Will the loss of the entertainment deduction affect your business?

Businesses—especially smaller firms—may scale back on treating clients to major league baseball games, golf outings and the like after Congress and President Donald Trump ended a tax break for such entertainment.

The tax overhaul that Trump signed Dec. 22 eliminated a 50 percent deduction for business-related expenses for “entertainment, amusement or recreation.” Suddenly, luxury boxes at stadiums and arenas—along with theater and concert tickets—will be more costly for firms that use them for clients.

Businesses that use the entertainment deduction extensively—including law, investment, accounting and lobbying firms—will have to gauge the effects on their bottom lines. Smaller businesses will be less able to absorb the cost.

The loss of the entertainment deduction is a kind of counterpoint to the Republican Congress’s sweeping tax cuts for businesses. The overhaul slashed the corporate rate to 21 percent from 35 percent. It also created a new 20 percent deduction for many partnerships, limited liability companies, sole proprietorships and other “pass-through” businesses, whose owners pay individual tax rates on the income they earn.

Each company will have to decide for itself whether the higher after-tax cost of these expenses makes good business sense.

Taking advantage of the new tax law to reduce taxes

 

The new tax law will affect everybody. Many individuals and companies will have opportunities to make planning decisions that could potentially reduce taxes.

Here’s an example:

For instance, let’s say you have an S Corp that has $500,000 of net income before any compensation to you, the 100% owner. Before the new tax act (Prior to tax year 2018) it would be best to pay yourself a reasonable salary and let the rest of the income flow to the bottom line. Being that both are taxable to you the salary  and the net income to you as S Corp income.

With the new tax law, the scenario will change and look more like this:

Using the example above.  You could pay yourself a reasonable $200,000 salary and let the $300,000 fall to the bottom line as net income. The new tax law states you would receive a 20% deduction on your personal tax return, or $60,000.  But wait! The House Committee reports suggest that you add back any owner compensation in computing the “Qualified Business Income” to the bottom line net income. The Senate version was silent on this. If the House version is interpreted by the IRS as the Act’s intent, the QBI would be the entire $500,000, giving you a deduction of $100,000 on your form 1040.

We will keep a close watch on this as IRS regulations and interpretations as they begin coming out, and will keep you updated. Don’t hesitate to call us anytime to discuss.

Lesson 1.03 – Jane learns about cash flow

Lesson 1.02 – Jane gets a big sale

Lesson 1.01 -Jane starts a business

 

Major tax changes expected under Trump Administration

First New Tax Legislation in a Generation

With the new tax bill ready to be signed into law by the President, we wanted to give you a recap of the major provisions.

The final bill still leans heavily toward tax cuts for corporations and business owners. But it also expands or restores some tax benefits for individuals relative to the earlier bills passed by the House and Senate.

The individual provisions will expire by the end of 2025, but most of the corporate provisions would be permanent.

Below you will find the key provisions:

      

For Individuals

 

Many individuals will experience lower tax rates in 2018. See table to the left which will show the decrease for many tax brackets and the fact that there will still be seven tax brackets.

 

 

Nearly doubles the standard deduction:

For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.

The net effect: The percentage of filers who choose to itemize would drop sharply, since the only reason to do so is if your deductions exceed your standard deduction.

Eliminates personal exemptions:

Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Doing so lowers your adjusted gross income and thus your tax burden. You will see these exemptions eliminated in 2018.

Caps state and local tax deduction:

The final Bill limits the combined deduction for state/local and real estate taxes to $10,000. Currently taxpayers who aren’t subject to the Alternative Minimum Tax (AMT) can deduct these expenses as itemized deductions.

What to do:

If you are not subject to AMT ensure that you pay all of you 2017 state and real estate taxes in 2017.

Expands child tax credit:

The credit will be doubled to $2,000 for children under 17. It also will be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today. Like the first $1,000 of the child tax credit, $400 of the additional $1,000 would also be refundable, meaning a low- or middle-income family will be able to have the money refunded to them if their federal income tax liability nets out at zero.

Creates temporary credit for non-child dependents: 

The bill would allow parents to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.

Lowers cap on mortgage interest deduction:

If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.

What to do:

If you are currently paying interest on a home equity line of credit, consider paying it down because the interest will no longer be deductible beginning in 2018.

