What You Need to Know About the Incoming Tax Law

BY Casper Haas

The tax reform legislation that Congress approved last month was the largest change to the tax system in over 3 decades. The last time the U.S. tax code saw such a significant reform was under President Reagan in 1986. Those reforms sought to simplify income tax, broaden the tax base and eliminate many tax shelters.

Under this new legislation, substantial changes have been made to both individual and corporate tax rates. While most of the corporate provisions are permanent, the individual provisions technically expire by the end of 2025. There is speculation whether a future Congress will uphold the Individual provisions.

The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. To help you prepare, we have highlighted a few of the most pertinent details below. Please keep in mind, the purpose of this article is to summarize the key provisions.

What’s Changing?

Tax Bracket Rates. While taxpayers will still fall into one of seven tax brackets based on their income, the rates have changed. Some of the brackets have been lowered. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

Standard Deduction. The standard deduction has nearly doubled. For single filers it has increased from $6,350 to $12,000; for married couples filing jointly, it’s increased from $12,700 to $24,000.

Personal Exemption. Under the prior tax code, a taxpayer could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents, thus lowering their taxable income. Under the new tax code, the personal exemption has been eliminated. For some families, this will reduce or counter the tax relief they receive from other parts of the reform package.

State and Local Tax Deduction. The state and local tax deduction, or SALT, now has a cap. While it remains in place for those who itemize their taxes, it now has a $10,000 limit. This is a significant change as filers could previously deduct an unlimited amount for state and local property taxes, plus income or sales taxes.

The Child Tax Credit. The child tax credit has been expanded, doubling to $2,000 for children under 17. It’s also available to more people. Single parents who make up to $200,000, and married couples who make up to $400,000 can claim the entire credit, in full.

Non-Child Dependents. A new tax credit is available for non-child dependents. Taxpayers can claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as children over age 17, elderly parents or adult children with a disability.

Alternative Minimum Tax. Fewer taxpayers will be affected by the alternative minimum tax. The purpose of the AMT is to ensure those who receive a lot of tax breaks are still paying some level of federal income taxes. The exemption will rise to $70,300 for singles, and to $109,400 for married couples.

Mortgage Interest Deduction. Going forward, anyone purchasing a home will only be able to deduct the first $750,000 of their mortgage debt. Down from $1 million, this will likely only affect people buying homes in more expensive regions. Current homeowners will likely be unaffected.

529 Savings Accounts. In the past, 529 savings accounts were untaxed and could only be applied towards college expenses.  Under the new tax code, up to $10,000 can be distributed annually to cover the cost of sending a child to a public, private or religious elementary or secondary school.

Alimony Payment Tax Deduction. The tax deduction for alimony payments will be eliminated for couples who sign divorce or separation paperwork after December 31, 2018.

Moving Expenses Deduction. The tax deduction for moving expenses is also gone, but may be exceptions for members of the military.

Tax Preparation Deduction. Taxpayers can no longer deduct the cost of having their taxes prepared by a professional or the money they may have spent on tax preparation software.

Disaster Deduction.  Under the prior tax code, losses sustained due to a fire, storm, shipwreck or theft that insurance did not cover and exceeded 10% of their adjusted gross income, were deductible. Effective under the new tax code, taxpayers can only claim the disaster deduction if they are affected by an official national disaster.

Estate Tax. Prior to the tax reform, a limited number of estates were subject to the estate tax, a tax which applies to the transfer of property after someone dies. Now, even fewer taxpayers will be affected. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled.

Health Insurance Mandate. The failure to repeal Obamacare earlier this year afforded the Republicans the opportunity to eliminate one of the health law’s key provisions with tax reform. Effective in 2019, the individual mandate, which penalized people who did not have health care coverage, was eliminated.

Corporate Tax Rate. Beginning in 2018, the corporate tax rate has been cut from 35% to 21%.

