Gaining Understanding of the Blockchain

We should think of the Blockchain as another class of thing like the Internet – a comprehensive information technology with tiered technical levels and multiple classes of applications for any form of asset registry, inventory, and exchange, including every area of finance, economics, and money; hard assets (physical property, homes, cars); and intangible assets (votes, ideas, reputation, intention, health data, information, etc.). But the blockchain concept is even more; it is a new organizing paradigm for the discovery, valuation, and transfer of all quants data (discrete units) of anything, and potentially for the coordination of all human activity at a much larger scale than has ever been possible before. This technology has a built-in ‘robustness’ as it stores blocks of information that are identical across its network and can be controlled by any single entity and has no single points of failure. The days of hearing large corporations make public statements  about data breach are long gone. Blockchain technology is the platform that was invented to allow Bitcoin and other cryptocurrencies to function. Bitcoin was invented in 2008 and since then has not had one significant disruption.  This will also lead to the idea of decentralization. Blockchain technology is managed by a network, not one central authority. Stock market trades will become simultaneous and will basically eliminate the need of record keeping.

So, how does this pertain to you? The Blockchain does not need to be necessarily understood for it to provide use in your life. Before using the internet did you actually understand how it works? Probably not, but you used it. Think about the amount of money spent on money transfers. In 2015 the World Bank estimates over $430 billion was sent via money transfer. With the Blockchain this would basically eliminate the middleman. While it may seem foreign now it  will soon become a large part of everyday life.

 

Tax Reform: Effects on Financial Planning

The recently passed tax reform bill has received a considerable amount of press, and for good reason. As the most comprehensive tax reform in over 30 years, the new tax laws will impact every individual & business in America. Its impact also extends to the way we approach financial planning for our clients.

Estate Planning

The most significant change in regards to estate planning is the doubling of the Estate & Gift Tax Exemption. Beginning in 2018, this means that individuals will be able to claim exemptions up to $11.2 million, and $22.4 million for couples. For many high net worth individuals, this could simplify estate planning, as only amounts over the exemption limits will be subject to Federal tax. This provision is set to expire at the end of 2025, at which time the exemption amounts will revert to their pre-2018 levels, with inflation adjustments.

Charitable Giving

For those who are charitably inclined, the doubling of the standard deduction means that giving levels may need to be increased in order to receive a tax benefit. For a married couple, if itemized deductions are under the new standard deduction amount of $24,000, there will be no tax benefit to itemizing. For individuals, this limit will be $12,000. In order to maximize the tax benefits, donors may want to consider the use of a Donor Advised Fund. A Donor Advised Fund allows taxpayers to contribute an amount of their choosing to the fund and take a tax deduction for the full amount in the year the contribution is made. They may then choose to direct gifts from the Donor Advised Fund to specific charities over an extended time frame.

The annual gift tax exclusion has also been increased to $15,000 per person for 2018, meaning that couples can gift up to $30,000 per year without incurring any tax, and without using any of their lifetime exemption amount. Single taxpayers can gift up to $15,000 per person.

IRA Recharacterizations

Under the new tax bill, the ability to recharacterize a Roth conversion is eliminated. Previously, taxpayers had up until the tax filing deadline plus extensions to recharacterize any amount converted from a Traditional IRA to a Roth IRA, if the account had fallen in value, or if the amount converted results in a higher tax than originally anticipated. Under the new laws, this will no longer be allowed. This is one of the few permanent changes within the bill. Note that this change only applies to the recharacterization of Roth conversions; contributions to either Traditional IRAs or Roth IRAs are still able to be recharacterized.

For planning purposes, this means that individuals wishing to convert need to be certain of their ability and willingness to pay the taxes. It will also likely lead to more conservative recommendations regarding the amount to convert in a given year. As always, a potential Roth conversion should be discussed with a tax professional prior to implementing.

Distributions from 529 Plans

Distributions from 529 Plans of up to $10,000 per year, per individual used for the cost of K-12 expenses will now be considered qualified and therefore will be non-taxable. Funds may be used for students enrolled in public, private or religious school. Post-secondary education expenses remain qualified.

While many of the changes within the tax reform bill are temporary and will revert back after 2025, some changes are permanent, including the increase in standard deduction, the elimination of the personal exemptions, the elimination of the ability to recharacterize Roth IRA conversions, and the changes regarding the use of 529 Plan funds.

Effect of new taw law on economy.

