February 2018

6 Last-Chance Tax Breaks: Do You Qualify?

Posted on February 14, 2018July 22, 2024 by Debra Barcuch

The new Tax Cuts and Jobs Act (TCJA) significantly changes some parts of the tax code that relate to personal tax returns. In addition to lowering most of the tax rates and increasing the standard deduction, the TCJA repeals, suspends or modifies some valuable tax deductions. As a result, millions of Americans who have itemized deductions in the past are expected to claim the standard deduction for 2018 through 2025.

New Law Retains Several Tax Deductions

The Tax Cuts and Jobs Act (TCJA) doesn’t suspend or eliminate every tax deduction on the books. Certain deductions survived the chopping block in their current form, or with modifications, including:

Medical and dental expenses,
Charitable contributions,
Gambling losses,
IRA contributions,
Educator expenses,
Self-employed health insurance,
Self-employed retirement plan contributions, and
Student loan interest.

Important: The medical expense deduction has been temporarily enhanced under the TCJA. Previously, the threshold for deducting expenses was 10% of adjusted gross income (AGI). But it’s lowered to 7.5% of AGI for 2017 and 2018. The TCJA provisions for individuals generally take effect for the 2018 tax year and “sunset” after 2025. That means that they technically expire in eight years unless Congress takes further action. In the meantime, you still have a shot at several key tax deductions on your 2017 return before they’re scheduled to expire. This is the return you must file or extend by April 17, 2018.

Here are six popular federal income tax breaks that will be suspended or modified by the new law. Generally, prior law continues to apply to these deductions for your 2017 tax year, so you can write off the expenses with little or no limitation for 2017.

1. State and Local Taxes (SALT)

The SALT deduction was a hot-button issue in tax reform talks. Eventually, Congress made a concession to residents of high-tax states, but it may be a hollow victory for some people.

Under prior law, if you itemized deductions you could generally deduct the full amount of your 1) state and local property taxes, and 2) your state and local income taxes or state and local general sales taxes. Now the TCJA limits the deduction to $10,000 annually for any combination of these taxes, beginning in 2018. But the deduction does you no good if you don’t itemize.

On your 2017 return, you can still opt to deduct the full amount of 1) property taxes, and 2) state and local income taxes or sales taxes. The income tax deduction is usually preferable to the sales tax deduction to those who reside in states with high income tax rates. Conversely, you can elect to deduct general state and local sales tax if your state and local income tax bill is small or nonexistent. If you opt for the sales tax deduction, you can deduct your actual expenses or a flat amount based on an IRS table, plus additional actual sales tax amounts for certain big-ticket items (such as cars and boats).

2. Mortgage Interest

Home mortgage interest can still be deducted after 2017, but new limitations will result in smaller deductions for some taxpayers.

For 2017 returns, you can deduct mortgage interest paid on the first $1 million of acquisition debt (typically, a loan to buy a home) and interest on the first $100,000 of home equity debt for a qualified residence. It doesn’t matter how the proceeds for a home equity loan are used.

Under the new law, the threshold for acquisition debt is generally reduced to $750,000 for loans made after December 15, 2017. In addition, the deduction for home equity debt is repealed. However, interest on home equity debt that is used to make home improvements might still be deductible if it can be characterized as acquisition debt. We’ll have to wait for IRS guidance on this issue to know for sure. In addition, if home equity debt is used to fund a pass-through business that the taxpayer owns (such as a partnership or S corporation or sole proprietorship), the interest expense may qualify as a deductible business expense (subject to new restrictions on business interest expense deductions under the TCJA).

Homeowners with existing mortgages are “grandfathered” under the new rules, even if the loan is refinanced (up to the existing debt amount). But you can’t deduct any interest on home equity debt that’s used for personal expenditures (such as a new car, a vacation or your child’s college costs) after 2017.

3. Casualty and Theft Losses

For 2018 through 2025, the TCJA suspends the deduction for casualty and theft losses except for damage suffered in certain federal disaster areas. Under prior law — which applies to your 2017 tax return — unreimbursed casualty losses are deductible in excess of 10% of your adjusted gross income (AGI), after subtracting $100 for each casualty or theft event.

For example, suppose you have an AGI of $100,000 in 2017 and incur a single casualty loss of $21,100. You can deduct $11,000 [$21,100 – $100 – (10% of $100,000)]. In addition, this loss must be caused by an event that is “sudden, unexpected or unusual.”

The new law suspends this deduction except for losses incurred in an area designated by the President as a federal disaster area under the Stafford Act. Special rules may come into play if a taxpayer realizes a gain on an involuntary conversion.

4. Miscellaneous Expenses

Under prior law, deductions for most miscellaneous expenses were subject to an annual floor based on 2% of AGI. From 2018 through 2025, this deduction won’t be available at all.

