiddie tax rate structure. The rest of the kiddie tax rules are the same as before. Here’s what you need to know about how this tax can come into play under the new law.

Important note: For simplicity, throughout this article we use the terms “child” and “children” to apply to both children and young adults under age 24 who may be subject to the kiddie tax.

Kiddie Tax Basics

For 2018 through 2025, the TCJA revises the kiddie tax rules to tax a portion of a child’s net unearned income at the rates paid by trusts and estates. These rates can be as high as 37% for ordinary income or, for long-term capital gains and qualified dividends, as high as 20%. (See “Trust and Estate Tax Rates for 2018,” at right.)

The trust and estate tax rate structure is unfavorable because the rate brackets are compressed compared to the brackets for single individuals. In other words, the kiddie tax rules can override the lower rates that would otherwise apply to an affected child’s unearned income.

By comparison, under prior law, the kiddie tax rules taxed a portion of an affected child’s unearned income at the parent’s marginal tax rate if that rate was higher than the child’s rate. For 2017, the parent’s rate could be as high as 39.6% for ordinary income or, for long-term capital gains and dividends, as high as 20%.

Important note: For purposes of the kiddie tax rules, the term “unearned income” refers to income other than wages, salaries, professional fees and other amounts received as compensation for personal services rendered. Examples of unearned income include capital gains, dividends and interest. Earned income from a job or self-employment isn’t subject to the kiddie tax.

In calculating the federal income tax bill for a child who’s subject to the kiddie tax, the child is allowed to deduct his or her standard deduction. For 2018, if the TCJA hadn’t passed, the standard deduction for a child for whom a dependent exemption deduction would have been allowed under prior law is the greater of:

$1,050, or
Earned income plus $350, not to exceed $12,000.

For 2018, the kiddie tax potentially affects children who don’t provide over half of their own support in 2018 and who live with their parents for more than half of the year.

The Age Factor

The kiddie tax can potentially apply until the year that a child turns age 24. More specifically, the kiddie tax applies when all four of the following requirements are met for the tax year in question:

1. The child doesn’t file a joint return for the year.

2. One or both of the child’s parents are alive at the end of the year.

3. The child’s net unearned income for the year exceeds the threshold for that year, and the child has positive taxable income after subtracting any applicable deductions, such as the standard deduction. The unearned income threshold for 2018 is $2,100. If the unearned income threshold isn’t exceeded, the kiddie tax doesn’t apply. If the threshold is exceeded, only unearned income in excess of the threshold is hit with the kiddie tax.

4. The child falls under one of the following age-related rules:

Rule 1. The child is 17 or younger at year end.

Rule 2. The child is 18 at year end and doesn’t have earned income that exceeds half of his or her support. (Support doesn’t include amounts received as scholarships.)

Rule 3. The child is age 19 to 23 at year end and 1) is a student, and 2) doesn’t have earned income that exceeds half of his or her support. A child is considered to be a student if he or she attends school full-time for at least five months during the year. (Again, support doesn’t include amounts received as scholarships.)

Kiddie Tax in the Real World

Here are several examples to help you understand who could be hit with the kiddie tax after the changes made by the TCJA:

Adam will be 17 on December 31, 2018. So, he falls under Rule 1 (above). For 2018, he will be subject to the kiddie tax if the other three requirements are also met.

Beth will be 19 on December 31, 2018. She doesn’t have any earned income for the year, and she’s a full-time student for the entire year. She falls under Rule 3. For 2018, she will be subject to the kiddie tax if the other three requirements are also met.

Claire is 19 on December 31, 2018. She’s not a student for 2018, so Claire is exempt from the kiddie tax for 2018.

Dennis will be 21 on December 31, 2018, and he graduates from college in May 2018. He qualifies as a full-time student, because he’s enrolled for the first five months of the year. Dennis couldn’t find a job after graduation, so he doesn’t provide over half of his own support for the year. Therefore, he’s subject to the kiddie tax for 2018 under Rule 3, if the other three requirements are also met.

Ellie will be 24 on December 31, 2018. Even though Ellie is still enrolled in college, she’s exempt from the kiddie tax for 2018 and all subsequent years, because none of the age-related rules apply to her.

The Mechanics

There are four steps when calculating the federal income tax bill under the kiddie tax rules.

1. Add up the child’s net earned income and net unearned income.

2. Subtract the child’s standard deduction to arrive at taxable income.

3. Compute tax for the portion of taxable income that consists of net earned income using the regular rates for a single taxpayer. (See “Computing Tax on a Child’s Earned Income,” below.)

4. The kiddie tax will be assessed on the portion of taxable income that consists of net unearned income and that exceeds the unearned income threshold. (That threshold is $2,100 for 2018.) Compute kiddie tax for this amount using the rates that apply to trusts and estates. (See “Trust and Estate Tax Rates for 2018,” above.)

