Tax Planning

In 1993, then President Bill Clinton sought to find a support system to aid the rapid growth in the workforce, which was increasingly made up of women with families.  The Family and Medical Leave Act (FMLA) was passed “to balance the demands of the workplace with the needs of families.”  This Act allowed both women and men to participate in work, but also protect them if a medical need arose.  Under this Federal Act, employers with fifty of more employees were required to provide up to twelve weeks to attend to serious health conditions of the employee, a parent, spouse or child.  It also provided for pregnancy and care of a newborn, adopted child or foster child.  In order to qualify, the employee needed to have worked in the business for at least twelve month and worked at least 1,250 hours over the past twelve months. (In 2008, different requirements and time periods were given to active duty families.  This leave was unpaid leave, and merely protected the employee’s right to benefits during the leave and return to their job or one of equal level, compensation and benefits.  Note that highly compensated employees have more limited rights when it comes to FMLA.

States are allowed to extend the benefits to FMLA if they so choose.  By 2016, four states had increased the benefits to include paid leave.  In 2019, Washington state will join California, New Jersey, Rhode Island, and New York.  Other states have dropped the threshold from fifty employees to less, and some have expanded coverage terms.  In 2008, the Act was amended to broaden the definition of family member for military families to include next of kin and adult children.  In 2010, the definition of “son and daughter” was clarified to ensure that the benefits covered those employees who assume the role of caring for a child regardless of their legal or biological relationship.  This change, along with February 2015 decision by the Department of Labor to redefine the definition of spouse, allowed for FMLA leave rights to cover same-sex and common-law marriages.  With these state level changes, some states also enacted payroll taxes to cover the increased payout costs and state programs and grants related to FMLA.  It is important for employers to ensure that they understand the requirements of their state, along with any taxation regulations linked to FMLA.

A new tax credit related to FMLA is available to eligible employers, even if they are exempt from providing FMLA.  Eligible employers are ones that have a written policy in place by the end of 2018 that requires the employer to provide at least two weeks of paid leave to qualified full time employees.  Part time employees can count towards eligibility if the leave is prorated for part time employees.  It is important to note that the IRS has stated that eligibility is calculated on expected normal work hours.  Overtime unless it is regularly scheduled, and discretionary bonuses are excluded from this calculation.  This credit is currently only available for the 2018 and 2019 tax years.  Tax practitioners may come across this credit during the 2018 filing season and should be aware of how to calculate the credit.

Under the credit, the definition of eligible employee is different than those of FMLA.  Again, under FMLA, the employee must have worked for the employer for a full year, not be highly compensated, and worked at least 1,250.  For Sec. 45S, the employee does not have to work the full year consecutively and the employer can use any method reasonable to determine whether the employee has been employed for one year or more.  Additionally, Section 45S does not require and employee to work the minimum number of hours per year to qualify.  Highly compensated employee is defined for the credit as being paid more than sixty percent of the applicable amount under Section 414(q)(1(B).  For 2018, the amount is $120,000, thereby making highly compensated employees anyone paid over $72,000.

Additionally, although FMLA allows for employees to elect, or employers to require, that employees substitute FMLA leave with any accrued vacation or sick leave, these leaves do not qualify for the tax credit unless that requirement is restricted to one or more of the following leave purposes:

• Birth and care of a newborn child of the employee;
• Placement of a child for adoption or foster with the employee;
• Care of the employee’s spouse, child or parent with a serious health condition;
• Employee’s inability to perform their duties due to serious health condition;
• Qualifying exigency arising from employee’s spouse, child or parent on covered active duty or call to active duty; or
• Employee who is the spouse, child, parent or next of kin to a covered servicemember to care for the service member

The FMLA credit equals an applicable percentage of the amount of wages paid to qualifying employees during their leave.  The wages paid to the employee must be equal to or exceed fifty percent of their regular and normal wages, up to one-hundred percent of regular and normal wages.  The credit’s applicable percentage is twelve and a half percent (12.5%) of the wages paid to the employee for leave during the calendar year and increases by 0.25 percentage points for each percentage point of wages paid for leave over fifty percent of normal wages.  This means that the maximum credit is twenty-five percent (25%) which is made up of 12.5% plus (50% multiplied by 0.25%) of wages paid for leave at a rate of 100% of normal wages.  The credit is limited to each employee’s hours of leave taken, multiplied by the employee’s normal hourly rate of pay when in service to the employer.  The method for converting a non-hourly rate employee to hourly for this calculation will be established under IRS regulation Sec. 45S(b)(2).  Until then, employers may use any reasonable method.  The current suggested method is to utilize the Fair Labor Standards Act of 1938 (FLSA) to determine regular rate of pay.  The employer must reduce the amount of the deduction claimed for wages and salaries paid by the amount of the leave credit.  This credit, when combined with all general business credits, cannot exceed the taxpayer’s net income tax over the greater of the tentative minimum tax or twenty-five percent of the taxpayer’s net regular tax liability that exceeds $25,000.  The excess, if eligible, can be carried back one year or forward twenty years.

You had a great idea and now you’ve put it in motion as a business.  And while income recognition is easy to determine, qualified business deductions can be a bit harder.  So… what are the most common tax deductions for small businesses?

Any materials you utilize for marketing your business and the cost of developing these can be deductible.  This can be advertisements in print or media, brochures, branded promo items, events or trade shows. Non-branded gift cannot be deducted.

Business insurance that is intended to protect your business as well as medical insurance that is paid by the business for its employees.  Auto related insurance falls under a different set of guidelines.  A portion of your vehicle expense can be taken related to the business use of the vehicle, unless standard mileage is taken instead.