For your 2017 return, you can still deduct miscellaneous expenses for the year above 2% of your AGI. These expenses typically relate to production of income, including:

Tax advisory and return preparation fees,
Investment fees,
Hobby losses, and
Unreimbursed employee business expenses.

For example, suppose you have AGI of $100,000 in 2017 and incur $5,000 of qualified unreimbursed employee business expenses. You can deduct any expenses over 2% of your AGI ($2,000). So, you can claim $3,000 ($5,000 – $2,000) of unreimbursed business expenses on Schedule A, absent any other limits.

Important note: Under the new law, taxpayers also can’t deduct miscellaneous expenses, including investment fees, for purposes of calculating net investment income. As a result, some taxpayers may pay more net investment income tax (NIIT), starting in 2018.

5. Job-Related Moving Expenses

Under prior law, you could claim qualified job-related moving expenses as an “above-the-line” deduction. Under the new law, this deduction is suspended for 2018 through 2025, except for expenses incurred by active duty military personnel.

To qualify for a deduction for moving expenses on your 2017 return, you must meet a two-part test involving distance and time:

Distance. Your new job location must be at least 50 miles farther from your old home than your old job location was from your former home.

Time. If you’re an employee, you must work full-time for at least 39 weeks during the first 12 months after you arrive in the general area of the new job. The time requirement is doubled for self-employed taxpayers.

Assuming you pass the test, you can deduct the reasonable costs of moving your household goods and personal effects to a new home in 2017, as well as the travel expenses (including lodging, but not meals) between the two locations. In lieu of actual vehicle expenses, you may use a flat rate of $0.17 per mile for 2017.

6. Alimony

Currently, alimony paid under a divorce or separation agreement is deductible by the spouse who pays it and taxable to the spouse who receives it. The TCJA repeals the alimony deduction and the corresponding rule requiring inclusion in income for the recipient.

In addition, unlike most of the other tax law changes for individuals, this provision doesn’t go into effect right away. It’s effective for agreements entered into after December 31, 2018. In other words, taxpayers with agreements executed before that cutoff date are allowed to follow the old rules. But payers under post-2018 agreements get no deduction. This change is permanent for post-2018 agreements; it doesn’t sunset after 2025.

More Information

This list isn’t complete. But it’s a good starting point for preparing your 2017 income tax return. If you have questions or concerns, contact your tax advisor.

Cobots: The Advance Guard of the Manufacturing Revolution

Posted on February 14, 2018July 22, 2024 by Debra Barcuch

The cobots are coming, the cobots are coming!

Just as mechanical breakthroughs spurred the Industrial Revolution, advanced robotics is now revitalizing the manufacturing industry. The current generation of robots — often referred to as cobots because they’re generally designed to collaborate with humans — are already making the mark and their impact will only continue to grow in 2018 and beyond.

But it isn’t as simple as putting cobots on the factory floor and letting them do the work. Manufacturing companies can benefit more by developing strategies that combine analytics, design thinking, workflow and other aspects of their production activities to enhance this new collaborative partnership.

Perfect Match

Manufacturing and robotics appear to be a perfect match because they both emphasize mass production. In fact, simple robots in the form of single arms have existed for years, but cobots take things to a higher level. The new generation is more mobile, more integrated with human activity and can process information faster than ever. What’s more, cobots aren’t confined to a single spot on the factory floor and can react to real-time data

As a result, both cobots and the humans they work with can make decisions in split seconds. This not only enhances production, but also improves safety, product design and, ultimately, profitability.

Five Critical Aspects

The impact is being felt in the way manufacturers operate and the skills required by their workers. These businesses are now increasingly encouraged to design strategies around workflow, operational integration, collaboration, advanced analytics and sensitivity to the human elements of a job. Here are five critical aspects of cobots to examine closely:

1. Cobots are designed to safely share workspace with humans while aiding in a variety of tasks such as assembly or packaging. Prices for cobots have ranged from about $20,000 to $30,000 per unit in recent years, depending on the functionality. But the costs are dropping and cobots are becoming more affordable to smaller manufacturing companies.

According to estimates by investment bank Barclays, providers such as Universal Robots, Rethink Robotics and FANUC are leading a charge that will result in a whopping $3.1 billion market in 2020. A steady 3% to 5% drop in prices a year is fueling the increase. As an example, the average 2015 price of $28,000 per unit is expected to fall to around $17,500 by 2025.

2. Cobots can collect and share data in real time with different systems, including manufacturing execution systems and warehouse management systems. Interfaces may be facilitated through supervisory control and data acquisition systems on the shop floor.

3. Cobots can factor in data such as temperature, humidity and assembly line speed to make decisions about the best approach to take in the circumstances and execute the appropriate action within a millisecond or even less. To do this they use advanced vision systems, lasers and sensors, and cognition and self-programming capabilities,

4. Cobots can partner with humans and that may extend to virtually any process involving a physical flow of materials. This includes creating finished goods, kitting or packing, and shipping. They could also facilitate post-production inspections. In addition, analytical reports may indicate patterns and issues that could lead to improvements in production techniques and materials.