To illustrate how to calculate a child’s federal tax bill, let’s look at one of the previous examples. Adam (age 17) has $2,000 of earned income from delivering newspapers and $7,000 of unearned ordinary income. His standard deduction is $2,350 ($2,000 of earned income + $350).

Adam’s taxable income is $6,650 ($2,000 + $7,000 − $2,350). The entire $6,650 is treated as unearned income because his $2,350 standard deduction offsets all of his earned income plus the first $350 of his unearned income.

The first $2,100 (the amount up to the kiddie tax unearned income threshold) is taxed at 10% under the regular rates for single taxpayers, resulting in $210 of tax.

The remaining $4,550 of taxable income ($6,650 – $2,100) falls under the kiddie tax rules and is, therefore, taxed at the rates for trusts and estates as follows:

- The first $2,550 is taxed at 10%, resulting in $255 of tax.

The remaining $2,000 ($4,550 – $2,550) is taxed at 24%, resulting in $480 of tax.

So Adam’s tax bill is $945 ($210 + $255 + $480).

Important note: Without the kiddie tax, all of Adam’s $6,650 of taxable income would have been taxed at 10% under the regular rates for single taxpayers, resulting in only $665 of tax.

Contact Us

The kiddie tax is somewhat easier to calculate under the TCJA. But it can still be confusing. Depending on your circumstances, your children or grandchildren may be hit even harder by the kiddie tax under the new rules. If your child or grandchild has significant unearned income, contact your Cornwell Jackson tax advisor to identify strategies that will help reduce the kiddie tax for 2018 and beyond.

Computing Tax on a Child’s Earned Income

2018 Ordinary Income Tax Rates for Single Taxpayers

10% tax bracket	$0 – $9,525
12% tax bracket	$9,526 – $38,700
22% tax bracket	$38,701 – $82,500
24% tax bracket	$82,501 – $157,500
32% tax bracket	$157,501 – $200,000
35% tax bracket	$200,001 – $500,000
37% tax bracket	$500,001 and above

2018 Long Term Capital Gains and Qualified Dividends Tax Rates for Single Taxpayers

0% tax bracket	$0 – $38,599
15% tax bracket	$38,600 – $425,800
20% tax bracket	$425,801 and above

Standard Deductions

For dependents with only unearned income, the standard deduction is $1,050.

For dependents with earned income, the standard deduction is the greater of: 1) $1,050, or 2) earned income plus $350, not to exceed $12,000.

For nondependent single taxpayers, the standard deduction is $12,000.

Spotlight on Pass-Through Entities under the Tax Cuts and Jobs Act

Posted on January 29, 2018July 22, 2024 by Debra Barcuch

Will pass-through entities still be popular under the Tax Cuts and Jobs Act (TCJA)? The tax rules for pass-through entities, including S corporations, limited liability companies (LLCs), partnerships and sole proprietorships, have generally become more beneficial — but also more confusing under the new law.

So which type of entity is best for your business? The answers depend on several factors, which are explained in this article.

New Deduction for Pass-Through Business Income

Under prior law, net taxable income from so-called pass-through business entities (meaning sole proprietorships, partnerships, LLCs that are treated as sole proprietorships or as partnerships for tax purposes, and S corporations) was simply passed through to owners and taxed at the owner level at standard rates.

For tax years beginning after 2017, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This break is available to eligible individuals, estates and trusts. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels. The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it is treated the same as an allowable itemized deduction.

This break is subject to the following restrictions:

W-2 Wage Limitation. The QBI deduction generally can’t exceed the greater of the noncorporate owner’s share of: 1) 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property means depreciable tangible property (including real estate) owned by a qualified business as of the tax year end and used by the business at any point during the tax year for the production of qualified business income. In addition, the QBI deduction can’t exceed 20% of the taxpayer’s taxable income exclusive of net long term capital gains and qualified dividends.

Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.

Service Business Limitation. The QBI deduction is generally not available for income from specified service businesses, such as most professional practices. Under an exception, the service business limitation does apply until an individual owner’s taxable income exceeds $157,500, or $315,000 for a married joint filer. Above those income levels, the W-2 wage limitation is phased in over a $50,000 phase-in range or a $100,000 range for married joint filers.

Important note: The W-2 wage limitation and the service business limitation don’t apply as long as taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.

New Rule on Distributions after Converting from S to C Corp Status

In general, distributions by a C corporation to its shareholders are treated as taxable dividends to the extent of the corporation’s earnings and profits (E&P). However, a special “posttermination transition period” rule provides relief to shareholders of a corporation that changes from S corporation status to C corporation status.

During this period, any distribution of money by the corporation to its shareholders is first applied to reduce the basis of the shareholder’s stock to the extent the distribution doesn’t exceed the accumulated adjustments account (AAA) balance that was generated during the company’s life as an S corporation. Such distributions of AAA amounts are tax-free to recipient shareholders.

The TCJA modifies the posttermination transition period relief rule for C corporations that:

Operated as S corporations before December 22, 2017,
Revoke their S corporation status during the two-year period beginning on that date, and
Have the same owners on December 22, 2017, and the revocation date.

Distributions from such corporations are treated as paid pro-rata from AAA and E&P. This can result in more of a distribution being treated as a taxable dividend and less being treated as a tax-free distribution of AAA. This change is intended to discourage the tax planning strategy of converting S corporations to C corporation status in order to take advantage of the new flat 21% federal income tax rate on C corporation income.

New Rule for ESBT Beneficiaries

As a general rule, trusts cannot be S corporation shareholders. However, an exception allows electing small business trusts (ESBTs) to be S corporation shareholders. Under prior law, an ESBT couldn’t have a current beneficiary who was a nonresident alien individual.

Thanks to a change included in the new law, such individuals can now be ESBT beneficiaries. This change is effective for 2018 and beyond.

“Technical Termination Rule” Repealed for Partnerships and LLCs

Under prior law, a partnership (or an LLC that’s treated as a partnership for tax purposes) is considered to terminate for tax purposes if, within a 12-month period, there’s a sale or exchange of 50% or more of the entity’s capital and profits interests. This so-called “technical termination rule” is generally unfavorable.

Why? First, the rule can require the filing of two short-period tax returns for the tax year in which the technical termination occurs. It also restarts depreciation periods for the entity’s depreciable assets. In addition, it terminates favorable tax elections that were made by the entity.

The TCJA repeals the technical termination rule for tax years beginning in 2018 and beyond.

Substantial Built-in Loss Rule Expanded

In general, a partnership (or an LLC that’s treated as a partnership for tax purposes) must reduce the tax basis of its assets upon the transfer of an ownership interest if the entity has a substantial built-in loss. (A built-in loss happens when the fair market value of the assets is less than their tax basis.)

This rule is unfavorable, because the basis reduction can result in lower depreciation and amortization deductions. Under prior law, a substantial built-in loss exists if the entity’s adjusted basis in its assets exceeds their fair market value by more than $250,000.

Under the TCJA, a substantial built-in loss also exists if, immediately after the transfer of an interest, the recipient of the transferred interest would be allocated a net loss in excess of $250,000 upon a hypothetical taxable sale of all of the entity’s assets for proceeds equal to fair market value. This unfavorable expansion of the built-in loss rule applies to ownership interest transfers in 2018 and beyond.

Loss Limitation Reductions for Charitable Donations and Foreign Taxes

Under a loss limitation rule, a partner (or an LLC member that’s treated as a partner for tax purposes) can’t deduct losses in excess of the tax basis in the partnership or LLC interest.

The new law changes the rules for charitable gifts and foreign taxes. For tax years beginning after December 31, 2017, an owner’s share of a partnership’s (or LLC’s) deductible charitable donations and paid or accrued foreign taxes reduces the owner’s basis in the interest for purposes of applying the loss limitation rule. This change can reduce the amount of losses that can be currently deducted.

However, for charitable donations of appreciated property (where the fair market value is higher than the tax basis), the owner’s basis isn’t reduced by the excess amount for purposes of applying the loss limitation rule. In other words, the owner’s tax basis in the interest is reduced only by the owner’s share of the basis of the donated appreciated property for purposes of applying the loss limitation rule.

Get Professional Help

As you can see, the tax landscape for various business entities has changed considerably under the new tax law. The type of entity that’s best for you depends on the industry you’re in, your income and many other factors. Consult with your tax advisor and attorney to determine the most tax-wise way to proceed.

Tax Reform Law: Topics of Special Interest for Individuals

Posted on January 26, 2018July 22, 2024 by Debra Barcuch

As you’ve heard by now, the Tax Cuts and Jobs Act (TCJA) includes a number of changes that will affect individual taxpayers in 2018 and beyond. Significant attention has been given to the reduced tax rates for most individuals and the new limit on deducting state and local taxes. But there is more to the story. Here’s a summary of some of the lesser-known provisions in the new law.

Repeal of the ACA Penalty for Individuals

The Affordable Care Act (ACA) requires individuals to pay a penalty if they aren’t covered by a health plan that provides at least minimum essential coverage. That penalty is also known as the “shared responsibility payment.” Unless an exception applies, the penalty is imposed for any month that an individual doesn’t have minimum essential coverage in effect.

The new tax law permanently repeals the ACA penalty for individuals for months beginning in 2019. But the penalty is still in force for all of 2018. The new tax law doesn’t change the ACA mandate for employers, however.

Revamped “Kiddie Tax”

Under prior law (in effect before the TCJA), unearned income of children above an annual threshold was taxed at their parents’ rates if those rates were higher. This so-called “kiddie tax” is imposed on individuals up to age 24 if they’re full-time students. For 2017, the unearned income threshold was $2,100. Unearned income beneath the threshold was taxed at the children’s rates. Earned income was also taxed at the children’s rates.