Depreciation and Section 179 expenses on capitalized business assets such as computers, office furniture, tools and equipment, and the like.  Leasehold improvements and other real estate related capital expenses cannot be taken under Section 179.  Special depreciation rules have been approved by the IRS in certain years that speed up depreciation life in qualified assets.

Home office deduction relates to the specific portion of your home that is utilized solely for business.  This deduction is often misunderstood and abused.  You must designate a space that is used exclusively and regularly for the trade or business. In general, this must be an actual office and not a convenient space in your home.  More importantly, this space must only be used for business.  To figure the deduction, you must take the costs associated with your home that relate to the space (rent, utilities, insurance, mortgage interest, real estate taxes, etc.) and then calculate the percentage of use of the home for the business.

Office supplies that you use and replace such as pens, paper, toner, hot/cold bags for deliveries, etc.  Supplies that are used to create a product are considered Cost of Good Sold and are also deductible, as is the labor to create the product.

Travel related to business trips are deductible, such as airfare, lodging, rental cars and so on.  If the trip has an element of personal costs or entertainment, these portions are not deductible.

If you travel for business, you can deduct the mileage driven to do your job at the IRS standard rate for the year.  However, you cannot deduct the mileage for commuting to and from your job.  If you leave your house and go directly to the client site, without stopping at the office first, you must still deduct the mileage that would have been considered commuting from your total miles.  For example, if you went to a client site 14 miles away, but your normal commute to work would have been 4 miles, you can only deduct the 10 miles that are over and above your commuting miles.

Meals and entertainment have always been heavily scrutinized by the IRS.  With the new tax law changes, very few deductions will be allowed for company provided meals, and even less for employee related entertainment and benefits.  A good rule of thumb for currently meals that are deductible at 50%: client meal out and business discussion is the focus of the meal; travel meals; meals provided by the employer to the employee for the employer’s convenience; seminar/meeting meals; and office provided food/coffee. Meals that are 100% deductible are food provided to the public and certain office parties that are not extravagant in nature.  And entertainment of a client with no business-related interaction is not deductible.  Seeking the advice of a tax professional to determine which of your meals and entertainment qualify is advisable.

The costs of employees are also deductible including wages, employer portion of payroll taxes, employer provided benefits, dues and association costs, licensing, and retirement/pension plan employer costs.

Other less thought of deductions include: bank fees, education or training, library or industry related subscriptions, commissions and fees, contract labor, janitorial, depletion, interest on loans or investments that utilized the funds for the business, legal and professional fees, rent or lease of a vehicle or equipment, repairs and maintenance, utilities, and taxes and licenses.  Keep in mind that education costs must not be to qualify you for a new career.  These fall outside of the realm of a business deduction.  Also, starting in 2018, businesses with average annual gross receipts in the three prior years of more than $25 million are limited in the percentage of interest that’s deductible. Interest on loans by owners to buy their businesses are treated differently. Interest from an owner’s investment interest or passive activity interest is not a business deduction.  Estimated, Federal or State taxes paid on behalf of the owner as reported on the personal returns are not deductible.  Owner draws are not deductible to the business.

Business gifts are deductible, but only to a limited extent.  The IRS allows for a deduction of only the first $25 worth of gifts to each customer.  Meaning, that if you were to spend $100 on one customer, you would receive a deduction of $25.  But if you were to spend that same $100 on four customers, you would be able to deduct $25 for each customer, or the full $100 spent.

Certain items are never deductible by the business.  Some of these things are: fines and penalties for breaking the law, life insurance premiums if the business is the beneficiary (directly or indirectly), and political donations.  Unless it’s a required uniform you have to wear for work, or protective clothing, you cannot deduct business clothing.  Likewise, cellphone usage is limited by the amount of business use versus personal use.  This must be well documented.

Charitable contributions made by the company are not deductible by the business itself unless it is a C Corporation.  These will flow through to the owner’s personal return and be deducted on Schedule A if they itemize.

There are many different business deductions, each with their own unique qualifications.  It is important to review these with your tax professional.

As the holidays near, more and more shoppers are turning to online methods of procuring that special gift.  And it makes complete sense.  The world of e-commerce opens the buyer up to products that may be unavailable in the local area, and it’s often cost-efficient.  With this massive turn in consumer spending, tax systems are struggling to keep up.  By now most taxpayers have heard of the South Dakota v. Wayfair ruling that overturned the 1992 Quill case and now imposes sales taxes on retailers with no physical presence in the state, as long as they have a clear connection to state consumers and certain threshold of sales.  With this, smaller brick and mortar shops may start to see an increase in their sales again.  It will also help local state and municipalities by bringing in more revenue through the taxation.

It is not great news for businesses that rely on e-commerce sales, however.  Smaller businesses will feel the impact of Wayfair far more than larger companies like Amazon and Overstock.com.  These large-scale businesses have been anticipating and preparing for these changes for years.  In fact, many of them have already been collecting and submitting sales tax with the assumption that this is where the nation was headed.  It is the smaller companies that merely dabble in online or across-boarder sales, that need to bring themselves up to speed on the new regulations and how it will affect them.  Likewise, new start-ups that plan to rely on e-commerce need to understand where they will ow taxes, and how much tax they will pay in each state in each year.  Small retailers should brace themselves for state and local tax collectors, as well as auditors, to start scrutinizing their operations looking for any missed taxation opportunities.