5. Cobots can combine with augmented reality (AR). Boeing, the giant aircraft manufacturer, has used AR to reduce the time required to wire its planes by as much as 25%. Similarly, tractor manufacturer Agco is using machines equipped with “informed reality” to provide employees with information without having to use a tablet or laptop.

Even greater productivity may result when humans and cobots work independently. Typically, cobots handle repetitive tasks, while humans spend more time on activities requiring cognitive skills. Also, when safety is involved, specific processes can be automated by harnessing robotics and smart machines that leverage the Internet of Things (IoT), thus reducing human intervention and the potential for error.

Acceleration, Reduction and Increases

Success is evidenced by accelerated time to market, reduced costs and productivity gains, as well as increased sales from expanded capacity and line flexibility. With the analytic insights available from cobots, manufacturers can set their sights even higher, perhaps developing new revenue streams previously not even thought of. But it doesn’t happen overnight.

There are several key elements to this new environment that manufacturers must incorporate into their strategic thinking, including:

Human/cobot partnerships. Implementing new processes depends on analysis of the relationships between humans and cobots. Because cobots can respond to situations in less than a second, while humans take longer, consider how this will mesh on the factory floor. On the other hand, humans may have intuitions that cobots haven’t yet developed.

Workflow. Frequently, cobots can be put to work out of the box, with built-in apps providing quick deployment. To reach optimal benefits, however, manufactures must reevaluate workflow patterns. For example, a cobot might send texts to humans to alert them of malfunctions on the assembly line before they would otherwise be noticed. Similarly, a safety device employed by humans might provide the impetus for a cobot repair. It is important to develop response strategies that maximize the potential benefits.

Integration with operations. The new line of cobots is conditioned to generate data and, thus, expand on a company’s IoT initiative. With the data and analytics provided, manufacturers can anticipate problems more easily and realize opportunities to improve production, by innovating or by customizing a product. To enhance operations, businesses may use special computing equipment that can act on insights in real time.

Multiple collaborations. Generally, manufacturers have adapted to the new environment on their own, but opportunities are being presented for collaborations and joint ventures among various interested parties. For instance, resources can be pooled involving cobot designers, integrated robotics strategy advisors, design experts, systems integrators, technology experts and academicians. These emerging partnerships go beyond traditional vendor-to-supplier relationships to create networking and sharing of technological advances, generate revenue streams and new market channels, and reduce costs.

It’s clear that the time for manufacturing companies to move forward has arrived. Better unitization of cobots is critical for future survival and success. The choice seems simple: Join the cobot revolution or become a historical footnote.

Strategies for the New Era in Manufacturing

Innovation is the most important skill needed in the manufacturing sector today, according to a recent study by IT provider Cognizant.

In the study, The Work Ahead: Designing Manufacturing’s Digital Future, 70% of respondents cited this skill and 89% said they expected this to grow in importance by 2020.

Furthermore, the study shows that an avalanche of data will trigger a greater need for analytics skills, increasing from 57% today to 75% in 2020. Workers can then benefit their employers on many fronts, including supply chain optimization, product quality and asset optimization. Respondents also said they anticipated robust growth in demand for design skills, with 70% naming this an important skill needed in 2020, up from 55% in 2018. The complete study can be found here.

New Tax Law Cracks Down on Transportation Benefits

Posted on February 13, 2018 by Debra Barcuch

The new Tax Cuts and Jobs Act (TCJA) eliminates some deductions that have been staples of businesses for years.

Case in point: The TCJA repeals the employer deduction for providing transportation fringe benefits, although the perks presumably will remain tax-free to employees if they are still offered.

The Way It Was: Three Eligible Benefits

Under the previous law, employers could deduct expenses for certain transportation fringe benefits. There are three main types of fringe benefits that employers were allowed to provide, either individually or in any combination.

1. Mass transit passes. This category includes: Any pass, token, fare card, voucher or similar item, entitling a person to ride free or at a reduced rate on mass transit or in a vehicle seating at least six passengers, if a person in the business of transporting for pay or hire operates it. Mass transit may be publicly or privately operated and includes transportation by bus, rail or ferry.

2. Commuter highway vehicle expenses. These are vehicles that carry at least six passengers. There must be a reasonable expectation that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces and employees must occupy at least 50% of the vehicle’s passenger seats.

A tax-free arrangement may involve van pooling in one of the following forms:

Employer-operated van pools. The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.
Employee-operated van pools. In this arrangement, employees independently operate a van for commuting purposes.
Privately or publicly operated van pools. The arrangement qualifies if the van seats at least six passengers, but the “80/50 rule” (see above) doesn’t have to be met.