Pass-through Entities. The owners, partners and shareholders of S-corporations, LLCs and partnerships will receive a tax break. Those who pay their share of the business’ taxes through their individual tax returns will have a 20% deduction.

To ensure business owners do not abuse the provision, the legislation has included additional terms to this provision.

Multinational Corporations. The new tax bill is a shift towards globalization, changing the way multinational corporations are taxed. Companies will no longer pay federal taxes on income they make overseas. These companies will be required to pay a one-time, 15.5% on cash assets and 8% on non-cash assets, on any existing offshore profits.

Nonprofit Organizations. There is a new 21% excise tax on nonprofit employers for salaries they pay out above $1 million.

Sexual Harassment Settlements. Companies can no longer deduct any settlements, payouts or attorney’s fees related to sexual harassment if the payments are subject to non-disclosure agreements.

Bonus Depreciation. The Bonus depreciation will increase from 50% to 100% for property placed in service after September 27, 2017, and before January 1, 2023, when a 20% phase-down schedule will begin. The previous rule that made bonus depreciation available only for new properties was also removed.

Vehicle Depreciation. The new tax bill raises the cap placed on depreciation write-offs of business-use vehicles. $10,000 for the first year a vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for each subsequent year until costs are fully recovered. The new limits only apply to vehicles placed in service after December 31, 2017.

What’s Staying the Same?

Student Loan Interest. You can still deduct Student Loan Interest – the deduction for this will remain max $2,500.

Medical Expenses. The deduction for medical expense was untouched. Rather, it was expanded by two years. Filers can deduct medical expenses that exceed 7.5% of their adjusted gross income for 2017 and 2018 tax years.

Teachers. Teachers will continue to deduct up to $250 to offset what they spend on resources for the classroom.

Electric Car Credit. If you drive a plug-in electric vehicle, you can still claim a credit of up to $7,500.

Home Sellers. Homeowners that sell their house and make a profit can exclude up to $500,000 (or $250,000 for single filers) from capital gains. The law still requires that it is their primary home and they have lived there for at least two of the past five years.

Tuition Waivers. Tuition Waivers, typically awarded to teaching and research assistants, will remain tax free.

What Does This All Mean?

Although doubling the standard deduction will arguably simplify the process of filing taxes for individuals, there are still deductions and credits to consider. More so, the filing for small businesses, can potentially become more complicated. Depending on your situation, it may be beneficial to review your filing status as part of an overall tax planning strategy.

Again, please keep in mind that the purpose of this article is to summarize the key provisions. Each client scenario will be different, and this has to be taken into account. The professionals in our office can answer the questions you may have regarding the individual, estate and corporate tax provisions outlined in the Republican’s tax reform bill.  Please give us a call if you have any questions.

2017 TAX REFORM: LAST-MINUTE YEAR-END MOVES IN LIGHT OF TAX CUTS AND JOBS ACT

BY Bauman Associates

Congress enacted the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last-minute moves you should think about making.

Lower tax rates coming.

The Tax Cuts and Jobs Act will reduce tax rates for many taxpayers, effective for the 2018 tax year. Additionally, many businesses, including those operated as passthroughs, such as partnerships, may see their tax bills cut.  The general plan of action to take advantage of lower tax rates next year is to defer income into next year.

Some possibilities follow:

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year. That way you’ll defer income from the conversion until next year and have it taxed at lower rates.
  • Earlier this year, you may have already converted a regular IRA to a Roth IRA but now you question the wisdom of that move, as the tax on the conversion will be subject to a lower tax rate next year. You can unwind the conversion to the Roth IRA by doing a recharacterization—making a trustee-to-trustee transfer from the Roth to a regular IRA. This way, the original conversion to a Roth IRA will be cancelled out. But you must complete the recharacterization before year-end. Starting next year, you won’t be able to use a recharacterization to unwind a regular-IRA-to-Roth-IRA conversion.
  • If you run a business that renders services and operates on the cash basis, the income you earn isn’t taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.
  • If your business is on the accrual basis, deferral of income till next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won’t upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year. Keep in mind that the rules in this area are complex and may require a tax professional’s input.
  • The reduction or cancellation of debt generally results in taxable income to the debtor. So if you are planning to make a deal with creditors involving debt reduction, consider postponing action until January to defer any debt cancellation income into 2018.

Disappearing or reduced deductions, larger standard deduction.

Beginning next year, the Tax Cuts and Jobs Act suspends or reduces many popular tax deductions in exchange for a larger standard deduction.

Here’s what you can do about this right now:

  • Individuals (as opposed to businesses) will only be able to claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of
    1. State and local property taxes;
    2. State and local income taxes.

To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don’t prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won’t be deductible in 2017. However, Congress only forbade prepayments for state income taxes, not property taxes, so a prepayment on or before Dec. 31, 2017, of a 2018 property tax installment is apparently OK.

  • The itemized deduction for charitable contributions won’t be chopped. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.
  • The new law temporarily boosts itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). Before the new law, the floor was 10% of AGI, except for 2017 it was 7.5% of AGI for age-65-or-older taxpayers. But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you won’t be able to itemize deductions after this year, but will be able to do so this year, consider accelerating “discretionary” medical expenses into this year. For example, before the end of the year, get new glasses or contacts, or see if you can squeeze in expensive dental work such as an implant.

Other year-end strategies.

Here are some other last minute moves that can save tax dollars in view of the new tax law:

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year. And, for various deductions, e.g., depreciation and the investment interest expense deduction, the deduction will be curtailed if you are subject to the AMT. If the higher 2018 AMT exemption means you won’t be subject to the 2018 AMT, it may be worthwhile, via tax elections or postponed transactions, to push such deductions into 2018.
  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn’t held primarily for sale. So if you are considering a like-kind swap of other types of property, do so before year-end. The new law says the old, far more liberal like-kind exchange rules will continue apply to exchanges of personal property if you either dispose of the relinquished property or acquire the replacement property on or before Dec. 31, 2017.
  • For decades, businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business. For example, if you take a client to a nightclub after a business meeting, you can deduct 50% of the cost if strict substantiation requirements are met. But under the new law, for amounts paid or incurred after Dec. 31, 2017, there’s no deduction for such expenses. So if you’ve been thinking of entertaining clients and business associates, do so before year-end.
  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses. So if you’re in the midst of a job-related move, try to incur your deductible moving expenses before year-end, or if the move is connected with a new job and you’re getting reimbursed by your new employer, press for a reimbursement to be made to you before year-end.
  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. So, we should determine whether paying additional employee business expenses in 2017, that you would otherwise pay in 2018, would provide you with an additional 2017 tax benefit. Also, now would be a good time to talk to your employer about changing your compensation arrangement—for example, your employer reimbursing you for the types of employee business expenses that you have been paying yourself up to now, and lowering your salary by an amount that approximates those expenses. In most cases, such reimbursements would not be subject to tax.

Please keep in mind that we’ve described only some of the year-end moves that should be considered in light of the new tax law. If you would like more details about any aspect of how the new law may affect you, please do not hesitate to call.

Measuring Customer Profitability

BY Daniel Carlson

Your P&L statement may measure the overall profitability of your business, but it falls short in terms of measuring the profitability of individual customers or services. To continually improve performance, every company should understand the economic building blocks that drive their business and have a deep understanding of their customers. For a company to be valuable to its shareholders it must also be valuable to current and future customers. Knowing how to grow customers into more profitable customers is essential to creating value and remaining competitive.

As companies evolve from a product-centric focus to a customer-centric business model, it’s important to keep in mind that not all customers are profitable. In truth, some high-maintenance customers can even be unprofitable. The true cost to handle one unit or serve one customer is a living barometer of profitability and should, therefore, be examined carefully.

Many companies’ managerial accounting systems are unable to accurately report the information used to rationalize which types of customers to retain, grow or win back and which types of new customers to target.

Accurately translating revenue into profitability requires a costing method that measures the cost to serve each customer or the cost to perform each service. This type of method is an economic or cost model of the business; it differs from an accounting model, which focuses on GAAP standards or financial statements. An economic model should focus on costs (inputs), cost drivers (activities), and how they relate to products or services (outputs). This model may be conceptual in nature or a complex system, depending on the needs of your business.

A costing methodology should provide accurate and relevant cost information, which is not the same as exact or precise cost information. In fact, we believe it can be a mistake to go to great lengths to provide exact information and lose sight of the intent of the analysis. Relevant cost information considers the decision at hand and does not necessarily require an ongoing costing system. It can be a point-in-time analysis that correctly measures customer or product profitability to support a specific decision. Depending on the business situation, direct activity costing information may involve analysis of fully-absorbed costs, incremental costs, historical costs or estimated future costs.

The process of developing a costing model is as important as the methodology itself. Traditional activity-based costing models are often useless for decision support. Every company has unique issues, including their core business model, time and resource limitations and access to data. A successful costing method for most small to mid-sized businesses will rely heavily on the 80/20 rule in applying 20% of the appropriate concepts to realize 80% of the benefits.

Employing a costing model in your company may help you increase your profitability and provide additional guidance in your decision-making processes. The professionals in our firm can assist you in developing these models and analyzing the results. If you would like to discuss how to measure customer or product profitability in your business, please feel free to contact us.

Individual Year-End Tax Planning

BY Casper Haas

With Donald Trump in the White House and Republicans maintaining a majority in Congress, dramatic tax changes may be on the horizon. Most likely, many provisions will not go into effect until 2018 or later. However, it’s important to keep in mind that 2018 legislation can still impact 2017 tax planning.

During year-end planning for 2017, individuals will need to keep an eye on future legislative changes and be prepared to take prompt action, if necessary. Below you will find an overview of key tax provisions and tax minimizing strategies.

Alternative Minimum Tax

Alternative minimum tax (AMT) should be considered before you and/or your accountant begin to time income and deductions. AMT is a separate tax system that limits some deductions and disallows others, such as state and local income tax deductions, property tax deductions and other miscellaneous itemized deductions that are subject to the 2% of AGI. Deductions include investment advisory fees and non-reimbursable employee business expenses.

With proper planning, you may be able to avoid AMT, reduce its impact or even take advantage of its lower maximum rate. Speak with your tax professional on AMT projections for this year and next.

Timing Income and Expenses

Timing is everything when it comes to income and expenses. Smart timing will reduce your tax liability, while poor timing can unnecessarily increase it.

If you don’t expect to be subject to AMT in the current or following year, consider income deferment. Deferring income and increasing deductible expenses for the current year is typically a good idea because it will postpone tax. If you expect to be in a higher tax bracket, or if tax rates are expected to increase, the opposite approach rings true.

Whatever the reason for timing your income and deductions, here are some income items you may be able to control:

  • Bonuses
  • Consulting or other self-employment income
  • U.S. Treasury bill income
  • Retirement plan distributions (to the extent they won’t be subject to early withdrawal penalties)

Followed by potentially controllable expenses:

  • State and local income taxes
  • Property taxes
  • Mortgage interest
  • Margin interest
  • Charitable contributions

Charitable Donations

Good deeds in the form of cash or in-kind items can reap great tax benefits. Generally, you may deduct up to 50% of your adjusted gross income for qualified charitable contributions. Tax savings can also be achieved through noncash donations. By giving gently worn items to a local resale shop, you can deduct the fair market value of the donated items. Before making a large donation to the charity of your choosing, discuss options with your tax professional.

 Healthcare Breaks

If medical expenses were not paid through tax-advantaged accounts or were reimbursable by insurance and exceed 10% of your AGI, you can deduct the excess amount. Eligible expenses may include:

  • Health insurance premiums
  • Long-term care insurance premiums (limits apply)
  • Medical and dental services
  • Prescription drugs

You may be able to save tax by contributing to one of these accounts:

  • HSA – You can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to a personal HSA. Contributions are $3,400 for self-only coverage and $6,750 for family coverage for 2017. As a bonus, if you’re age 55 or older, you may contribute an additional $1,000. Like an IRA, HSAs can bear interest or be invested, growing tax-deferred. Balances can be carried over from year to year, and withdrawals for qualified medical expenses are tax-free.
  • FSA – An employer-sponsored Flexible Spending Account can be used to redirect pretax income. The plan pays or reimburses you for qualified medical expenses, not to exceed $2,600 in 2017. The balance that remains at the end of the year you lose, unless your plan allows you to roll the balance over (up to $500).

Sales Tax Deduction

Taking an itemized deduction for state and local sales taxes instead of state and local income taxes can be valuable for taxpayers residing in states with no or low-income tax or who purchase a major item, such as a car or boat. Certain deductions are reduced by 3% of the AGI amount if your AGI surpasses the applicable threshold (not to exceed 80% of otherwise allowable deductions).

The thresholds for 2017 are $261,500 (single), $287,650 (head of household), $313,800 (married filing jointly) and $156,900 (married filing separately).

Self-Employment Taxes

As a self-employed taxpayer, you may benefit from other above-the-line deductions. You can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You can also deduct retirement plan contributions and, if you’re eligible, an HSA.

Estimated Payments and Withholdings

You can become subject to penalties if you don’t pay enough tax through estimated tax payments and withholding. Here are some strategies to help avoid underpayment penalties:

  • Know the minimum payment rules
  • Use the annualized income installment method
  • Estimate your tax liability and increase withholdings

 If you have questions about these or other tax saving tips, please contact your accounting professional to schedule your year-end planning meeting.

New Option for Small Business Startups Claiming Research Credit

BY Justin Koppa

The IRS has issued guidance explaining how a new research credit option can help minimize the tax liability for eligible small businesses that incur qualifying research expenses throughout the year. According to Notice 2017-23, eligible businesses can take advantage of a new option which enables them to apply part or all of their research credit against their payroll tax liability. This is big news for taxpayers who previously could only take the research credit against their income tax liability.

This new option was available for the first time to any eligible small business filing its 2016 federal income tax return this last tax season. The new payroll tax credit is especially attractive to eligible startups that have little or no income tax liability. To qualify, a business must:

  • have gross receipts of less than $5 million and
  • could not have had gross receipts prior to 2012

An eligible small business with qualifying research expenses has the option to apply up to $250,000 of its research credit against its payroll tax liability. This option can be selected by completing Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return. Don’t worry if you failed to choose this option and still wish to do so. Under a special rule for the 2016 tax year, eligible small businesses can still make the election by filing an amended return by Dec. 31, 2017.

For more information, please contact one of our tax professionals today.

AICPA Unveils Cybersecurity Risk Management

BY Nathan Kalepp

One only needs to skim the daily news to realize that hackers are getting better and cybersecurity is more important than ever. The most recent cyberattack was a strain of ransomware that spread itself across all workstations in a network, causing a global epidemic. It is estimated that this attack impacted more than 200,000 victims in at least 150 countries. Luckily, a programmer developed an internal “kill switch,” which disabled the malware from spreading any further. Regardless of whether your system was impacted by this outbreak or not, there are many lessons to be learned; principally, the need to reinforce fundamental security practices to prepare for the future.

Taking these recent outbreaks into consideration, it is evident that organizations need to make cybersecurity risk management a top priority. To help leaders in the accounting profession reach this goal, the American Institute of Certified Public Accountants (AICPA) has unveiled a cybersecurity risk management reporting framework that will help companies and auditors communicate cyber risk readiness to stakeholders. The framework is long overdue. Until now, a common language for companies to communicate about their cybersecurity risk management was non-existent. The AICPA’s new framework includes three main resources:

  1. Description criteria used by management to explain the organization’s cybersecurity risk management program in a consistent manner and for use by CPAs to report on management’s description.
  2. Control criteria used by CPAs providing advisory or attestation services to evaluate and report on the effectiveness of the controls within a client’s program.
  3. Attest Guide, Reporting on an Entity’s Cybersecurity Risk Management Program and Controls, will be used to assist CPAs engaged to examine and report on an entity’s cybersecurity risk management program.

Cyber threats are constantly evolving; and unfortunately, your cash and customer information are desirable targets. Providing assurance to your team and stakeholders requires intentionality and a plan. Having strong cybersecurity measures in place will help safeguard sensitive information, and the AICPA’s new reporting framework will help you better communicate your preparedness to key stakeholders. If you need any guidance in this area, please reach out to one of our professional staff.

Determining if Your Business Is Subject to State Taxes

BY Chad Ryder

Operating exclusively in one physical location may no longer be ideal for some businesses to remain profitable in an ever-changing landscape. To adapt, many businesses are moving towards virtual business models. As businesses expand their operations across state lines, it becomes increasingly important for states to collect taxes (income and sales tax being the most common).

As a result, many states are making necessary updates to tax laws. For instance, several states have implemented an “economic nexus” standard, which requires businesses to file a state tax return regardless of whether they have a physical presence there.

The AICPA defines economic nexus as the amount and degree of a taxpayer’s business activity that must be present in a state before the taxpayer becomes subject to the state’s taxing jurisdiction or taxing power. There are numerous business activities that can prompt a tax filing. We have listed the most common below. Consider which of these might apply to your business.

  • Presence of employees, even without sales
  • Execution of contracts
  • Others acting in an “agent” capacity
  • Employees who work remotely
  • Product delivery via a company-owned truck
  • Data stored on a server

While the economic nexus standard can be helpful in determining if your business is subject to state tax, there is inconsistency between states that define economic benefit differently. To provide additional guidance, some states have gone a step further to set a “bright-line rule.” The purpose of such a rule is to define a standard, leaving little or no room for interpretation.

To help determine if your business is required to file and pay state taxes:

  • Identify which states you have activity in
  • Research the state nexus rules for income and sales tax

If you have questions regarding your state tax return filing requirements, please contact one of our professionals today.

 

How the New Audit Rules Will Impact Estate Planning

BY John Satre

Future changes to partnership audit rules will impact estate planning. Typically, one would not assume these changes would impact estate planning but they do, considering many estates have LLCs taxed as partnerships to obtain valuation discounts. Entities taxed as partnerships will need to update their operating agreements so they:

  • reflect the new rules,
  • appoint a partnership representative and define their authority, and
  • determine whether to elect out of the unified audit rules.

Effective January 1, 2018 both existing and new partnerships will be subject to new partnership audit rules. The new rules allow for partnership level determination of deficiencies if the partnership is audited as the default regime. There are several potential problems to consider:

  • Current partners could be liable for past deficiencies if there were different partners during the year under audit.
  • Allocation issues may arise since the IRS will not undo errors; rather, they will assess the net increase against the partnership.
  • The deficiency will be assessed at the highest tax rate.

 

In addition, under the new rule, the tax matters partner (the partner that represents the partnership before the IRS in all tax matters) no longer exists. Under the new rule, the partnership representative does not even need to be a partner. A potential problem to consider:

  • Electing a representative should be a high priority as the IRS can select one if one is not appointed.

These potential problems may motivate partnerships to opt out, keeping determinations at the partner level. If so, the question will be whether trustees that own partnership interests on behalf of trusts will have the capability to opt out. Under the new audit rules, opting out is allowed only if:

  1. there are less than 100 K-1s and
  2. the partner of the pass-through entity reveals the identity of its members. This is so that the master partnership can confirm that the pass-through entity has 100 or fewer direct and indirect partners who are US individuals, C corporations or foreign entities that would be treated as C corporations if they were US entities.

At this time, it is uncertain whether partnerships that have trusts as owners will be able to opt out as the new code section does not address trusts or trustees.

 

What’s next?

Entities taxed as partnerships should ensure compliance by including portions of the new code in partnership and operating agreements. This will be especially important should a scenario arise where the partners do not return to amend the agreements.

Regarding existing partnerships, waiting to make modifications is best as the IRS will likely issue more regulations. For now, remain cautious regarding trusts as owners since it is uncertain whether they can opt out.

The professionals in our office can answer any questions you may have about the new audit rules. Call us today.

 

Planning Ahead: 2017 Health Savings Account Limits

BY Chad Ryder

The Internal Revenue Service (IRS) has released the annual contribution limitations for health savings accounts (HSAs) and the minimum deductible amounts and maximum out-of-pocket expense amounts for high-deductible health plans. These limitations are updated annually to reflect cost-of-living adjustments. Business owners should inform employees of the HSA contribution limits increase for 2017.

Employers commonly offer employees HSA contributions as part of their healthcare benefit packages. HSAs are a popular option because of its dual purpose. Employees can utilize HSAs to save for the future or pay for qualified medical expenses tax free.

Under Sec. 223 of Rev. Proc. 2016-28, individuals who participate in a health plan with a high deductible are permitted a deduction for contributions to HSAs set up to help pay their medical expenses. To be eligible to contribute to an HSA you must participate in a high deductible health plan.

The following chart summarizes the contribution and out-of-pocket limits for HSAs and high-deductible health plans for 2017. There was only one minor change between 2016 and 2017.

  2016 2017 Change
HSA contribution limit Self: $3,350

Family: $6,750

Self: $3,400

Family: $6,750

Self: $50

Family: No Change

HSA catch up contribution (age 55+) $1,000 $1,000 No Change
HDHP minimum deductible Self: $1,300

Family: $2,600

Self: $1,300

Family: $2,600

No Change
HDHP maximum out of pocket Self: $6,550

Family: $13,100

Self: $6,550

Family: $13,100

No Change

Employers should remind employees who are contributing to or using their HSA:

  • They have until April 15, 2018 to make contributions for the 2017 tax year.
  • Withdrawing from their HSA for nonqualified purposes is subject to income tax.
  • Nonqualified withdrawals are also subject to a 20% tax penalty unless an exception applies.

The professionals in our office can clarify any questions you may have on HSAs. Call on us today.

Education Tax Credits: Two Benefits to Help You Pay for College

BY Justin Koppa

If you paid for college it can mean tax savings on your federal tax return. There are two education credits that can help you with the cost of higher education. These credits include the American Opportunity Credit and the Lifetime Learning Credit.  Here are some important facts you should know about these education tax credits.

The American Opportunity Tax Credit allows you to claim up to $2,500 per eligible student. Some tips to consider under this tax credit:

  • The credit only applies to the first four years at an eligible educational institution.
  • It reduces the amount of tax you owe. If the credit reduces your tax to less than zero, you may receive up to $1,000 as a refund.
  • It is available for students earning a degree or other recognized credentials.
  • The credit applies to students going to school at least half-time for at least one academic period that started during the tax year.
  • Costs that apply to the credit include the cost of tuition, books, required fees and supplies.

The Lifetime Learning Credit is limited to $2,000 per tax return, per year. Some tips to consider under this tax credit:

  • This credit is available for an unlimited number of years as it applies to all years of higher education at an eligible educational institution. This includes classes for learning or improving job skills.
  • The credit is limited to the amount of your taxes.
  • Costs that apply to the credit include cost of tuition, required fees, books, supplies and equipment.