Since the inception of the world wide web in 1991, online shopping has increased.  In fact, even though internet sales were a relatively new idea, in 1992 the Supreme Court ruled on their taxation in the case of Quill Corporation v North Dakota.  In the case of Quill, companies only had to collect sales tax for transactions that fell in a specific state where the company had a physical presence – meaning a brick and mortar retail store, employees, warehouse or office building.  On the surface this seems perfectly reasonable.  Afterall, these businesses are not contained within the state and are not benefiting from the state, so why should they pay taxes in the state.  However, this meant that a company was free to sell in another state without expense to themselves or the consumer for taxes.  When you look at it from this perspective it is easy to see why consumers turned to online sales, and companies looked to cross state lines.

So, then why is sales tax compliance different for small online businesses?  The biggest hurdle that small businesses face is the method in which to track sales tax.  Sales tax must be tracked at the state, county and municipal levels, with varying rates and exemptions on each level.  An increase complication is that many states have a sales threshold that is made up of a monetary or number of sales value, or both.  Meaning that sales tax must be collected once the company has passed the threshold amount, but only once the threshold has been passed.  Additionally, sales and use taxes are also based upon the buyer’s exemption status.  Sellers will be required to collect and retain exemption certificates to support any non-taxed sales.  Sales tax is due to be remitted by the seller, even if they fail to collect it from the buyer.  Knowing the sales tax rate and when it is applicable is crucial for business owners looking to not pay more out of their own pockets than necessary.  Late filing fees are also a large hardship on small businesses that may miss the deadlines in each area.  It’s also important to note that not every state has sales tax, and not every state that does has adopted economic nexus as their collection basis.  Additionally, some states have destination-based sales tax within each location of the state.  Deducting and applying all of these new data points will increase the time and costs associated with tracking, collecting, reporting and submitting these taxes.  There are entire companies dedicated to assisting businesses with these items.  Additionally, small online businesses will have to bank on their diversity of product to compete with the brick and mortar stores, as they no longer will have the added benefit of reduced cost due to sales tax.

As well as changing the taxation game in the United States, it is believed that Wayfair will pave the way for international sales to be more regulated when it comes to taxation.  We often think of taxation as something that resides solely within our boarders.  Unlike Untied States income taxes, sales and use taxes are not covered by international tax treaties.  This means that a company may be protected from federal taxes based on the treaties established between its country and the United States, but it still may be subject to taxes on the state level.  In 2008, New York implemented what is sometimes known as a “click-through” nexus status.  This created a presumption of nexus for out-of-state sellers who compensated an in-state person based upon commission.  Some states also enacted an “affiliated nexus” statue that creates nexus for companies that have common ownership with an in-state company and engages in activities that expand the marketplace of the out-of-state company.  With the Wayfair case defining online sellers as needing to have “economic nexus” in a state, international sellers may be subject to collection of sales tax.  Additionally, if an international seller has a warehouse in the United States, such as an FBA warehouse, they will now have to comply with the collection and remittance of sales tax.

Both national and foreign companies will need to start reviewing their sales and determine what system they will need to use to properly charge and submit their sales tax.  Additionally, companies must review the regulations for licensing in each state, as the definition of business activity may have changed given the Wayfair changes.

Small business ownership is a good way to take more control of your time and puts more money in your pocket.  But what is the true cost of small business ownership?  Surprisingly, many small business owners are faced with many challenges that may leave them with less time and less money than when they were earning a living working for someone else.

One of the most common mistakes that small business owners make is made within eh first few weeks of starting up their business.  Choosing the wrong entity and/or business structure can severely hurt a small business trying to get on its feet.  While each state is different, the common types of business structures are:  sole proprietorship, partnership, limited liability company, and corporation (C and S are the most common).  It is important to understand who the structuring of your business will affect your tax situation, how you raise money, the paperwork that is needed to be field, as well as your own personal liability requirements.

A sole proprietorship is the easiest to form and gives you complete control over how the business is run.  In most cases, you are automatically considered a sole proprietorship is you perform business activities and do not register as any other type of business.  Sole proprietorships report their taxes on the owner’s personal Federal Form 1040 tax return.  They are also subject to self-employment taxes, and the owner cannot take a W2 wage.  As they are not seen as separate from the owner, all assets and liabilities are also not separate from the owner, and you may be held personally liable for any debt and obligation incurred on behalf of the business.  Sole proprietorships are considered low risk, and a good place for owners looking to start out before creating any more formalized business.

Partnerships are the simplest structure for two or more owners to do business together.  There are two common types of partnerships: limited partnerships and limited liability partnerships.  With a limited partnership, there can be only one general partner and the rest are limited liability partners.  The limited liability partners also have limited control over the company and its decisions.  Profits and losses are passed through to the general partner to report on their personal Federal Form 1040, and any profit is subject to self-employment taxes.  The limited liability partners only pay self-employment on any guaranteed payments they receive.  In the limited liability partnership, the liability is limited to each owner.  This protects all partners from debts against the partnership and the actions of the other partners.

A limited liability company gives the small business owner the benefit of both the corporation and partnership structure.  Limited Liability Companies are designed to protect the owner(s) from personal liability, thereby protecting their assets from lawsuits or debt created in the business.  The profits and losses are passed through to the owner’s personal Federal Form 1040 for taxation.  They are, however, considered to be subject to self-employment taxes.  Each state has different rules regarding the treatment of limited liability companies, so it is important to determine I the regulations of your state will work for your business.