3. Qualified parking fees. This benefit features employer-provided parking for employees on or near the workplace. It also covers fees for parking on or near the location from which employees commute using mass transit, commuter highway vehicles or carpools (for example, the parking lot for a train station). However, it doesn’t extend to parking at or near the employee’s home.

The Protecting Americans from Tax Hikes (PATH) Act, eventually placed these three fringe benefits on an equal footing with a maximum exclusion of $250 per month. The PATH Act also provided inflation indexing in future years. For 2017, the maximum that could be excluded by employees was increased to $255 a month, and for 2018, it increases to $260 a month.

Qualified transportation benefits may be provided directly by an employer or through a bona fide reimbursement arrangement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item isn’t readily available for direct distribution by the employer.

The Way It Is Going Forward: Changes

The TCJA includes significant changes for the deduction of transportation fringe benefits. No deduction is allowed for the expense of a qualified transportation fringe benefit an employer provides. However, the law generally doesn’t address the tax-free treatment afforded to employees receiving the benefits (see box below, Bicycling Benefit Comes to Screeching Halt). As a result, the benefits appear to remain tax-free for now.

Moreover, an employer can’t deduct any expense incurred for providing transportation — or any payment or reimbursement — to its employees. In other words, you can’t circumvent the crackdown by simply reimbursing employees for their commuting costs.

Key exception: The ban on deductions doesn’t apply to payments made for an employee’s safety. The IRS will likely flesh out this exception in new guidance, but existing regulations point to two possible scenarios:

1. An employer pays for an employee’s transportation home when they work late at night and it’s not safe to ride on public transportation, and

2. The employer provides employees with special vehicles (for example, armored cars) or chauffeurs for safety reasons.

Rethinking Benefits Packages

As a result of the changes under the TCJA, an employer may want to rethink its fringe benefit package for employees. Although the rules can’t be circumvented through reimbursements or similar payments, additional wages can help make up the shortfall for employees, taking into account that wages are taxable to recipients. Consider the best approach for your company under the new law.

Bicycling Benefit Comes to Screeching Halt

Now the Tax Cuts and Jobs Act bars employers from deducting bicycling benefits and eliminates the corresponding tax exclusion for employees (unlike the three main transportation benefits for which only the employer deductions are specifically eliminated).

These changes take effect in 2018, but sunset after 2025.

Before the law change, an employer could provide a tax-free fringe benefit to cyclists who rode their bikes to and from work. The maximum monthly allowance of $20 a month could be used to pay for reasonable expenses such as the cost of a bike, repairs, improvements and storage. However, this bicycling benefit couldn’t be offered in conjunction with any other transportation fringe benefit.

How the New Tax Law Could Change Construction

Posted on February 12, 2018 by Debra Barcuch

Early reviews are mixed on how the Tax Cuts and Jobs Act (TCJA) will affect the residential and commercial construction markets.

Here is a review of how the new tax law could affect the construction industry:

Residential Commercial Construction

Growth in residential construction has been fueled, in part, by the tax breaks associated with home ownership. For decades, homeowners have relied on deductions to make the costs of acquisition and maintenance more affordable. Beginning this year, the TCJA waters down or eliminates the tax breaks for some taxpayers. Combined with other tax law provisions, this may have a dampening effect on the residential market.

These three key provisions of the TCJA are expected to strongly affect residential construction:

1. Individual tax cuts. The TCJA replaces the graduated tax rate structure with one featuring lower rates and wider bracket ranges at the upper levels. While this revised structure may lower tax liability for many taxpayers, it also reduces the benefit of offsetting deductions.

In conjunction with the tax cuts, the new law essentially doubles the standard deduction while eliminating or reducing certain itemized deductions. The net result is that a significant number of taxpayers who have itemized deductions in the past will be claiming the standard deduction instead in the future.

2. Mortgage interest. Generally, a homeowner can deduct mortgage interest paid on a loan for a qualified residence, including a principal residence and one other home such as a vacation home. Before the new law, the deduction was limited to interest paid on the first $1 million of acquisition debt such as that incurred to buy or build a home and $100,000 of home equity debt.

For loans after December 15, 2017, the TCJA reduces the acquisition debt threshold to $750,000, while the mortgage interest debt deduction is completely eliminated after 2017. Homeowners with existing acquisition debt are grandfathered. These changes could discourage home buying.

3. Property taxes. Previously, a homeowner could deduct the full amount of state and local property taxes paid during the year, in addition to state and local income taxes or sales taxes. But the new law imposes an annual limit of $10,000 on these deductions. This, too, may lead to more homeowners claiming the standard deduction rather than itemize.

This provision is especially damaging to residents of states where property taxes are high, such as California, New York and New Jersey. Because the full $10,000 deduction wasn’t available until 2018, and isn’t available at all to those who don’t itemize, this cutback is expected to result in declining home values.

