Ref: IRS Reg-104397-18 (8/8/18)

A simplified summary of items allowed for 100% federal bonus depreciation currently through 12/31/2026:

• New personal property used for business (special rules for vehicles) with a MACRS recovery period of 20 years or less.
• Used personal property used for business UNLESS acquired from a related party (or used by the control person in another business previously)
• Computer software
• Qualified film, television or live production allowable under Code Sec 181

NOT allowed after 1/1/2018 is Qualified [leasehold] Improvement Property (QIP).

HOWEVER, according to the IRS FS-2018-9, a Section 179 expense election can be made for QIP (2018 limit of $1 million subject to phaseouts) UNLESS the improvement involves:

• the enlargement of a building
• any elevator or escalator
• the internal structural framework of the building
• roofs, HVAC, fire protection systems, alarm systems and security systems

These are very detailed regulations.  Please call for discussion if you feel that they apply to you.

Ref: Revenue Procedure 2018-33 (amplifying Rev Proc 2015-57)

When Corinthian Colleges, Inc closed, the Department of Education (ED) estimated that fifty thousand attending students had taken out loans.  American Career Institutes (ACI) was another for-profit college that closed with thousands attending.  The ED is in the process of discharging those student loans under its “Closed School” program.

The IRS has indicated that the students with these discharged loans won’t have cancellation-of-debt (COD) income on their returns.  Additionally, they won’t have to amend and repay prior education tax credits claimed or reverse education loan interest deducted.

Please call if you have further questions.

Here’s an example of the new pass-through deduction for a sole proprietor machine shop with no employees:

Service business: No (manufacturer/wholesaler)

Taxable income on his/her tax return using the new rules: $185,000

Filing status: Single

Net income of the machine shop: $215,000

Section 199A deduction: $19,350

Reference: Tax Cuts and Jobs Act of 2017

Example situation I: Married, total W2 $100,000. K-1 from a service-type S corporation shows net income $200,000 (the S corporation paid total wages to employees (including shareholder) of $100,000. The taxable income using 2018 federal regulations is $315,000.  Outcome: The pass-through deduction is $40,000.  If their effective rate is 20%, this has saved them $8,000 in federal tax.

Example situation II: Same as Situation I except household taxable income is $375,000.  Outcome: The pass-through deduction is $16,000. If their effective rate is 23%, this has saved them $3,680 in federal tax.   This is limited because the S corporation is a service-type business and their taxable household income exceeds $315,000.

Example situation III: Same as Situation II except the S-corporation is in retail sales (not a service-type business).  Outcome: The service business limitations don’t apply so the pass-through deduction is $40,000.

Ref: Hargis v. Koskinen, 2018 PTC 184 (8th Cir. 2018)

This case serves as a reminder that signing a loan with the S corporation as a co-borrower or guarantor doesn’t give the shareholder basis in the debt.  The lack of basis can keep you from using an S corporation loss on your individual tax returns.  If you are a shareholder in an S corporation running a loss and needing cash flow, you should:

1. Borrow money at the shareholder level and/or tap into personal (non-retirement) savings.
2. Lend the money to the S corporation yourself.
3. Draw up a note at the time you lend to the S corporation.
4. Be sure that the note is documented in the S corporation minutes.
5. Be sure that the S corporation pays interest at least annually and issues you a Form 1099-INT.

Call with questions.

June 29, 2018:  Today the IRS released the draft of the new Form 1040.  As promised, it’s much smaller than the old… HOWEVER, many of the changes came from eliminating lines and requiring NEW SUB-SCHEDULES where those old lines are summarized.

For example, a new Schedule 1 will summarize K-1 income, rental income, etc.

So… less comparable to prior years and less information easily seen on the front of the return.  In other words, more complex and less user-friendly.

Oh well, so much for positive reform…

Source: Dynamex Operations West v. Superior Court (April 30, 2018: CA Supreme Court)

The CA Supreme Court has reset the standards for qualifying as an independent contractor in the State.  In summary: the burden is on the business to prove that a worker is an independent contractor.  All workers are assumed as employees unless proven otherwise.

There is now an ABC test: 

A) the worker is free from control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.

B) the worker performs work that is outside the usual course of the hiring entity’s business

C) the worker is customarily engaged in an independently established trade, occupation or business.

ALL THREE TESTS MUST BE FULFILLED.  

We are not a law firm and can’t make a classification determination for you, but we can recommend employment attorneys to help.  Financial penalties for mis-classification can be significant.

Source: Tax Cuts and Jobs Act (TJCA)

The TJCA has increased the standard deduction to $24,000 for couples filing married-joint starting in 2018.  Because of this, many won’t be able to use their deductions to charity.

Example: A married couple have itemized deductions of $10,000 state and local taxes (the limit in 2018), mortgage interest of $8,000 and charitable contributions of $5,000.  As their total itemized deductions are less than $24,000, they will take the standard deduction and the charitable deductions won’t help them.

Planning:  Instead, in Year 1, the couple makes no charitable contributions.  On January 1 of year 2, they give $5,000 and on December 15 of Year 2 they give $5,000.  Over the two period, they have given $10k (as was their habit), but by bunching both into year 2, they can now itemize in Year 2 and get some benefit of the charitable giving.

Source: Tax Cuts and Jobs Act (TCJA)

Thanks to the TCJA, the basic exclusion amount increased substantially for 2018 (until the year 2025) to $11,180,000 per individual estate.  A husband and wife with an AB-type living trust could exclude $22,360,000 from estate taxes under this current law.

Annual exclusion: For 2018, the annual exclusion for gift “sprinkling” to individuals increased from $14,000 (2017) to $15,000. 

As with any tax act, although this is the law now, there is no guarantee that it will remain unchanged in future tax acts.  Still, this will give relief to many taxpayers who would have otherwise been subject to estate tax upon death.

Source: IRS Notice 2018-54

Under the Tax Cuts and Jobs Act, the deduction for state and local taxes (SALT) on itemized 2018 individual tax returns will be limited to $10,000.  Some states are working on legislation designed to create new state tax credits in lieu of paying state income taxes directly.  Under this Notice, the IRS has announced that it intends to propose regulations reclassifying such payments as payments of SALT and including them within the $10,000 annual limitation thereby shutting down attempts to do an end-run around the new limit.