For 2018 through 2025, the TCJA stipulates that a child’s earned income is taxed at the standard rates for single taxpayers while unearned income is taxed using the rates and brackets that apply to trusts and estates. This change will make the kiddie tax much easier to calculate.

Restriction on Casualty and Theft Loss Deductions

For 2018 through 2025, the TCJA eliminates deductions for personal casualty and theft losses. However, it provides an exception for losses incurred in federally-declared disasters.

Another exception for losses, which aren’t due to federally-declared disasters, allows deductions for personal casualty and theft losses if the taxpayer has personal casualty gains. That happens when insurance proceeds exceed the basis of the damaged, destroyed or stolen property. In this situation, personal casualty and theft losses are allowed up to the amount of the taxpayer’s personal casualty gains.

Itemized Deduction Phase-Out Rule Eliminated

Under prior law, individuals with high levels of income were subject to a phase-out rule that could eliminate up to 80% of the most common itemized deductions, including the tax breaks for mortgage interest, property taxes and charitable donations.

For 2018 through 2025, the TCJA eliminates the itemized deduction phase-out rule. But some of the itemized deduction rules are changed (and limited) by other provisions in the new law. For example, the TCJA limits the deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 for married people who file separately).

Changes to Charitable Deduction Rules

The TCJA also increases the charitable deduction limit for some gifts. Under prior law, the deduction for cash contributions to public charities and certain private foundations was limited to 50% of your adjusted gross income (AGI).

For 2018 and beyond, the new law increases the deduction limit to 60% of AGI. Deductions that are disallowed by the 60% rule can generally be carried forward for five years.

But not all changes to the charitable deduction rules are taxpayer friendly. The TCJA also eliminates deductions for donations to obtain seating rights at college athletic events, for 2018 and beyond.

Under prior law, you could treat 80% of such payments as a charitable donation if:

The payment was to or for the benefit of a college, and
The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.

Restrictions on Deducting Gambling-Related Expenses

For 2018 through 2025, the TCJA limits deductions for a year’s out-of-pocket gambling-related expenses and gambling losses (combined) to that year’s gambling winnings.

Under prior law, a professional gambler could deduct out-of-pocket gambling-related expenses as a business expense. Only deductions for actual gambling losses were limited to gambling winnings.

Sweeping Changes

The TCJA is the biggest piece of tax reform legislation that’s been enacted since the landmark Tax Reform Act of 1986. It’s expected to have a major impact on individual taxpayers in 2018. Want to learn more? Consult with your tax advisor; it’s never too soon to plan for this year and beyond.

New Law Eliminates Miscellaneous Itemized Deductions

The new tax law eliminates most itemized deductions, starting in 2018. Under prior law, the following deductions were deductible if they exceeded 2% of your adjusted gross income. For 2018 through 2025, this change eliminates deductions for a wide variety of expenses, such as:

Tax-Related Expenses

Tax preparation expenses,
Tax advice fees, and
Other fees and expenses incurred in connection with the determination, collection, or refund of any tax.

Expenses Related to Taxable Investments

Investment advisory fees and expenses,
Clerical help and office rent for office used to manage investments,
Expenses for home office used to manage investments,
Depreciation of computer and electronics used to manage investments,
Fees to collect interest and dividends,
Your share of investment expenses passed through to you from partnership, limited liability company or S corporation,
Safe deposit box rental fee for box used to store investment items and documents, and
Other investment-related fees and expenses.

Expenses Related to Production of Taxable Income

Hobby expenses (limited to hobby income),
IRA trustee/custodian fees if separately billed to you and paid by you as the account owner,
Loss on liquidation of traditional IRAs or Roth IRAs,
Bad debt loss for uncollectible loan made to employer to preserve your job, and
Damages paid to former employer for breach of employment contract.

Unreimbursed Employee Business Expenses

Education expenses related to your work as an employee,
Travel expenses related to your work as an employee,
Passport fees for business trips,
Professional society dues,
Professional license fees,
Subscriptions to professional journals and trade publications,
Home office used regularly and exclusively in your work as an employee and for the convenience of your employer,
Depreciation of a computer that your employer requires you to use,
Tools and supplies used in your work as an employee,
Union dues and expenses,
Work clothes and uniforms if required for your work and not suitable for everyday use,
Legal fees related to your work as an employee, and
Job search expenses to seek new employment in your current profession or occupation.

If an OSHA Inspector Comes Calling

Posted on January 25, 2018 by Debra Barcuch

One of the most nerve-wracking experiences in a manufacturing executive’s career is when an Occupational Health and Safety Administration (OSHA) inspector shows up at the door and says something like: “We received a complaint and we’d like to take a look around.”