Curbs who’s hit by AMT:

The final version keeps AMT, but reduces the number of filers who would be subject to it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.

Preserves smaller but popular tax breaks: 

Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students. The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.

Doubles Estate Tax Exclusion:

Currently set at $5.49 million for individuals, and $10.98 million for married couples.  The exclusion will be increased to $10 million for individuals and $20 million for married couples.

What to do:

Review your estate plan and utilize annual-exclusion gifts

Slows inflation adjustments in tax code: 

The bill would use “chained CPI” to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worth less — since the inflation adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.

Eliminates mandate to buy health insurance:

There would no longer be a penalty for not buying insurance. While long a goal of Republicans to get rid of it, the measure also would help offset the cost of the tax bill. It is estimated to save money because it would reduce how much the federal government spends on insurance subsidies and Medicaid. The Congressional Budget Office expects fewer consumers who qualify for subsidies will enroll on the Obamacare exchanges, and fewer people who are eligible for Medicaid will seek coverage and learn they can sign up for the program. But policy experts also note that the mandate repeal could raise premiums because more healthy people might decide to skip buying insurance.

For Businesses and Corporations

Lowers tax burden on pass-through businesses:

The tax burden on owners, partners and shareholders of S-corporations, LLC’s and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction, somewhat less than the 23% called for in the Senate-passed bill. The 20% deduction would be prohibited for anyone in a service business — unless their taxable income is less than $315,000 if married ($157,500 if single).

What to do:

Consult with your tax advisor to see if your current form of business makes the most sense going forward. This is something that a lot of businesses should study beginning in 2018. Nothing to do in 2017.

Includes a rule to prevent abuse of the pass-through tax break:

If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates. But to prevent people from re-characterizing their wage income as business profits to get the benefit of the pass-through deduction, the bill would place limits on how much income would qualify for the deduction. Tax experts nevertheless have warned that this kind of anti-abuse measure still presents taxpayers with a lot of opportunities to game the system, and favors passive owners of a business over active owners who actually run things.

Substantial cuts to corporate tax rates:

The bill cuts the corporate rate to 21% from 35%, starting next year. That’s somewhat higher than the 20% called for earlier. The bill would also repeal the alternative minimum tax on corporations.

Change how U.S. multinationals are taxed:

Today U.S. companies owe Uncle Sam tax on all their profits, regardless of where the income is earned. They’re allowed to defer paying U.S. tax on their foreign profits until they bring the money home. Many argue that this “worldwide” tax system puts American businesses at a disadvantage. That’s because most foreign competitors come from countries with territorial tax systems, meaning they don’t owe tax to their own governments on income they make offshore.

179 Depreciation limits doubled:

For property placed in service beginning after December 31, 2017, the maximum amount a taxpayer may expense under code section 179 is increased from $500,000 to $1 million.

Temporary 100% Cost Recovery of Qualifying Business Assets

 

Currently known as Bonus Depreciation, a 100% (currently 50%) first-year deduction for the adjusted basis is allowed for qualified property acquired and placed into service after September 27, 2017, and before Jan 1, 2023. The additional first-year depreciation deduction is allowed for new and used property (previously only applied to new property).

If you are not sure if this will effect your taxes, the best advice we can give you is to contact us. Whether you email Susan Hopkins at susan@marshalljones.com or schedule an appointment with Kristen Hughes 404-231-2001, we would be happy to discuss your individual situation.

IRS Issues 2018 Work Plan for Tax Exempt Organizations

The Tax Exempt and Government Entities (TE/GE) division of the IRS recently issued its FY 2018 Work Plan, which builds upon the agency’s ongoing mission to refine, realign and improve their education and examination methods. In 2017, the agency implemented data analytics and knowledge management strategies to target organizations with a high likelihood of noncompliance, and the 2018 plan continues this practice. Facing budget cuts and a declining workforce, the agency reiterated its mission, first stated in last year’s work plan, of transparency, efficiency and effectiveness.

For nonprofits preparing for 2018 now is the ideal time to review the work plan and develop a plan in the case of an IRS audit.