There’s no denying that these changes cumulatively hurt homeowners. Current house prices reflect current tax breaks because homebuyers generally factor taxes into their decisions. The reduced tax benefits will translate into lower housing prices.

Some reports say that the new tax legislation will also hit housing through higher mortgage rates. Specifically, at the peak of the new law’s impact on housing prices in 18 to 24 months, reports estimate that national house prices will be 4% lower than they would have been without any tax legislation.

Commercial Construction

The TCJA generally is seen as an overall boon for big business with some concessions to small businesses (see box below, Tax Incentive for Small Businesses). Many provisions are designed to stimulate business growth and expansion, so the commercial construction market appears primed for an upward trend. Generally, the business tax breaks are effective in 2018, but, unlike the individual provisions, which are scheduled to sunset after 2025, these changes are permanent.

Here are three provisions likely to affect commercial construction:

1. Corporate tax cuts. The new law replaces the graduated tax structure for C corporations with a flat rate deduction of 21%. Previously, the top rate was 35%, so this change represents a significant reduction for larger companies. With corporations able to reduce the tax cost of doing business, they likely will be looking to spend more, including making building acquisitions and improvements.

2. Business expensing. Due to two related changes, business entities will be able to realize instant tax gratification for expenditures on qualified business property:

Section 179 deduction. Effective in 2018, the maximum expensing allowance for business property is doubled from $500,000 to $1 million and the threshold for phasing out the deduction is raised from $2 million to $2.5 million. Note that the Section 179 deduction is still limited to the amount of business income.
Bonus depreciation. The previous 50% bonus depreciation allowance is doubled to 100% for qualified property placed in service after September 27, 2017. This 100% deduction is gradually reduced to zero over five years, beginning in 2023. The definition of “qualified property” is expanded to include used property (this already was allowed for Section 179 property).

Because companies will frequently be able to write off the entire cost of equipment and machinery in one year, they may be looking to expand their physical space or find larger quarters.

3. Real estate depreciation. Under the previous law, business buildings were generally depreciated over 39 years. A 15-year cost recovery was allowed for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The new law consolidates certain provisions to provide the faster, 15-year write-off period and makes the changes permanent.

The commercial market is expected to benefit overall from these changes, spurring growth for construction firms. Of course, other developments and extenuating circumstances could have an impact and shift trends one way or another. We will continue to monitor the industry in the wake of this monumental new law.

Tax Incentive for Small Businesses

The new law doesn’t just benefit big business.

One key provision creates a deduction of up to 20% for pass-through entities such as S corporations, partnerships and limited liability companies, as well sole proprietors. The deduction is phased out for most service businesses and may be reduced for other entities under a complex set of rules.

With this tax break in hand, smaller businesses may jump on the building bandwagon, resulting in more revenue for construction firms.

3 Affordable Care Act Taxes Postponed by Congress

Posted on February 9, 2018 by Debra Barcuch

On January 22, President Trump signed into law a short-term government funding bill. It ended the brief government shutdown by funding the federal government through February 8. It also suspends the following Affordable Care Act (ACA) taxes, which were designed to help fund health care coverage provided under the ACA.

1. Cadillac Tax

Under prior law, for tax years beginning after December 31, 2019, a 40% excise tax was scheduled to apply to any “excess benefit” provided to any employee who’s covered under any “applicable employer-sponsored coverage.” This tax is commonly known as the “Cadillac tax,” because it affects upper-end employer-sponsored insurance coverage. It’s paid by the coverage provider, which is typically the health insurance provider or the entity that administers the plan benefits.

The Cadillac tax was originally scheduled to apply for tax years beginning after 2017 but it has been delayed a number of times, most recently by the 2016 Consolidated Appropriations Act.

The recent government funding law further delays the Cadillac tax for an additional two years. It’s now scheduled to apply for tax years beginning after December 31, 2021.

2. Medical Device Tax

Under prior law, for tax years beginning after December 31, 2017, a 2.3%-of-sales-price excise tax was to be imposed on the sale of any taxable medical device by the device’s manufacturer, producer or importer.

Originally, the medical device tax was scheduled to apply for sales after December 31, 2012. But it has been suspended, most recently by the 2015 Protecting Americans from Tax Hikes (PATH) Act.

The January 2018 government funding law further delays the medical device tax for an additional two years. It’s now scheduled to apply to sales after December 31, 2019. The delay is retroactive to the beginning of 2018.

3. Annual Fee on Health Insurance Providers

Effective for calendar years beginning after December 31, 2013, U.S. health insurance providers generally were supposed to face an annual flat fee. The fee is a fixed amount allocated among all providers based on their relative market share as determined by each entity’s net premiums written for the data year (the year immediately preceding the year in which the fee is paid).

The annual fee on health insurance providers was suspended for 2017 by the 2016 Consolidated Appropriations Act. Now it’s been further suspended by the recent government funding law. The annual fee on health insurance providers is now scheduled to apply in tax years beginning after December 31, 2019.

What’s the Status of Other ACA Provisions?

The ACA individual mandate was permanently eliminated under the Tax Cuts and Jobs Act (but the change isn’t effective yet). This mandate requires taxpayers without coverage by a qualifying health plan to pay a penalty. The elimination of the individual mandate is effective for months beginning after December 31, 2018. So, the individual mandate is in effect for 2017 and 2018.

In addition, the employer mandate for providing health coverage has been retained. This “shared responsibility” mandate imposes a penalty on a “large employer” if it doesn’t offer “minimum essential” health insurance coverage or if one or more of its full-time employees obtains a premium tax credit to help purchase health coverage. The employer mandate applies to for-profit companies, not-for-profit organizations and government entities.

Thanks to the new government funding law, no new ACA-related taxes or penalties are scheduled to go into effect in 2018. For more information on the status of the remaining ACA provisions, contact your employee benefits or tax advisor.

New Law Eases the Individual Alternative Minimum Tax

Posted on February 8, 2018 by Debra Barcuch

Unfortunately, the Tax Cuts and Jobs Act (TCJA) retains the individual Alternative Minimum Tax (AMT). But there’s a silver lining: The AMT rules now reduce the odds that you’ll owe the AMT for 2018 through 2025. Plus, even if you’re still in the AMT zone, you’ll probably owe less AMT than you did under the old rules.

Here’s what you need to know about the new-and-improved AMT rules for 2018 through 2025.

Important note: The prior law version of the AMT still applies for your 2017 income tax return, which is due on April 17, 2018.

Why the AMT Hits Upper-Middle-Income Taxpayers

Under prior law, many high-income taxpayers weren’t affected by the AMT. That’s because, after numerous legislative changes, many of their tax breaks were already cut back or eliminated under the regular income tax rules. So, there was no need to address the AMT. For instance, the passive activity loss rules restrict the tax benefits that can be reaped from “shelter” investments like rental real estate and limited partnerships.

If your income exceeds certain levels, you run into phaseout rules that chip away or eliminate other tax breaks. As a result, higher-income taxpayers had little or nothing left to lose by the time they got to the AMT calculation, while many upper-middle-income folks still had plenty left to lose. Also, the highest earners were in the 39.6% regular federal income tax bracket under prior law, which made it less likely that the AMT — with its maximum 28% rate — would hit them.

In addition, the AMT exemption is phased out as income goes up. This amount is deducted in calculating AMT income. Under prior law, this exemption had little or no impact on individuals in the top bracket, because the exemption was completely phased out. But the exemption phaseout rule made upper-middle-income taxpayers even much more likely to owe AMT under prior law.

Under the TCJA, upper-middle-income people are somewhat less likely to owe the AMT, and if they do, their AMT liabilities are likely to be lower.

The Basics

Think of the AMT as a separate tax system that’s similar to the regular federal income tax system. The difference is that the AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax deductions and credits.

The maximum AMT rate is 28%. By comparison, the maximum regular tax rate for individuals was 39.6% for 2017 under prior law. The maximum regular tax rate for individuals is reduced to 37% for 2018 through 2025 thanks to the TCJA.

For 2017, the maximum 28% AMT rate kicks in when AMT income exceeds $187,800 for married joint-filing couples and $93,900 for others. For 2018, the maximum 28% AMT rate starts when AMT income exceeds $191,500 for married joint-filing couples and $95,750 for others.

Inflation-Adjusted Exemption

Under the AMT rules, you’re allowed a relatively large inflation-adjusted AMT exemption. This amount is deducted when calculating your AMT income. The TCJA significantly increases the exemption for 2018 through 2025. The exemption is phased out when your AMT income surpasses the applicable threshold, but the TCJA greatly increases those thresholds for 2018 through 2025.

If your AMT bill for the year exceeds your regular tax bill, you must pay the higher AMT amount. Originally, the AMT was enacted to ensure that very wealthy people didn’t avoid paying tax by taking advantage of “too many” tax breaks. Unfortunately, the AMT also hits some unintended targets. (See “Why the AMT Hits Upper-Middle-Income Taxpayers” at right.) The new AMT rules are better aligned with Congress’s original intent.

Key Figures

The following table summarizes the AMT exemptions and phaseout thresholds for 2017:

	Unmarried individuals	Married couples who file jointly	Married individuals who file separately
AMT exemption amount	$54,300	$84,500	$42,250
Phaseout starts at	$120,700	$160,900	$80,450
Completely phased out at	$337,900	$498,900	$249,450

The following table summarizes the AMT exemptions and phaseout thresholds for 2018:

	Unmarried individuals	Married couples who file jointly	Married individuals who file separately
AMT exemption amount	$70,300	$109,400	$54,700
Phaseout starts at	$500,000	$1 million	$500,000
Completely phased out at	$781,200	$1,437,600	$718,800

Under both old and new law, the exemption is reduced by 25% of the excess of AMT income over the applicable exemption amount. But under the TCJA, only those with really high incomes will see their exemptions phased out, while others (including middle-income taxpayers) will benefit from full exemptions.

Risk Factors Before and After the TCJA

So, who will be hit by the AMT? Various interacting factors come into play when evaluating whether the AMT will apply or not, but there are several common warning signs to watch for under the old and new rules.

Substantial income. High income can cause the AMT exemption to be partially or completely phased out. The TCJA significantly increases the exemptions and thresholds for 2018 through 2025, reducing or eliminating the AMT hit for most taxpayers.

Large itemized deductions for state and local income and property taxes. Under the prior law, these taxes can be fully deducted for regular federal income tax purposes, but they’re completely disallowed under the AMT rules. Under the TCJA, the regular tax deduction for state and local income and property taxes is limited to $10,000. So, this risk factor has lost most of its teeth.

Multiple personal and dependent exemption deductions. Under the prior law, these deductions are disallowed under the AMT rules. Under the new law, personal and dependent exemption deductions are eliminated. So, this risk factor is gone under the TCJA.

Exercise of “in-the-money” incentive stock options (ISOs). The so-called bargain element (the difference between the market value of the shares on the exercise date and the exercise price) doesn’t count as income under the regular tax rules, but it does count as income under the AMT rules. Unfortunately, this risk factor still exists under the new law.

Significant miscellaneous itemized deductions. Examples of these deductions include investment expenses, fees for tax advice and unreimbursed employee business expenses. Under the prior law, you can write off these deductions for regular tax purposes, but they are disallowed under the AMT rules. Under the TCJA, most miscellaneous itemized deductions are eliminated. So, this risk factor is basically gone.

Interest from “private activity bonds.” This income is tax-free for regular federal tax purposes, but it’s taxable under the AMT rules. Unfortunately, this risk factor still exists under the new law.

Significant depreciation write-offs. Individuals may deduct depreciation expense for fixed assets — such as machinery, equipment, computers, furniture and fixtures — from owning sole proprietorships or investing in S corporations, limited liability companies or partnerships. These assets must be depreciated over longer periods under the AMT rules, which increases the likelihood that you’ll owe the AMT.

Under the new law — for assets placed in service between September 28, 2017, and December 31, 2022 — businesses can deduct the entire cost of many depreciable assets in the first year under both the regular tax rules and the AMT rules. So this risk factor is diminished for newly added assets. However, it continues to exist for older assets that are subject to the depreciation schedules allowed under the prior law.

Contact a Tax Pro

Though the new law reduces the odds that you’ll owe the AMT for 2018 through 2025, don’t automatically assume you’ll be exempt. Be aware of the risk factors that still apply under the new law, because IRS auditors are specifically trained to find them. If you fail to report your AMT obligation, you’ll owe back taxes, interest, and possibly penalties.

Ask your tax advisor about your AMT exposure. If you’re at risk, some planning strategies may be available to lower your AMT profile.

Check the New Definition of Joint Employer: The Upside and the Down

Posted on February 6, 2018 by Debra Barcuch

Being a joint employer means that you and another employer share, both “individually and jointly,” the responsibility of complying with labor laws and regulations. So if this classification applies to your business, it’s critical that you pay close attention to how your fellow joint employer deals with the employees you share.

Most employers take pains to avoid joint employer status for that reason, but it doesn’t always work out that way. Three years ago, the National Labor Relations Board (NLRB) took a hard line position on this status in a case involving Brown Ferris Industries (BFI).

Union Representation Case

A group of workers employed by Leadpoint (a staffing services company) who performed services for BFI were seeking union representation. The union (Teamsters Local 350) wanted BFI to be ruled a joint employer, with the expectation that BFI could afford to offer a more generous contract than would be possible with Leadpoint. The conflicting opinions were taken to the NLRB for resolution.

BFI argued, in effect, that it wasn’t a joint employer because it only had “indirect” control over those employees, and that although it might in theory be able to exercise some level of control over the employees, it hasn’t done so. But the majority of NLRB members disagreed, ruling that even with only unexercised and indirect control, BFI should be considered a joint employer. BFI appealed the ruling to the federal court system and the case hasn’t yet been decided. However, in light of recent changes at the NLRB, the company may be in a much more favorable position.

After the election of Donald Trump, the composition of the NLRB was modified, resulting in a more business-friendly majority which takes a dim view of the Board’s 2015 ruling in the BFI case. It expressed that opinion in a new case involving an employment services company and a construction company. The majority opinion stated that the “indirect control” standard applied in the BFI case represented a “distortion of common law,” and that it would prevent the NLRB from “fostering the stability of labor-management relations.”