Part of the reason for the anxiety is that OSHA investigators don’t give any notice and can be very secretive.

Here are some steps you can take to help protect your company:

If there’s a fatal industrial accident at a plant, OSHA will conduct an investigation within eight hours. The company should have at least one experienced employment lawyer on hand who can not only deal with OSHA, but also the police and the prosecutor’s office. And it sometimes helps to have an attorney sit in at meetings with concerned employees.

Put someone in charge of a possible inspection. You need a designated hitter who can respond intelligently and courteously. And you should have a back-up contact person ready in the event of vacations or days off.

Check credentials. If someone shows up at your workplace and claims to be from OSHA, don’t automatically believe it. You obviously don’t want strangers walking through your facility — whether you have trade secrets or just modern-day security concerns. If you aren’t satisfied with the inspector’s credentials, call the local office before letting him or her get past the waiting room.

Inquire what it’s all about. Ask the inspector to tell you the area of concern and what OSHA is looking for before answering questions or giving a tour. Inspections are usually caused by complaints. While the inspector won’t say who called, he or she will outline the issue. Less often, OSHA does programmed inspections based on Standard Industrial Classification (SIC) codes and it’s possible that your number just came up.

Don’t demand a court order in most cases. The inspector won’t have any trouble getting one quickly and you’re likely to antagonize the government. If you’re uneasy, you might want to call and see if your attorney can come right away.

Keep the visit focused. Once you identify the problem, answer only the questions the inspector asks — don’t volunteer additional information. And only show the inspector areas of your building that are affected. Avoid walking through the rest of the building if possible. This isn’t to impair the agency. You’re simply trying not to raise new issues that will enlarge the enforcement effort.

Do what OSHA does. If the inspector measures something and takes pictures, you should measure and take pictures of the same items. If the inspector does an air-quality study, bring in an expert as soon as possible — that day, preferably — to repeat the study. If you aren’t armed with your own test data or photographs, it’s hard to argue that the agency’s determination is wrong. And it may be even more difficult to convince a jury that the testing is wrong.

Consider the alternatives. After an inspection, OSHA holds a closing conference. The inspector will outline the problems and tell you to expect correspondence from the agency. Citation notices and proposed penalties arrive shortly afterwards. There are rules you must follow in posting the citations in your workplace.

The penalties may seem small, but by paying them, you may trigger action from other government agencies. And if you don’t change the way you do business, subsequent penalties are likely to increase dramatically. So what initially may seem like an expensive fight to prove your company’s innocence can turn out to be the less-costly route in the long run. Consult with your human resources and legal advisors.

Don’t let time slip away. OSHA gives 15 business days to contest a citation. Failure to meet deadlines can result in serious consequences. Get legal help.

By understanding how OSHA conducts inspections, you can be better prepared to handle the situation in a way that minimizes your legal and financial exposure.

Protection if Employees’ 401(k) Choices Yield Poor Results

Posted on January 24, 2018 by Debra Barcuch

For several years now, the responsibility for financing one’s retirement has increasingly shifted from the employer to the employee. According to the Bureau of Labor Statistics, over the 15-year period from 1985 to 2000, the primary retirement plan participation of employees moved from defined benefit plans to defined contribution plans, such as 401(k) plans. And that trend has certainly continued.

401(k) Plan Features

A key feature in most 401(k) plans is that participants make their own investment choices from a set of options offered by the plan. The fact that participants make their own investment choices might lead business owners to conclude that participants — and participants alone — are responsible for the consequences of these decisions. However, plan fiduciaries, such as the employer plan sponsor, are not automatically absolved of responsibility for a participant’s investment decisions merely because the plan offered choices and participants made them. In order for a plan fiduciary to escape liability for losses resulting from a participant’s investment decisions, the 401(k) plan must comply with the Employee Retirement Income Security Act (ERISA) Section 404(c).

Exercise of Control Defined

According to the regulations, participants are able to exercise control when they have the opportunity to give investment instructions to an identified fiduciary and when they have the opportunity to obtain sufficient information to make investment decisions. “Sufficient information” includes a description of the investment alternatives, their objectives, risk/return, type, diversification, fees, expenses and sales loads. Participants must also receive an explanation of how to give investment instructions and any limitations. The regulations include specific requirements for plans that offer employer securities as an investment option.

401(k) Compliance With Section 404

According to regulations issued by the Department of Labor, a 404(c) plan is one in which participants have the opportunity to exercise control over assets in their individual accounts (see box below) and the ability to choose how to direct those assets from a broad range of investment alternatives. The regulations spell out in detail how these two requirements are met and how compliance with each aspect is needed to secure the protection that 404(c) offers.