Fiscal Year 2018 Initiatives 
For fiscal year 2018, the IRS has outlined the following compliance strategies:

  • Examine entities that state they are supporting organizations and filed the Form 990-N
  • Examine organizations that have operated as for-profit entities in the past, but now operate as 501 (c)(3) organizations
  • Examine organizations that show signs of providing private benefit or inurement to individuals or private entities though contracts with individuals or other arrangements such as partnership agreements

If any of these attributes apply to your organization, it is crucial to ensure your financial information is organized and correct, to prepare for the possibility of an audit.

Tax Gap Issues in the Spotlight
In 2016 and 2017, the agency identified the tax gap as a key issue area. In 2016, the IRS conducted almost 5,000 examinations, with a large portion of these examinations encompassing tax gap issues, such as employment tax and unrelated business income tax. For 2018, these tax areas remain an area of concern. Organizations should be aware of the following:

  • Unrelated Business Income: Organizations should review materials as they relate to gaming, non-member income, expense allocations, net operating losses, rental activity, advertising, debt financed property rentals and investment income.
  • Employment Tax Issues: Including unreported compensation, accountable plans, worker reclassifications, noncompliance with FICA, FUTA and backup withholding requirements. In recent years, the agency has demonstrated their seriousness in pursuing these issues and leveraged the knowledge and expertise of specialists from the Federal State and Local government function. This partnership improved their ability to detect and resolve employment tax issues. As part of the FY 2018 plan, the employment tax specialists will now work as part of the same unit as the exempt organization specialists.

Due to the prevalence of tax gap issues, the agency plans to release an issue snapshot addressing the unrelated business income tax. A knowledge management product on employment tax issues is also planned to be released to help both IRS examiner and organizations get up to speed on these key issues.

Filing a form incorrectly, or making a reporting error, will not necessarily result in an audit or examination. The agency will continue to use compliance checks to determine whether an organization is keeping proper records and reporting the required information. Compliance checks allow an organization to revise filed information and tax returns, but they are not an examination or audit. With the tax gap being a major issue for many nonprofits, the first step in resolving many tax gap problems will be a compliance check.

Data and Guidance Initiatives
In May 2017, TE/GE brought online a Compliance Planning & Classification unit, streamlining processes and providing a comprehensive approach to identify and monitor compliance risks using data analytics. The agency will continue to implement data gathered from form 990, 990-EZ and 990-PF. Utilizing data analytics for increased efficiency will continue, as in FY 2018, the agency will launch a Compliance Strategy Tool and an Internal Submission Portal. These tools will facilitate crowdsourcing on areas of non-compliance. With a data-driven approach, agents will become faster and more efficient in their auditing process.

The IRS has focused on providing online guidance and knowledge materials with the expectation that this will improve compliance and increase the number of correctly submitted documents. Not only will this guidance aid organizations in the proper process for exemption filing, but it will also act as a training resource for agents, allowing for the quick resolution of issues.

Best Practices for Organizations
With the IRS work plan released, organizations can start preparing for the year ahead. If there are any uncertain tax positions, it is best to sort them out sooner rather than later. Preparation is key.

After analyzing what to expect for the coming year and identifying any potential issues, organizations should ensure they have properly documented all financial activity. A routine audit means 3-years of documentation will be examined. However, in certain circumstances, documents from years prior may be requested. For example, if an organization is offsetting current income with a loss generated two decades ago, the IRS can request information from the year of the loss. In the event your organization must challenge an IRS outcome, documentation will be crucial. Without proper documentation, it will be difficult to make a strong case.

If you need help with the application, understanding, or have further questions regarding this standard, please call 404-231-2001, ask for Nathan, or email nathan@marshalljones.com

 

Will the IRS reject your tax return next year?

In the latest signal that the Affordable Care Act is still law, the Internal Revenue Service said this week that it is taking steps to enforce the most controversial provision: the tax penalty people face if they refuse to obtain health insurance.

Next year, for the first time, the I.R.S. will reject your tax return when filed electronically if you do not complete the information required about whether you have coverage, including whether you are exempt from the so-called individual mandate or will pay the penalty. If you file your tax return on paper, the agency said it could suspend processing of the return and delay any refund you might be owed.

The I.R.S.’s guidance makes it clear that taxpayers cannot simply ignore the Affordable Care Act. While the penalty applies only to people without insurance, all taxpayers are required to say whether they have coverage.

Legal experts say the I.R.S. has been clear that the law was in effect, despite repeated efforts by Mr. Trump and Republican lawmakers to repeal it. Congress would have to specifically repeal the mandate, they say, even if the administration has significant leeway over how aggressively it enforces it.

But there has been substantial confusion among taxpayers and insurers. Many insurance companies raised their rates for next year’s plans because they were worried the administration would essentially stop penalizing people who refused to buy coverage, leading to fewer enrollments.

People may have also mistakenly believed they did not have to comply with the law’s reporting requirements. The new guidance suggests taxpayers will now face a sharp reminder that they need to provide this information, when they go to file a return electronically or submit the appropriate paperwork to get any refund they are due.

Under the law, an individual who does not have insurance can face a penalty of $695 a year for an individual, up to a maximum of $2,085 for a family or 2.5 percent of your adjusted gross income, whichever is higher. People are exempt from the penalty if they have too little income or if the lowest-priced coverage available costs them more than 8.16 percent of their household income.

The I.R.S. had initially held off rejecting returns because the law was new, but then it delayed its plans to assess the effect of the executive order. In evaluating its stance, the agency may have decided the requirement eases the burden on taxpayers by making it clear they need not worry if they have insurance or are exempt from the penalty. While the agency is taking steps to be sure it collects all the information necessary to levy the penalty, it could also take a very lenient view of how aggressively it goes after anyone who does not sign up.

Why Financial Statements Prepared by Outsourced Accounting Services Can Be More Reliable

When it comes to your company’s success, accurate financial information is critical to making the correct business decisions. Knowing your margins and having visibility into cash flow will allow you to elevate your company to the next level. That’s why your financial statements need to go beyond just the basic requirements.

Your company will benefit from a knowledgeable and experienced accounting team. If you can’t commit to hiring a dedicated crew just for financials, outsourcing your accounting functions is one of the most beneficial business decisions you can make. When you partner with Marshall Jones, we’ll provide you with all the assistance and financial expertise you need without having to hire a full-time staff.

Embracing Financial Proficiency

When companies lack exclusive accounting teams, other individuals like business owners or managers with other primary responsibilities must handle the daily bookkeeping. Without a dedicated individual or crew maintaining financials, many essential tasks and functions get overlooked:

  • Low prioritization: When accounting is not an employee’s primary job function, financial tasks sometimes become a low priority. A lack of emphasis can increase the likelihood of errors.
  • Limited time: When someone has other duties to perform in addition to the financials, it can lead to inaccuracies and errors as they consistently rush through both of their jobs.
  • Unqualified personnel: The employee handling the financials may not have the technical knowledge about the latest standards and tax laws to perform the job effectively.

At Marshall Jones, our team of certified public accountants and advisors can supplement or manage all of your accounting responsibilities expertly and accurately for as long as you need us, allowing you to refocus your energies on your business’s core functions.

Benefits of Outsourced Accounting

When you outsource your financials to a reliable accounting firm, you’ll benefit from the experience of professionals who can take the financial stress off your plate and free up your time. The valuable insight an outsourced team provides can help guide your business decisions. Among the added benefits of hiring an outsourced accounting service are:

  • Automation: Outsourced accounting services often integrate directly into your payroll, inventory, sales and other bookkeeping systems. Each time a transaction is made, your accounting systems update automatically. This information virtually eliminates the possibility of human error in data entry.
  • Expert review: Instead of reactively looking back into your financial statements for discrepancies, you’ll have a clear understanding of the implications of your business decisions. This knowledge allows you to be proactive and gives you a dynamic view of the steps needed to grow your business and profits.
  • Best practices: A fresh set of eyes with advanced accounting expertise can provide an advantage when it comes to analyzing your financials. While old, inefficient methods might be enough to get by, an entire team dedicated to your operation will boost efficiency and accuracy. 

Contact Marshall Jones for Your Outsourced Accounting Needs Today

At Marshall Jones, our certified public accountants and advisors have provided outsourced accounting and other financial services to the Metro Atlanta area for more than 35 years. Our mission is to deliver superior service to our clients with the highest integrity and technical competency. Contact us today to find out how we can help with your company’s financial needs!

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