Month: December 2017

2018: Pass-through deduction for service businesses.

Posted on by Craig Mathias

Ref: HR 1, Tax Cuts and Jobs Act

First read our article regarding non-service businesses.

Service business: Any trade or business in the fields of health, law, consulting, athletics, financial services, brokerage services, OR any trade or busineess where the principal asset of such trace or business is the reputation or skill of one or more of its employees or owners.  The IRS will cast a wide loop here. We’ll be waiting for regulations more specific to this definition.

This is a highly complex calculation.  Your starting point is the calculation as if the business was not a service business (see prior article).

Individual return taxable income:  If your individual return is as follows, further restrictions may apply:

Joint filers taxable income under $315,000 (no further restrictions)

Joint filers taxable income over $415,000 (no pass-through deduction allowed)

Joint filers taxable income between $315k and $415k: A complex set of nested calculations must be executed to determine the allowable pass-through deduction.

Single filers:  The above amounts are replaced with $157,500 (no limitation); $207,500 (no pass-through deduction); and between $157,500 and $207,500 the complex set of nested calculations.

Example: A sole proprietor filing as a single male has net income of $187,500 from his service business.  There is no wage limitation (see prior article for non-service businesses).  After the complex nested calculations, his deduction is NOT 187,500 * 20% = $37,500.  With the service business limitations, the deduction in this case is $12,000.

Due to the very complex nature of this calculation, each tax situation will have to be carefully calculated separately.

2018: Pass through deduction for non-service businesses.

Posted on by Craig Mathias

Ref: HR 1 Tax Cuts and Jobs Act

Assumption: You receive income from your sole proprietorship, S corporation, LLC , partnership or other pass through entity.  Also, that entity is NOT a service business.  Example: Retail, manufacturing or leasing personal property.

Simple example:  Net income from the business is $350,000 and the business paid total W2 wages of $100,000.  Assuming no equipment placed in service in the year, the deduction would be the lesser of 20% of $350k ($70k) OR 50% of wages of $100k = $50k.  The pass through deduction is $50k.

This deduction is taken on page 2 of the Form 1040 when determining taxable income.  It is NOT taken into account in dertmining Adjusted Gross Income (AGI) on page 1 of the return.

This is a simple example.  Your pass through deduction should be calculated specifically to your tax situation.

2018:No unreimbursed employee deductions.

Posted on by Craig Mathias

Ref: HR 1, “Tax Cuts and Jobs Act”

NOW is the time to negotiate with your employer for 2018.  If you are an employee tasked with paying many unreimbursed costs for your employer, work with the company to set up a qualified reimbursement plan.

GONE ARE:

  1. MILEAGE DEDUCTION
  2. BUSINESS MEALS DEDUCTION (i.e., entertaining customers)
  3. TRAVEL EXPENSE DEDUCTION INCLUDING PER-DIEM
  4. EMPLOYEE HOME OFFICE DEDUCTION
  5. ALL OTHER UNREIMBURSED DEDUCTIONS

Nearly all of these can be reimbursed by your employer.  If so, the employer gets a deduction and you DON’T have reportable income.  (Big exception… even the employer doesn’t get a business meals / entertainment deduction in 2018).

SELF EMPLOYED:  The above DOESN’T apply to self employed.  This change only applies to W2 employees who in 2017 and before took an itemized deduction for unreimbursed employee expenses. For self-employed, see our post dateed Jan 24, 2018.

2017 Tax Bill: Property tax prepay … and what is allowed?

Posted on by Craig Mathias

Reference: HR 1, “Tax Cuts and Jobs Act.”

There’s a LOT of contradictory media articles on the subject of prepayment of California property taxes due April 2018.  Here’s an excerpt from Parkers Tax Bulletin:

Caution: The Conference Bill includes a provision blocking taxpayers from prepaying state and local income tax relating to the 2018 tax year in 2017 in order to circumvent the new limitation on the deduction. Specifically, the bill provides that, in the case of an amount paid in a tax year beginning before January 1, 2018, with respect to a state or local income tax imposed for a tax year beginning after December 31, 2017, the payment will be treated as paid on the last day of the tax year for which such tax is imposed for purposes of applying the provision limiting the dollar amount of the deduction.

Our analysis: As CA starts its fiscal year 7/1/17, the taxes payable in April are for a tax year beginning before 12/31/17 and should be ok.

So… in PLAIN LANGUAGE:  You CAN pay your 2nd installment of your 2017 property taxes (due by April 2018) before 12/31/2017 (postmark) and deduct in 2017 UNLESS you are subject to Alternative Minimum Tax in 2017.  You CANNOT pay your December 2018 (first) installment of your 2018 property taxes early.  The CA counties won’t take the payment and the IRS won’t let you deduct it.

Problem solved!

Attorneys fees for alimony (non-deductible)

Posted on by Craig Mathias

Ref: Barry v. Comm’r, TC Memo 2017-237

Summary: Taxpayer hired an attorney to reclaim alimony that he felt was overpaid.  He argued the legal fees were deductible under Sec 212(1) because the result would be taxable income.

Tax court: Not deductible: Under the “origin of claim” doctrine, the transaction started under family law and not under a profit seeking venture.  The Tax Court also referenced earlier decisions where it disallowed legal payments incurred for alimony adjustment and for alimony recovery in prior cases. Lastly, the Court argued that had Barry brought this claim in the year of the divorce, the legal fees would have been clearly nondeductible as part of the divorce proceedings (a personal expense).