The “broad range of investment alternatives” must include at least three diversified investment options that enable a participant to materially affect the potential return and minimize the risk of large losses. While most 401(k) products today include more than this minimum number of investment options, the plan sponsor (perhaps with the assistance of an investment professional) still needs to determine whether the asset classes and style of the funds offered satisfy the diversification, potential return and risk minimization requirements.

It is important to note that ERISA Section 404(c) imposes no obligation on plan sponsors to offer investment advice to participants. Also, 404(c) protection is only available to the extent that a participant directs the investments of his or her individual account. It also requires several communications to be made to participants, including notice that the plan intends to comply with 404(c) and that participants are responsible for the results of their investment decisions.

Market Factors

Events from several years ago make a strong case for seeking 404(c) protection. Two bear markets in the 2000s hit investors hard, including many 401(k) participants. Market gains that came easy faded quickly and 401(k) balances plummeted. Corporate scandals have led to collapsing retirement plans at affected firms. Questionable trading activity within mutual funds was reported in the news. All these events have focused attention on 401(k) investment performance and the potential liability of plan fiduciaries for investment losses.

Caution: The relief that ERISA Section 404(c) provides plan fiduciaries is not absolute. Regardless of 404(c) compliance, plan sponsors continue to have the duty to act prudently and solely in the interest of plan participants when selecting the investment options offered by the plan. Furthermore, both investment managers and their offerings must be monitored to ensure that there continue to be prudent choices.

NOTE: Under the Pension Protection Act, signed into law in 2006, retirement plan sponsors and fiduciaries are allowed to hire and compensate “fiduciary advisors” to supply investment advice and make investment transactions for participants and beneficiaries of defined contribution plans and beneficiaries of IRAs. A fiduciary advisor can be a registered broker or dealer, a registered investment advisor, a bank or similar financial institution, an insurance company or an affiliate, employee, agent or representative of one of the above.

Why Your Dealership Needs Good LIFO Records

Posted on January 22, 2018 by Debra Barcuch

Recordkeeping is often essential to business operations and automobile dealerships are no exception.

Case in point: Many auto dealerships use the Last-In, First-Out (LIFO) method of inventory accounting. Although the LIFO method can provide significant tax benefits, you must be careful to meet certain tax law requirements. One such requirement that is often overlooked is the need to maintain comprehensive records.

There are different LIFO methods for new and used vehicle inventories. For new vehicle inventories, dealerships electing to use the alternative LIFO method are required to follow IRS Revenue Procedure 97-36. (This IRS guidance superseded and amplified IRS Revenue Procedure 92-79.)

LIFO Basics

The Last In, First Out (LIFO) method assumes the items of inventory your dealership purchased or produced last are sold or removed from inventory first. Items included in closing inventory are considered to be from the opening inventory in the order of acquisition and acquired in that tax year.

The rules for using the LIFO method are very complex. According to the IRS, two common methods are used to price LIFO inventories are:

1. The dollar-value method. Under the dollar-value method of pricing LIFO inventories, goods and products must be grouped into one or more pools (classes of items), depending on the kinds of goods or products in the inventories.

2. Simplified dollar-value method. Under this method, you establish multiple inventory pools in general categories from appropriate government price indexes. You then use changes in the price index to estimate the annual change in price for inventory items in the pools. An eligible small business (average annual gross receipts of $5 million dollars or less for the three preceding tax years) can elect this method.

Under this pronouncement, an automobile dealer must maintain and retain “complete records” of the computations utilizing the alternative LIFO method. In addition, the dealership must maintain actual purchase invoices for every new vehicle.

This requirement has been generally interpreted to mean that the dealership should retain all invoices and related LIFO computations dating back to the first year for which the alternative LIFO method was elected.

If your dealership made the election to use alternative LIFO years ago, the records should be permanently stored in a secure location. Do not make the common mistake of keeping the records on the business premises. You don’t want to run the risk that the records may be destroyed by a natural disaster or otherwise ruined or stolen.

What is the potential downside? If you don’t keep adequate records, it could lead to expensive tax complications. For instance, good records may help you withstand challenges from the IRS and avoid tax penalties. Also, if you put your dealership up for sale, the buyer may ask you to reduce the price by the amount of the LIFO taxes deferred.

A business using the alternative LIFO method should also:

Ensure that it permanently maintains copies of the IRS Form 970 originally used for the LIFO election.
Maintain copies of any IRS Form 3115 requests to change accounting methods.

Practical suggestion: Have the required LIFO records held by your CPA firm, which specializes in automobile dealerships. Don’t assume the firm has the records if you used a different practitioner years ago.

Employers: Timelines for Keeping Payroll Records

Posted on January 16, 2018July 22, 2024 by Debra Barcuch

You already know about the need to create and maintain payroll records, but you may be wondering how long you have to keep payroll records and for what purpose. The answers depend on the amount of time required by the appropriate statute, which can often lead to confusion and mistakes by the uninformed. Here are some general guidelines that can help you sort out your responsibilities. This is valuable information even if maintenance of your payroll system has been delegated.