A C Corporation is a legal entity completely separated from its owners.  As a separated entity, it is responsible for its own taxes as well as legal liability.  While this structure provides the most legal protection for the owner, there is also the greatest cost to set up a C Corporation.  They also require the most amount of record keeping, operational process and reporting.  Additionally, they are subject to double taxation.  The profits are first taxed on the corporate level, and then the dividends paid to each owner is taxes on the owner’s personal Federal Form 1040 return.  If an owner chooses to leave the Corporation, he/her shares are simply sold, and the Corporation feels little to no affect.  Raising funds can also be easier, as the Corporation can sell stock.

Sub Chapter S Corporations are designed to avoid the double taxation that occurs in the more traditional C Corporation.  The S Corporation allows for profits and losses to be passed directly to the owner’s or owners’ personal Federal Form 1040 for taxation purposes without being subject to self-employment taxes.  Again, each state has different regulations when it comes to the treatment of S Corporations, and so it is important to understand your own states stance.  The S Corporation is limited in its shareholders to one hundred, and they must all be US Citizens.  It also retains the strict processes and operations reporting that a C Corporation has.  And like a C Corporation, it is easy for a shareholder to leave the company.

As business owners begin to navigate their structure, often underpayment or overpayment of taxes become a key issue.  Many owners are not aware of what income is reportable, participate in barter systems in their first years but do not report them as income, or engage in cash transactions that are not reported to the IRS.  Often owners are unaware of what expenses can be taken against the income, and this can lead to over or under reporting of expenses.  In many states there are taxes associated with the location of the consumer, special licenses and other items that the small business owner may not be aware that they must track or have.  Small business owners often have difficulty complying with the complex tax code that surrounds business ownership because they simply are not aware of it.

It is important to take advantage of deductions and credits available to your business.  It is often hard to keep up with the ever-changing landscape of tax laws and tax reform.  Over forty percent of small business owners say they spend eighty or more hours working on tax and accounting related issues a year, and generally all in the last quarter of the year.  Often it can seem overwhelming to a small business owner, especially those just starting out.  It is important to make sure you start out on the right foot and seek the help of a professional or your state’s business regulatory site to ensure that you are capturing all of the requirements and reporting correctly.

When most people think of foreign accounts, they think of ex-pat living overseas and utilizing banks for the accumulation of their payments.  However, many taxpayers may also be subject to the federal Foreign Bank and Financial Accounts or FBAR reporting without realizing it.  The United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) 114 form is filed alongside taxpayers’ federal tax return and reports information for those that have a financial interest or signature authority over a foreign financial account.  Financial interest is defined as: directly owning an account; directly owning or indirectly owning more than fifty percent of a corporation’s voting power and/or shares when that corporation owns an account; directly owning or indirectly owning more than fifty percent of a partnership’s profits or capital when that partnership owns an account, or directly owning or indirectly owning more than fifty percent of the voting power, total value or the equity interest or assets, or interest in profits of any entity that owns an account.  It is important to note that disregarded entities that have no other filing requirements may still have an FBAR requirement.  Signature authority is more broadly defined as:  the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account in maintained.  Here it is important to note that officers and employees may delegate the filing of Form 114 under this definition to another, but they still remain personally liable for any delinquent filing.  It is important to know what accounts your company has stakes in if you have signature authority over any company accounts.

The FBAR was created to uncover funds being hidden offshore.  And while it has been around for quite a while, the Internal Revenue Service has not seriously enforced it until recently.  For most filers, you will be required to complete Part III of Schedule B of Form 1040 and Form 8938 as part of your tax return, as well as Form 114 which is filed separately.  Bear in mind that the FBAR and other foreign reporting forms are not taxation related forms.  They are simply balance reporting forms so that the IRS is aware of overseas monies.

Individuals, corporations, partnerships, limited liability companies, trusts and estates are all subject to foreign reporting if they meet the threshold requirements.  The current threshold amount for reporting is $10,000 of your combined foreign accounts at any given time during the calendar year.  Heavy penalties are enforced if a taxpayer meets these requirements but fails to file the proper form(s), even if they did not know that they had a requirement to file.  These fines can be anywhere from $10,000 to $100,000 or fifty percent of the account balances, depending on the reason for not filing and the amount of your account balances at the time of the violation.  Over the last ten years, after the introduction of the penalties, the filings for FBAR reporting increased from two-hundred—eighty-thousand to over one million.

As many taxpayers were unaware that they had filing requirements in accordance with the Foreign Account Tax Compliant Act (FATCA), in 2009, the IRS established the Offshore Voluntary Disclosure Program which allowed taxpayers to alleviate civil penalties and lower the risk of criminal prosecution for failing to disclose offshore accounts.  It is important to note that the OVDP is different than filing a delinquent FBAR and/or Form 8938 and understanding which is more beneficial to the taxpayer is crucial before applying.  The OVDP is used generally by taxpayers that have criminal tax exposure with respect to non-willful noncompliance of their tax situation.  Non-willful tax violation means that you did not intentionally try to evade your tax reporting, may not have been aware of your reporting requirements, may not have been aware that your aggregate total in your foreign accounts reached the threshold, or you did not properly convert the account to the USD value and understand that there it met the filing requirements.  Other violations include not understanding which accounts fall under the aggregate account definition, and or which accounts you have signature authority over.  And while filing the OVDP can mean that you can avoid some of the more severe penalties, it can mean that the taxpayer is found to have underreported their foreign income and taxes can be due, including “failure to file” and “failure to pay” penalties and interest, as well as the “in lieu” penalty.  In exchange for not being penalized criminally, the filer agrees to pay back the penalties.  A taxpayer does have the option to opt-out of the OVDP, but that means that the IRS can come after you for criminal penalties, although this is rare is you have substantial evidence that you non-willfully failed to report.  If you are facing OVDP penalties of fifty percent or greater of your account values, then opting-out may be an option.  Filing delinquent FBAR, in these cases, may mean paying less in tax penalties.