Joint Employment Scenarios

So returning to square one, here are the relevant criteria you can use to assess whether you could be pulled into joint employer status, as described by the Department of Labor (DOL) Wage and Hour Division. The most common joint employment situations are the following:

1. Where the employee has two (or more) technically separated or associated employers, or

2. Where one employer provides labor to another employer and the workers are economically dependent on both employers.

Here are some examples of a possible joint employer relationship under the first scenario offered by the DOL:

The employers have an arrangement to share the employee’s services,

One employer acts in the interest of the other in relation to the employee, or

The employers share control of the employee because one employer controls, is controlled by, or is under common control with the other employer.

Degree of Association

The joint employer status determination will “focus on the degree of association between the two employers,” according to the DOL. Questions that will lead to a determination include:

Who owns or operates the possible joint employers?
Do the employers have any overlapping officers, directors, executives or managers?
Do the employers share control over operations?
Are the operations of the employers intermingled?
Does one employer supervise the work of the other?
Do the employers share supervisory authority over the employee?
Do the employers treat the employees as a pool of workers available to both of them?
Do they share clients or customers?
Are there any agreements between the employers?

Under the second scenario (that is, where one employer provides labor to another employer and the workers are economically dependent on both employers) joint employer status would be evaluated with questions including:

Does the other employer direct, control or supervise the work?
Does the other employer have the power to hire or fire the employee, change employment conditions, or determine the rate and method of pay?
How permanent or lengthy is the relationship between the employee and the other employer?
Is the work performed on the other employer’s premises?
Does the other employer perform functions for the employee typically performed by employers, such as handling payroll or providing tools, equipment or Workers’ Compensation insurance, or, in the case of agriculture, providing housing or transportation?

There is, inevitably, some subjectivity in joint employer status determination. The DOL says the ultimate focus is on what it calls the “economic realities of the relationship.” But, thanks to the NLRB’s rejection of the broader “indirect control” standard, fewer companies are likely to be deemed as joint employers. When in doubt, however, consult with a qualified employment law attorney.

Related Finance Company Pros and Cons

Posted on February 6, 2018July 23, 2024 by Debra Barcuch

A related finance company can provide a useful service to the public when operated to help auto dealerships sell cars to people who need an alternative financing method. This does not mean that every dealer should operate an RFC. Rather than a benefit to the dealer, it can actually be a financial drain due to unnecessary overhead costs. In addition, the Internal Revenue Service has imposed increased scrutiny on RFCs over the last few years to crack down on potential noncompliance issues.

Pros of Creating an RFC

There are pros and cons to RFC creation and operation. Let’s look at the pros first. These entities allow dealerships to work with consumers who have little, no or bad credit. The consumer is able to finance a car through the RFC, separating the dealership from direct payment collections and insulating it from possible bad publicity if the loans default. Because interest rates charged in a “buy here, pay here” car purchase are substantially higher than with traditional loans, an RFC must maintain a larger level of cash reserves. The RFC keeps the default financial risk separate from the dealership.

History shows that when an RFC is involved in collection of auto loan payments, customers are less likely to default than when making payments directly to the dealer. In addition, RFC discount rates may be lower than what a dealer would obtain from third party lenders — resulting in a better profit per transaction.

Another benefit, depending on the licensing and regulatory requirements of the state, is the ability for the dealer to isolate liability for violation of licensing or capital requirements for finance companies. Such violations, if they occurred in the operation of the RFC, wouldn’t affect normal operation of the dealership.

The downside of using a Related Finance Company

In fact, RFCs work very well for dealerships that have approximately $1 million or more in receivables. This is the breakeven point if you look closely at the numbers of any given transaction compared to a straight retail sale as well as the overall net benefit on any income tax deferrals. Even at $1 million, however, dealers and managers need to consider very seriously if the additional overhead costs and administration of an RFC result in an overall financial benefit.

An RFC is, after all, a separate entity and must be operated as such to meet IRS guidelines. This includes many fixed operating costs along with the costs of employing separate staff and ideally maintaining a separate location. Dealers need to factor in the time and money spent on creating the entity and then operating it. You must compare that ongoing expense to the potential savings based on your receivables.

As receivables grow past $1 million, an RFC starts to make more sense. Well-managed RFCs can offer discount rates much lower than rates offered by a third-party lender. Dealers can also rely on RFC experience to be more selective when extending credit, improving the quality of transactions. Proper management is the key, including the burden of ongoing diligence to satisfy IRS requirements. The trouble starts when the structure and operation of the RFC fails to pass the IRS validity test as an entity that is truly separate from the dealership.

Interested in more details about RFCs and auto dealership accounting? Download our whitepaper.

Continue Reading: Does Your RFC Pass the IRS Validity Test?

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Blog originally published Dec. 2, 2015. Updated for content on February 6, 2018.

Unlock the Potential of Your Business

Let’s Connect