What Are Considered Payroll Records?

In general terms, payroll records refer to the documents kept for the time that your employees work for your company and the wages they are paid. This can reflect amounts paid for overtime (time-and-a-half paid to non-exempt full-time employees for work of more than 40 hours a week). Under the Fair Labor Standards Act (FLSA,) the records should include the following information:

Employee’s full name and Social Security Number,
Address, including zip code,
Birth date, if younger than age 19,
Sex and occupation,
The time and day of the week when employee’s workweek begins,
Hours worked each day and total hours worked each workweek,
Basis on which employee’s wages are paid,
Regular hourly pay rate,
Total daily or weekly straight-time earnings,
Total overtime earnings for the workweek,
All additions to or deductions from the employee’s wages,
Total wages paid each pay period, and
Date of payment and the pay period it covers.

In some cases, the length of time to keep payroll records is discretionary, but there are two key federal statutes that require records to be kept for a definitive period: the aforementioned FLSA and the Age Discrimination in Employment Act (ADEA). These records may be required for inspection by the Equal Employment Opportunity Commission (EEOC).

1. FLSA. Generally, the FLSA is the federal law that applies to work performed by employees for most employers, although there are certain exceptions. The FLSA requires employers to pay employees a minimum hourly wage of at least $7.25 under current standards. Note that many states and municipalities impose minimum wage requirements that are higher than the federal standard.

Under the FLSA overtime rules, an employer must pay an employee one-and-a-half times the employee’s regular hourly rate for all hours worked over 40 in any workweek, unless the employee falls in the exempt category, such as salaried executives. Detailed and accurate time records are required for all non-exempt employees. Other restrictions may apply, such as rules regarding labor by children.

It’s important for employers to determine if each worker is an employee and, whether he or she is exempt or non-exempt. For instance, misclassifying an employee as an independent contractor can lead to penalties, as does classifying a worker as being exempt when he or she should be treated as a non-exempt worker. Typically, if an employer lacks the proper records, its exposure to claims is increased.

2. ADEA. The ADEA specifically forbids age discrimination against people who are age 40 or older. Although it doesn’t protect workers under age 40, some states offer comparable protections for these younger workers. It isn’t illegal for an employer to favor an older worker over a younger one, even if both workers are age 40 or older, but discrimination may still occur when the victim and the person causing the discrimination are both over age 40.

Specifically, the law prohibits discrimination in any aspect of employment, including, among other things:

Hiring	Promotions
Firing	Layoffs
Pay	Training
Job assignments	Benefits

It’s also illegal to harass a person because of his or her age. Such harassment can include offensive or derogatory remarks about the age of an individual. The law doesn’t prohibit simple teasing, offhand comments or isolated incidents that aren’t very serious. However, harassment is actionable when it’s so frequent or severe that it creates a hostile or offensive work environment or it results in an adverse employment decision (for example, the victim is fired or demoted).

The person harassing may be the victim’s supervisor, a supervisor in another area, a co-worker or an outside person, such as a client or customer.

For both the FLSA and the ADEA, most payroll records must be kept for three years, but the FLSA allows employers to discard some supplementary payroll records, including wage tables, after two years.

Records on which wage computations are based — such as time cards and piece work tickets, wage rate tables, work and time schedules and records of additions to or deductions from wages — may be kept for only two years.

These records must be open for inspection by DOL representatives, who may ask the employer to make extensions, computations or transcriptions. The records may be kept at the place of employment or in a central records office.

Form and Function

According to the EEOC, time clocks aren’t required to keep track of employee hours under the FLSA, nor do payroll records have to be kept in any particular format. Similarly, the ADEA doesn’t mandate one format as long as the records are available when the EEOC requests them. However, under the FLSA, microfilm or punched tape shouldn’t be used unless the employer has the equipment to make these formats easily readable.

The key function of maintaining employee payroll records under the FLSA is to protect an employee’s rights to fair pay, including the right of covered, nonexempt workers to the minimum wage and overtime pay. The records may also be used to ensure an employer isn’t violating child labor laws.

The records that must be kept for the ADEA serve a different purpose. They are intended to ensure that an employee who is discriminated against due to age can identify and locate the information needed to prove or disprove a claim.

Consult the Pros

Under both the FLSA and the ADEA, payroll records should generally be kept for three years following the date of an employee’s termination. However, other statutes may come into play, including various state laws. Rely on the expertise of professionals in this area.

Off-Site Construction Makes Strides, Led by Large Corporations

Posted on January 16, 2018July 22, 2024 by Debra Barcuch

Typically, construction firms have worked in the field while manufacturers stayed put, cranking out products in centralized factories. One of the exceptions to the rule were diners. They crossed the barrier by being fabricated off-site in their familiar narrow and elongated style, which facilitated transportation to the restaurant’s ultimate site. In fact, buildings have been built in one place and then reassembled in another throughout history, with early uses being for new settlements and hospitals. But now, the distinction between on- and off-site constructions is becoming increasingly blurred. Offsite construction — also called prefabrication or modular construction — has been rapidly growing in popularity.