Recently, the IRS announced that it is closing the OVDP.  Although the program was successful in incentivizing taxpayers to report their foreign transactions, the use of the program has steadily declined in recent years.  More and more taxpayers are utilizing proper reporting techniques, and this led to only 600 filed cases in 2017.  However, the closing of the program should not lead to the assumption that the IRS will stop combating offshore tax evasion and noncompliance issues.  Historically, the OVDP has evolved over the years, and a new version may manifest in the coming period.  Alternatives to the OVDP are currently available to taxpayers wishing to disclose.  Taxpayers are encouraged to utilize the IRS Streamlined Voluntary Disclosure Submission Process, the IRS Criminal Investigation Voluntary Disclosure Program, the Delinquent FBAR, or the Delinquent International Information Return.

Due to the complexities involved with each of these filings, it is advisable to seek the advice of an experienced OVDP attorney prior to making any disclosures.

When we are working, taxes are a part of daily life and influence the considerations that we take in our spending habits.  Once we start thinking about retiring, we often forget to add in taxes as a component to our thought process.  It is important to understand your tax situation in retirement prior to retiring so that you will be ready when the time comes to pay on the taxes due.

1. Social Security

When we think about retirement, Social Security tends to be the first thing that comes to most people’s minds.  An individual’s Social Security is funded by reducing a portion of their paychecks as taxation payable towards the Federal Insurance Contributions Act, better known as FICA taxes, as well as their employer paying in matching taxes from their own funds.  For the self-employed, both sides of FICA are paid through self-employment taxes based upon the Self-Employment Contributions Act of 1954 (SECA) by the self-employed individual.  Social Security was originally created through the Social Security Act of 1935, to ensure basic rights to each person as they aged, became unemployed, and for under working age children.  While it has gone through several changes since President Roosevelt first signed it into law, the idea behind Social Security remains the same.

Up until 1984, Social Security benefits remained untaxable.  This was different than private pensions, in that most private pensions are partially taxable.  Private pension benefits are taxable to the extent the pension recipient is generally liable for the portion of the benefits that (s)he did not her/himself contribute.   This includes the employer portion of the pension contributions, as well as interested earned by the funds.  The 1983 Amendments to the Social Security Act, challenged the taxability of Social Security benefits by determining that Social Security was also not funded solely by the individual employee.  Additionally, many individuals were receiving benefits over and above the amount that they themselves contributed due to Social Security’s program operating on the insurance principle.  In the 1983 Amendments, Congress approved that Social Security up to fifty-percent of the value of the benefit could be potentially taxable.  In 1993, as part of the Omnibus Budget Reconciliation Act, a secondary threshold was created that meant that up to eighty-five percent of Social Security benefits could be potentially taxable.  The intention here was to bring Social Security closer in line with private pensions, but only for the higher-income beneficiaries.

Knowing the income thresholds that will push your Social Security into a taxable position, will be important as you approach retirement.  The higher your income, the larger the percentage of Social Security benefits you will have to pay taxes on.    The income used in the threshold calculation is known as your adjusted gross income and include pensions distributions, retirement account withdrawals from taxable retirement (other than Social Security), and tax-free interest; as well as any earned income you may have.  This makes Roth accounts a good option for retirement planning,

2. Traditional and Tax-deferred Accounts Versus Roth Accounts

There are may ways of thinking and planning for retirement account funding, much of which will depend on where you are in your working life, as well as retirement goals and needs. As this is a brief overview of the three general types of retirement accounts, discussions on which plan type is right for you should be reviewed with your retirement plan broker and tax accountant.

Traditional individual retirement accounts (IRA) are funded by contributions made with after-tax dollars that allow for tax-free growth.    The contributions made to these accounts are potentially deductible on your income tax return.  These are generally utilized to supplement employer-sponsored plans that may not accumulate enough to give you the retirement savings you need.

While you are working, tax-deferred retirement accounts provide the benefit of reducing your taxable income while you save for the future.  Contributions to these types of retirement plans allow you to contribute directly from your wages or self-employed income before taxes.  However, once you have retired, any distribution from these funds becomes taxable.  The idea is that at the point you begin to withdraw these retirement funds, you will be in a lower tax bracket than when you were working.  At age seventy and a half, the Internal Revenue Service requires you to take a certain amount of funds out of your account each year.  The penalty for not taking your required minimum distribution is fifty percent of the amount you should have withdrawn.

On the flip-side, distributions that you take out of your Roth retirement accounts are tax-free.  A Roth is an after-tax contribution funded account.  Most other retirement contributions are either made with pre-tax dollars or are deductible against taxable income.  Roths are not.  So, while you will not see the benefit of a Roth contribution while you are working, qualified withdrawals from the account in retirement are tax-free (as long as the account has been open for five years or more).  Roths also lack the required minimum distribution portion that non-Roth accounts have.  Roths also allow you to withdraw the contribution amount at any time and for any reason, without penalty.

3. Withholding and Estimated Tax Payments

When we are working for an employer, most of our annual tax liability gets paid in the form of federal withholding on our paychecks.  Withholding is calculated using the IRS tables and based on the information on your Form W4.  While many of us would prefer to have those extra dollars in our pockets each month, it does reduce or can potentially wipeout the taxes due in April.  In this way, paying a little in each pay period can be beneficial to a large tax hit in April.  Once we retire, however, these payments are no longer made through our wages.  With the IRS requirement that says that you must make payments throughout the year if you are going to owe one-thousand dollars or more, knowing your potential tax ahead of time is crucial.  You must ensure that you pay at least what you owed in the prior year, or one-hundred and ten percent if your adjusted gross income will be more than one-hundred-fifty-thousand dollars.  This will reduce the underpayment penalty but may not cover the taxes you end up owing in the current year. One way to achieve this pre-payment is to continue your withholding through your retirement payments.  Another is to make estimated tax payments throughout the year in quarterly installments.  These can be made through the IRS website or via check with a voucher you will receive with your annual tax return if requested.  The calculation of what you may owe can be complex and it is best to seek the advice of a tax professional.

The Tax Reform Act of 1986 first brought about the concept of taxation on the investment and unearned income for those individuals over thirteen and under seventeen years of age.  It is commonly known as the “Kiddie Tax.”  Originally the law only covered children over fourteen, as children under that age cannot legally work.  This meant that any income of a child under fourteen was derived from dividends or interest from bonds.  More recently, the age limits were revised to include children who hadn’t reached age nineteen by the close of the tax year, and full-time students under age twenty-four whose earned income was less than half of their own support, had at least one living parent, and didn’t file a joint return.  In the original tax bill, this tax is imposed on children whose investment and unearned income was higher than the annual threshold.  Under the old law, the first $1,050 of a child’s income is tax-free and the next $1,050 is taxed at 10%.  Furthermore, any unearned income over the $2,100 was taxed at the parents’ rate if it was higher than that of the child.  Earned income, like wages from a job, were still taxed at the child’s lesser rate.  In other words, the earned income from a job and the unearned investment income up to $2,100, less the standard deduction, was taxed at the child’s rate.  This encouraged parents and grandparents to make financial gifts to minors in the form of appreciated stock, assets from taxable estates, income transfers, and inherited IRAs.

During the introduction of the new Tax Cuts and Jobs Act of 2017 little was said about the rewrite of the Kiddie Tax rules. With these changes taxpayers will need to give pause in their strategies.  Beginning in 2018 and continuing until at least through 2025, when the law sunsets, the taxable income attributable to the child’s earned income is taxed under the rates for a single individual, as before.  However, the portion of the unearned income that is subject to tax, meaning the amount over $2,100, will now be taxed at the brackets applicable to trusts and estates.  This does mean that calculating the Kiddie tax will become far simpler.  Previously, parents and children would have to combine the income from all of the children, figure the parents’ tax rates and spread the tax between everyone.  Now everyone’s earnings are separate.  But with the use of the trust and estate brackets, there will be added complication in the form of a higher tax bracket for most.  For example, the income from IRA distributions, interest and short-term gains is taxed at the rate of 37% when the estate and trust rates are applied (once it exceeds $12.500).  By contrast, the married parents would only pay that rate on the portion of their income that exceeded $600,000.  The top long-term capital gains rate of 20% kicks in at $12,700 for the child, but not until $479,000 for the parents.

Children of high earning parents may find themselves in a lower tax bracket, as high-income taxpayers could be taxed up to 39.6%.  However, families of modest means will be hit harder, where the tax bracket is well under 37%.  Additionally, the tax applies to all types of unearned income, including Social Security from survivor’s benefits, legal settlements, investment income, and inherited IRAs and 401Ks.

The new tax law changes will also affect the standard course of utilizing inherited IRAs and other investments for school funding.  For example, a college student has parents in a fairly low-income tax bracket.  The grandparents previously gifted the child stock to sell.  For this example, the child pulls out funds for college, resulting in $200,000 of capital gains.  Under last year’s taxes, the $200,000 would have been subject to his parents’ capital gains rate of 15%.  Under the new law, the same gains are subject to 20%.  Under this taxation difference, it would have been a better strategy to gift the stock to the parents and have them sell it for the lower bracket on the gains.  Additionally, because by definition, a child must provide over half of their support from earned income to qualify as financially independent, this withdrawal of funds will not remove them from the Kiddie Tax effects.  Many financial advisory firms are recommending that the safest tax strategy is to have the student borrow for college and then utilize the IRA withdrawals to pay back the loan(s) after they have turned 24. 

Parents and grandparents wishing to gift investment wealth to their descendants will have to utilize a bit more strategy.  Leaving a child a Roth IRA may present a better option, as these result in tax-free payouts that would not be subject to the Kiddie Tax.  Naming children or grandchildren as beneficiaries on a Roth IRA and rolling the investment funds from a traditional pre-tax IRA to the Roth can be a good strategy.  Traditionally, the grandparents will have a lower income tax bracket and can take the hit of the taxes on the pre-tax rollover.  Make sure that you do not leave your IRAs subject to your estate.  This will mean that the distribution to your beneficiaries will need to take place within five years and cannot be stretched over the life span of the beneficiary.  Choosing investments wisely, is also a good strategy.  With $2,100 of non-taxable and low tax rate dollars to work with, dividends from large investments can be relatively sheltered from tax.  On the other hand, a taxable merger with large capital gains could result in a much higher Kiddie Tax.  If the goal is to pay for education, funding a 529 college plan is a good way to give tax free assistance.  Furthermore, the Tax Cut and Jobs Act allows for up to $100,000 a year of 529 money per child to be used for kindergarten through twelfth grade private-school costs tax-free, provided your state allows it.  Gifts of low-basis stocks to a Uniform Transfers to Minors Act account is also still a sound strategy.  Since the parents’ return is no longer involved, UTMA simpler now.  Additionally, once UTMA held stocks are sold, the funds can be transferred into a 529 account.