New tax law having positive effect on economy

According to the Wall Street Journal, July 13, 2018. The effect of the new tax law can be seen in June government statistics. According to the U. S. Treasury, tax revenues fell 7% in June compared to June 2017. Corporations and Individuals are lowering their tax payments and withholdings due to the lower rates. Even though revenues fell, the budget deficit narrowed to $74.86 billion from June 2017 because of a 9% drop in government outlays.

Keeping Your R&D Credit

 

 

Business owners are often surprised to learn they may be able to claim the Research & Development tax credit.

The credit was originally created as way to encourage American companies to conduct R&D activities domestically. While initially thought to apply to large companies with formal R&D departments, “smaller businesses” in a wide range of industries, such as manufacturing, engineering, software development, architecture, pharmaceuticals, aerospace and defense, metal foundries, chemical companies and others, have discovered they can also claim the benefit. However, it’s important to be aware of best practices when claiming the credit, especially in areas where issues commonly arise, such as a lack of supporting documentation. Mistakes in documenting qualified research can result in missed opportunities and create problems should the company be selected for an IRS audit.

 

 

Common Documentation Mistakes

  • Lack of supporting documentation: R&D tax credit studies are at their weakest when they lack contemporaneous supporting documentation. Studies are often performed after the tax year is closed out. Some studies simply comprise a report that summarizes the findings and a brief description, if any, of the qualifying business component. One of the objectives of an R&D tax credit study should be to answer a common question under audit: Why does this business component qualify? In order to properly address this question, it’s important to take a fluid approach to documentation. No two taxpayers are the same. No two projects are the same. As such, taxpayers may need to be creative in the identification of documents that show how projects meet the qualification criteria with specific emphasis on the presence of uncertainty and experimentation. Information such as project records, lab notes, design drawings, photos of the design/build and testing trials, prototypes and patent applications are needed to corroborate customary R&D expenses. Having access to this information is especially helpful in the event of an IRS audit.

 

  • Informal documentation process: If a company is considering claiming the R&D tax credit for a project, it would be useful to implement a formal documentation process before beginning. Because many companies don’t understand who should be documenting, what they should be documenting and when the process should be occurring, it’s often left as a task to complete at year-end. When this happens, a single person is often assigned the task of poring over hundreds of documents to find proof of qualifying expenses. The result is that expenses are often missed, and the potential credit value is diminished. To overcome this, a best practice would be to implement a process that collects relevant information on an ongoing basis, while the R&D activities are occurring. The more thorough the process, the greater the likelihood that qualifying expenses will be captured and used appropriately when claiming the credit.

 

  • Lack of clarity: A common issue in the documentation process is that it’s unclear how the various expenses, personnel or other items relate to the R&D project. Remember that an IRS agent will not be familiar with your business, product or research process. Because they will be the primary judge of whether an expense qualifies toward the R&D credit, it’s essential to ensure the relationship between the expense and qualifying activity is clear. Avoid incomplete or inadequate descriptions, general statements that sound canned, and documentation that is not clearly related to the project. The more you rely on an IRS auditor to figure out how your documentation supports expenses, the greater the risk of exposure.

Charlie Jones featured on Atlanta’s ‘Shrimp Tank’

Last week, our company was invited to be on the national broadcast The Shrimp Tank which is produced here in Atlanta, GA. We had a great time on the show and gave lots of tidbits and nuggets to all of the listeners on how to become a better business owner.

To that end, we wanted to share the post show wrap up video that was shot on site and say thanks to all of you for allowing us to work with you. None of this could be possible without having the best clients on the planet!

If you want to hear a download of the full broadcast, please go to www.shrimptankpodcast.com. They have the entire show on the website and some fascinating articles to read as well.

Thanks again for all of your support for our company.

Changes we expect to see with divorce

Divorce is stressful enough, but the new tax bill may ramp up the complications and anxieties for couples who are calling it quits.

Divorce experts are predicting a confusing, turbulent year, thanks to the tax plan’s reversal on who pays taxes on alimony. For more than 70 years, the tax law allowed the higher-earning spouse to deduct the alimony they paid to their exes, while the “receiving” spouse was taxed at a 15% rate.

But the new Tax Cuts and Jobs Act reverses that long-standing arrangement. Starting in 2019, the higher-income spouse will lose the alimony deduction and must pay federal taxes on it, while the receiving spouse won’t have to pay taxes. The new tax bill affects divorce agreements signed after Dec. 31, 2018, while divorces settled before that will be grandfathered in under the old tax bill.