According to a recent report published by Technavio, a global technology research and advisory firm, the global prefab construction market is expected to rise at a compounded annual rate of between 6% and 7% during the next few years. The report, which valued the prefabricated construction market at about $79 million in 2015, expects the amount to scale the $110 million mark by 2020. Now, even contractors who were initially hesitant are looking to get on board.

Simple Concept

The concept of off-site construction is relatively simple. Essentially, building components or completed structures are manufactured in a factory. Typically, this method utilizes all the bells and whistles of modern manufacturing, including ultra-precise design software, robotics and logistics-based delivery. This helps to create uniform pieces that can be built quickly and transported efficiently to the jobsite, where they’re assembled.

Proponents of off-site construction point to two major reasons for its growing popularity:

1. Reduced construction costs, and

2. Improved quality.

Producing components or buildings in the factory ensures complete control of the building process. Notably, there are no deviations in quality due to a shortage of skilled workers, a problem that has been plaguing many on-site crews in the past decade.

What’s more, construction firms and contractors don’t face the usual disruptions because of inclement weather, especially during the winter months, or accidents caused by human error. As a result, schedules can run seamlessly and few, if any, unexpected expenses are incurred.

But that doesn’t mean off-site construction is being universally embraced. Some long-time contractors and others in the construction industry bemoan the cookie-cutter nature of prefabrication. They maintain that computers and robots in the factory can’t readily duplicate distinctive touches and true craftsmanship.

Whether off-site construction is beneficial or not, or somewhere in between, is a matter of opinion. Nevertheless, the industry is leaning in this direction.

Five Key Factors in Off-Site Construction

Several developments are fueling the increase in off-site construction as we head into 2018. Contributing to the trend are these five key factors:

1. Lack of skilled labor. The continuing skilled labor shortage is making off-site look attractive to many construction companies. For example, in a 2017 survey conducted by the Associated General Contractors (AGC) of America, a leading construction association, 73% of the construction company owners said they’re still having difficulty finding qualified workers.

As finding and retaining good workers remains a challenge, it becomes harder to stay on schedule and on budget. Off-site construction can help ease this problem.

Of course, prefab doesn’t eliminate the need for skilled labor. Skills are needed both for the installation and inspection of the modular structures and the actual fabrication. Modular construction does, however, mitigate some of the labor requirements needed for initial construction.

2. Technological advances. Technology is a driving force behind the growth of prefab. Businesses and consumers are accustomed to whipping out their smartphones and ordering whatever they want on-demand and instantly. Off-site builders are making this a reality.

For example, software giant Autodesk recently partnered with San Francisco-based Project Frog to create a cloud-based connected system linking architectural designs to industrial fabrication facilities. As a result, you can order up a building as easily as you can buy something on Amazon or eBay. Corporate giants like Starbucks and Marriott have already used this sort of high-tech approach to build drive through coffee outlets and prefabricated hotel rooms.

3. Collaborations and alliances. The Autodesk-Frog partnership is just one example of the increased collaboration and cooperation between firms. These alliances aim to satisfy both the prefabricators and traditional construction firms and contractors. Previously, the construction industry operated in a virtual vacuum.

Collaboration and communication at the outset is critical to success. Once prefabrication begins, it’s more difficult and costly to make changes, especially at the rapid pace of off-site construction. It pays to get it right from the start.

4. Objections and education. As more construction firm owners and their workers learn about the benefits of off-site construction, objections gradually will likely diminish. In addition, education will be enhanced by the successful completion of projects. Some of the most effective promotions of modular construction come from Marriott, Starbucks and Google, who bought 300 modular units for Silicon Valley employees.

5. Eco-friendliness. Besides saving time and money and improving quality, off-site construction presents another advantage: It’s friendlier to the environment than traditional construction.

Construction typically requires extra materials that lead to increased waste. However, the extra materials from sub-assemblies in a factory can be recycled in-house rather than sending them to a landfill. Moreover, the controlled environment of a factory allows for more accurate construction, tighter joints and better air filtration. In turn, this can result in better wall insulation and increased energy efficiency. Prefabrication and “going green” may work hand-in-hand.

No Worries for Tradition — Yet

Although great strides are being made in prefab buildings, they aren’t expected to eliminate the need for “boots on the ground” construction companies. The model tends to suit certain types of projects — such as health care facilities and modular housing developments — where uniformity and repetition of design is standardized.

However, as the popularity of off-site construction continues to grow, it may soon affect your market — if it hasn’t already. Take a look around and, if necessary, take action to help ensure your firm won’t be left in the dust.

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