Many people wait until year-end to make substantial gifts.  With the complications added by the Tax Cuts and Jobs Act, now is a good time to start the process of determining the best possible ways in which to pass along your wealth. The best advice is to seek the aid of a tax professional to run numbers and find the best way to achieve your goals.

The Tax Cuts and Jobs Act (TCJA) tax reform and transfer pricing questions have become hot topics. However, as publications such as Tax Notes have observed, there is no single simple answer that applies across the board and fits all companies. While companies based in the U.S. are cheering on the new 21 percent corporate tax rate (a substantial relief from the 35 percent rate), local businesses may not have a firm grasp on how changes to transfer pricing could affect theme. (Keep in mind: these changes will affect 2018 corporate tax return filings, but not 2017.) A guiding principle that should be remembered: the effects of changes to transfer pricing guidelines will not impact every small business the same way. The effects must be considered on a case-by-case basis with each client. There are layers of factors that must be considered at the same time when attempting to model these transfer pricing issues.

Note: The following is a brief, generalized overview. It does not constitute comprehensive or actionable advice. It is imperitive that you consult with your own legal and tax professionals before engaging in a definitive strategy for tackling the issues of transfer pricing raised by the TCJA.

Transfer Pricing for Small Businesses

The issue of transfer pricing isn’t confined to multi-entity companies with operations overseas. The rules of transfer pricing also apply to local businesses who work with entities across state lines. Small businesses confined to domestic operations should aim to keep their transfer prices in an “arm’s length” (or ALP, which means Arm’s Length Principle) to market costs so that no one entity in the company is out of balance in their financial health with the other entities. Effective transfer pricing should be modeled to keep every component of the company in the same shape as the other component no matter where their operations are located.

Small companies with cross-border entities should take into account the cross-border prices incurred on services, royalties, loans, and other components such as inventory. If you do not adjust your transfer pricing to account for the new US federal tax rate, for example, the benefits may not be spreading equally across to cross-border entities, and the overall financial health of the company may become out of balance.

In addition, small businesses with cross-border entities should also look at tranfer pricing modeling to ensure they’re in compliance on both sides of the border. They should be diligent in preparing unique policy documentation for each country in question, and the documentation should be articulating and defending their transfer pricing decisions in each context.

Make the Effort to Review Your Transfer Pricing Approach

This last point may seem obvious but it is a common problem. Companies often rely on old transfer pricing models that haven’t been updated for a lengthy period of time. It is even more imperitive to review your transfer pricing model now that the TCJA is coming down the pike for 2018 corporate tax filings.

No Cookie Cutter Answers

The nature of transfer pricing means there is not a cookie cutter answer that applies to all small businesses all of the time. The simple fact is difficult to zero in on a single across-the-board, uniform impact of how TCJA will affect transfer pricing models for companies. As mentioned previously, it could easily be different for each small business and their unique situations and company goals.

Tax planning will become more important than ever now that the TCJA has completely transformed the tax code landscape. There are significant implications for tax planning on every level, from individuals to businesses.

The following highlights provide a bird’s-eye-view of what tax planning considerations could be made in 2018 and beyond.

For business owners

Biz Journal takes note of several items that businesses should consider for tax planning. In particular, sole proprietorships and owners of pass-through businesses (partnerships, LLCs taxed as partnerships, and S corporations) enjoy a new tax deduction equal to 20 percent of qualified business income from a qualified U.S. business. (This deduction is also available to individuals, trusts, and estates and expires for taxable years beginning after Dec. 31, 2025.)

However, there are several limitations to consider that will impact whether your business can take the deduction: 

• Qualified business income includes the ordinary income and deductions of a trade or business, but excludes most investment type income such as dividends and interest. Guaranteed payments to partners and reasonable compensation paid to S corporation shareholders or income generated from the business of being an employee are not included. The definition of qualified business excludes “specified service trades or businesses” including, health, law, accounting and financial services, and performing arts.
• Qualified business income is capped at an amount that exceeds either (i) 50 percent of W-2 wages paid by the qualified business or (ii) 25 percent of W-2 wages paid plus 2.5 percent of the unadjusted basis of qualified depreciable property used in the qualified business. Guaranteed payments to partners are not included, although W-2 wages paid to S corporation shareholders may be included.
• Limits on the qualified business income deduction do not apply if taxable income falls beneath $157,000 (315,000 for married taxpayers filing a joint return - MFJ).

For individuals

As the Money Guy notes in a recent report, there are certain steps that individuals will want to consider for tax planning as well, including the following:

Defer or Accelerate Income

• While TCJA still features seven tax brackets, they are slightly modified from the existing tax law. If you find yourself in a higher tax bracket next year due to the adjustments, consider deferring or accelerating your income if you’re able to control it like someone who self-employed or earns a commission.
• As an example, a married couple filing jointly earning $100,000 a year would find themselves in the 25 percent tax bracket in 2017, but in the 22 percent tax bracket in 2018. Therefore, if you were in a position to defer income until after the New Year you could take advantage of your lower tax rate.

529 Plans

The Money Guy notes that under TCJA, they are even more attractive because you can now use a 529 plan toward private K through 12 education expenses, not just college.

Other Considerations for Individuals

Biz Journals also points out that income tax rates are temporarily reduced in the TCJA, with the highest rate at 37 percent. The TCJA also brings other significant changes, including the following:

• Ties the kiddie tax to trust tax rates and brackets.
• Increases AMT exemptions, with adjustments for inflation (not applicable to trusts and estates).
• Increases standard deduction to $12,000 ($24,000 MFJ).
• Increases child credit to $2,000 per qualifying child ($1,400 is refundable), and a $500 nonrefundable credit for qualifying dependents.
• Increases limit on cash contributions to public charity deductions to 60 percent of AGI.
• Eliminates deductions for investment fees, mortgage debt, and other miscellaneous itemized deductions.
• Limits total itemized deduction for state and local income and property taxes to $10,000.
• Limits deduction for mortgage debt interest to $750,000 for indebtedness incurred after Dec. 14, 2017. Previous mortgage debt incurred is grandfathered in and limited to $1 million.
• Excludes personal property from section 1031 like-kind exchanges.
• Eliminates deductions for alimony and excludes inclusion of alimony payments in income for divorce settlements after Dec. 31, 2018.
• Expands section 529 plans to include K-12 education expenses but limits use to $10,000 per year per beneficiary.

For estate planning

Biz Journals also explains that estate, gift, and generation-skipping transfer taxes have increased lifetime exemptions to $11,180,000 per individual with annual adjustments for inflation. This increased threshold expires Dec. 31, 2025.

As you look into the details of your tax planning for 2018 and beyond, keep in mind that this article only highlights some key points of this topic. It does not constitute comprehensive or actionable advice of any sort. It is imperitive that you consult with your own legal and tax professionals before engaging in a definite tax planning strategy.

With such sweeping changes coming in with that Tax Cuts and Jobs Act (TCJA), there has been a fair amount of confusion with how certain deductions are handled. In particular, there are frequent questions about how entertainment and client meal expenses are handled.

Before TCJA, companies for the most part could deduct 50 percent of these expenses for business-related meal and entertainment purposes. In addition, if the meal was provided by the employer on the employer’s property it was 100 percent deductible.

Not so anymore.

Under the new law, any entertainment expenses incurred or purchased after Dec. 31, 2017 are not deductible. Meals provided by the employer (i.e. food and beverages provided on-site or provided through a cafeteria operated by the company) on the employer’s property are reduced to a 50 percent deduction.

The following summaries by Tax Connections provide the fine print details of how these changes will work:

• Disallowance of Deduction for all Entertainment, Amusement, and Recreation Expenses. Prior to TCJA, entertainment, amusement, and recreation expenses could be deducted (subject to certain restrictions) to the extent the taxpayer could “establish that the item was directly related to, or in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such an item was associated with, the active conduct of the taxpayer’s trade or business.” TCJA §13304(a) fully repealed the deductibility of these items, regardless of any proximate business purpose.
• Disallowance of Deduction for Entertainment Tickets, Skyboxes, etc. Prior §274(l) placed further restrictions on the deductibility of entertainment tickets and box suites.  274(l) was fully repealed by TCJA due to the blanket, 100% disallowance of these types of expenses.
• De Minimis Fringe Eating Facilities Now Subject to 50% Disallowance. Prior §274(n)(2)(B) provided that expenses for food and beverage that were excluded from gross income of the recipient under §132(e) were not subject to the general 50% meals and entertainment disallowance under §274(n)(1).  This provision was repealed by TCJA, thereby making such expenses now subject to the general 50% limitation.
• No Deduction for Meals Provided for Convenience of Employer after 12/31/2025. Effective January 1, 2026, new §274(o) provides that no deduction is allowed for any expense for a de minimis fringe eating facility (§132(e)) or any meal provided for the convenience of the employer (under §119(a)).

There are some exceptions to these disallowances that Tax Connections notes, and they’re worth considering. For example, in order for meals expense to be deductible, it must first pass muster as ‘ordinary and necessary’ under §162 or §212. In addition, the expense must be directly related to or associated with the business or have a business purpose. If the meal is for goodwill or to make a client view your company favorably, rather than having a direct business purpose, such as a sales pitch, the expense will not be deductible.

In general, for all meals expenses, proper documentation that provides an explanation of the business purpose for each event should be retained. With that in mind, the following items are generally 100% deductible:

• Recreational activities and/or facilities furnished primarily for the benefit of employees for recreational, social, or similar activities. An example of this would be a holiday party for your office or taking your employees to a sporting event. However, this exception does not apply if the purpose of the event is primarily for the benefit of officers, highly compensated employees, or shareholders.
• Lodging and facilities charges (excluding meals) for business meetings or business travel, such as hotel rooms and conference facilities.
• Any expenses that are treated as compensation to the recipient (i.e., an employee per diem meal allowance).

In addition, the following would be examples of expenses subject to the 50% limitation §274(n):

• Food and beverages provided for employees on the employer’s business premises, such as in a cafeteria.
• Meals provided at a shareholder or employee business meeting.
• Meals for officers or employees traveling for business purposes.
• Meals provided during business meetings held with clients. However, in order for the expense to qualify as a business expense, a business purpose for the meeting must be documented, and the taxpayer or an officer, owner, or employee of the taxpayer must be present for the meal. There is also a “reasonableness” test associated with this limitation and the expense should not be considered “lavish or extravagant.”

This article only highlights some key points of this topic and does not constitute comprehensive or actionable advice of any sort. It is imperitive that you consult with your own legal and tax professionals before strategizing your business expenses and tax deductions.