Those dynamics may result in a tense year of negotiations for couples who are splitting apart as higher-earning spouses likely push for a settlement in 2018, allowing them to lock in a tax deduction. Lower-earning spouses may want to delay the settlement until 2019, believing the new tax law will benefit them, he said.

Where to start

Given the complicated mix of emotion and finances in divorce, it can be helpful to rely on a team of experts, including a divorce attorney, a divorce coach and a financial analyst with expertise in divorce. The analyst can help spouses understand how the tax bill will affect their settlement.

A detailed financial analysis can help put things in perspective, including how the new tax code will affect spouses. Examining a post-divorce forecast of your cash flow — and how the tax law will affect it — will clarify whether it’s possible to maintain your current home or where you might need to cut back, for instance.

Take a step back

A spouse who wants to argue for lower alimony payments based on the new tax code may want to examine how much their fight will cost in legal fees. The typical hourly rate for a divorce attorney is $350, although it can be as high as $1,000 an hour in big cities.

How it affects happily married couples

Married couples with prenuptial agreements should also pay attention to the new alimony taxation. That’s because most of those prenups likely include alimony provisions based on the prior tax law.

Those prenups probably have to change. If you are happily married, this probably isn’t even on your radar. But they’ll have a big ‘uh-oh’ moment if they go through divorce and have this in their prenup.

New Georgia tax legislation will benefit all Georgia taxpayers

 

Governor Nathan Deal signed major income tax changes in response to the federal Tax Cuts and Job Act of 2017 (“TCJA”), on March 2, 2018.

The major components of the legislation are as follows:

  1. The top individual and business tax rates have been reduced to a maximum rate of 5.75%
  2. The standard deduction for individuals has been increased to $ 6,000 for married filing jointly taxpayers, and other increases for other classes of taxpayers
  3. Conforming the Georgia code to the newly enacted federal tax law changes

 

There are more specific details concerning the legislation, but the above three major changes cover the basics. For information on how these changes will affect your individual situation, please give us a call.

Hiring new employees with the 2018 Tax Act

When you hire a new employee, they must fill out a W-4 form telling you, their employer, how they want their federal withholdings. Single, married. Number of withholding allowances.

The Internal Revenue Service has issued a notice providing guidance for employees and employers on what to do with the Form W-4 under the new Tax Cuts and Jobs Act. They have extended. the effective period of Forms W-4 furnished to claim exemption from income tax withholding) for 2017 until Feb. 28, 2018 and temporarily allows employees to claim exemption from withholding for 2018 by using the 2017 Form W-4. Note that “withholding allowances” was used both for dependents and other things. Since there is no longer a deduction for dependents, it may be necessary for ALL employees to file new W-4 forms. We will stay on top of this and notify you on a future blog when this becomes clear.

The new IRS notice also suspends a requirement that employees must give their employers new W-4 forms within 10 days of a change of status resulting in fewer withholding allowances The new guidance also specifies that the optional withholding rate on supplemental wage payments is 22 percent for taxable years 2018 through 2025.

In addition, it says that, for 2018, withholding on annuities or similar periodic payments where no withholding certificate is in effect is based on treating the payee as a married individual who is claiming three withholding allowances.

The new tax law that Congress passed has led to confusion among many employers and employees since it eliminates many longstanding provisions of the tax code, including personal exemptions. Earlier this month, the IRS updated the withholding tables, and promised further guidance would be on the way. It also promised an online tax withholding calculator would be posted on its website where employees could double check their withholding to make sure it’s correct.

2017 Tax Reform: IRS clarifies interest on home equity loans

 

2017 Tax Reform: IRS clarifies interest on home equity loans. Often still deductible

In an Information Release, IRS has announced that in many cases, taxpayers can continue to deduct interest paid on home equity loans under the recently enacted Tax Cuts and Jobs Act (PL 115-97, 12/22/2017).

Background. Taxpayers may deduct interest on mortgage debt that is “acquisition debt”. Acquisition debt means debt that is:

  1. Secured by the taxpayer’s principal home and/or a second home, and
  2. Incurred in acquiring, constructing, or substantially improving the home.

This rule hasn’t been changed by the Tax Cuts and Jobs Act.

Under pre-Tax Cuts and Jobs Act law, the maximum amount that was treated as acquisition debt for the purpose of deducting interest was $1 million ($500,000 for marrieds filing separately). This meant that a taxpayer could deduct interest on no more than $1 million of acquisition debt. Taxpayers could also deduct interest on “home equity debt”. “Home equity debt”, as specially defined for purposes of the mortgage interest deduction, meant debt that:

  1. Was secured by the taxpayer’s home, and
  2. Wasn’t “acquisition indebtedness” (that is, wasn’t incurred to acquire, construct, or substantially improve the home).

Thus, the rule had allowed deduction of interest on home equity debt and enabled taxpayers to deduct interest on debt that wasn’t incurred to acquire, construct, or substantially improve a home—i.e., on debt that could be used for any purpose. As with acquisition debt, the pre-Tax Cuts and Jobs Act rules limited the maximum amount of “home equity debt” on which interest could be deducted; here, the limit was the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home.

Under the Tax Cuts and Jobs Act, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-Tax Cuts and Jobs Act limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. (Code Sec. 163(h)(3)(F))

Under the Tax Cuts and Jobs Act, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there is no longer a deduction for interest on “home equity debt”. The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred. (Code Sec. 163(h)(3)(F))

New guidance. In IR 2018-32, IRS said that despite the newly-enacted restrictions on home mortgages under the Tax Cuts and Jobs Act, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labelled.

IRS clarified that the Tax Cuts and Jobs Act suspends the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses—such as credit card debts—is not. As under pre-Tax Cuts and Jobs Act law, for the interest to be deductible, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

For anyone considering taking out a mortgage, the Tax Cuts and Jobs Act imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. The lower limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

IR 2018-32, provides the following examples:

Illustration 1: In January 2018, John takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, he takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if John used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Illustration 2: In January 2018, Mary takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, she takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if Mary took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Illustration 3: In January 2018, Bob takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, he takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. Only a percentage of the total interest paid is deductible.

Call us if you have any questions.

Pros and Cons of the New Tax Law on Real Estate Owners

There are certain provisions of the new tax law that offer expanded tax cuts while others eliminate existing deductions.

One big plus is bonus depreciation. Under prior law, there was a 50 percent bonus depreciation for property placed in service in 2017, 40 percent for 2018, and 30 percent for 2019. Qualified property has to be new, not used.

Under the new law, there’s 100 percent bonus depreciation for property placed in service after Sept. 27, 2017, and before 2023, 80 percent for 2023, 60 percent for 2024, 40 percent for 2025 and 20 percent for 2026. The acquisition date for property purchased with a written contract is the date of the contract.

Qualified property includes property acquired by purchase. A qualified property does not include property used in a business that is not subject to the net business interest expense limitation (see below), but it does include property used in farm business. The law also adds a new category for qualified film, TV, and live theatrical production property. Taxpayers can elect a 50 percent bonus for 2017.

Section 179 expensing has also expanded to include roofs, HVAC systems, fire protection, alarm systems and security systems, with the allowable expense increased from $500,000 to $1,000,000 in 2018, and the phase-out deduction increased to $2.5 million. These rules now include tangible personal property acquired for rental properties, furniture and appliances.

 

Potential losses of prior credits include:

Interest deduction limitation: Interest is now limited to 30 percent of a business’s adjusted taxable income, with the exception of businesses with average annual gross receipts of $25 million or less. Real property businesses can opt out of the interest limitation if they elect the Alternative Depreciation System recovery period rather than MACRS (the Modified Accelerated Cost Recovery System). ADS recovery periods are 40 years for nonresidential property, 30 years for residential and 20 years for improvement property.

State and local tax and property tax deduction: The exclusion of local income and sales tax deductions is for non-corporate taxpayers. There is a $10,000 limit for deductibility of property tax which applies to individuals only.

Property placed in service: Under prior law you could deduct up to $500,000. The limit would be reduced dollar-for-dollar if $2 million in property was placed in service during year. Under the new law, you can deduct up to $1 million starting in 2018. The limit is reduced dollar-for-dollar if $2.5 million in property is placed in service during year. The new law also adds tangible property used for lodging (beds and other furniture for hotels and apartments) and an election for roofs, HVAC property, fire protection and alarm systems, and security systems for nonresidential real property placed in service after the date the real estate was first placed in service. The provisions are effective for property placed in service in 2018.

 

All things considered, the new tax law will provide significant tax savings for the majority of businesses given an overall reduction of tax rates and increased bonus and Section 179 deductions. Real estate owners should strongly consider projected revenue, tax liability and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions.