Tips for taxpayers who make money from a hobby

For answers to your questions regarding tax returns, please call Kevin M. Sayed, J.D., LL.M., at 252-321-2020. The following materials were originally published by the IRS.

Many people enjoy hobbies that are also a source of income. From painting and pottery to scrapbooking and soap making, these activities can be sources of both fun and finances. Taxpayers who make money from a hobby must report that income on their tax return.

However, the rules for how to report the income and expenses depend on whether the activity is a hobby or a business.

There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:

If the activity is a business or a hobby.
If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby. They should base their determination on all the facts and circumstances of their activity.

Allowable hobby deductions.
Taxpayers can only deduct ordinary and necessary hobby expenses:

  • Ordinary expense is common and accepted for the activity.
  • Necessary expense is appropriate for the activity.

Limits on hobby expenses.
Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.

How to deduct hobby expenses.
Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Taxpayers can look into this now to determine if they will itemize their deductions when they file their 2019 tax return next year. Expenses may fall into three types of deductions, and special rules apply to each type.

Use IRS Free File.
Hobby rules can be complex. IRS Free File can make filing a tax return easier.

More Information:
Publication 334, Tax Guide for Small Business
Publication 525, Taxable and Nontaxable Income
Publication 529, Miscellaneous Deductions
Publication 535, Business Expenses
Publication 17, Your Federal Income Tax
About Schedule C, Profit or Loss from Business
Estimated Taxes

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IRS releases Data Book for 2018 showing range of tax data including audits, collection actions and taxpayer service

For answers to your questions regarding tax returns, please call Kevin M. Sayed, J.D., LL.M., at 252-321-2020. The following materials were originally published by the IRS.

The Internal Revenue Service today released the 2018 IRS Data Book, a snapshot of agency activities for the fiscal year.

The 2018 IRS Data Book describes activities conducted by the IRS from Oct. 1, 2017, to Sept. 30, 2018, and includes information about tax returns, refunds, examinations and appeals. The annual publication is illustrated with charts showing changes in IRS enforcement activities, taxpayer assistance levels, tax-exempt activities, legal support workload and IRS budget and workforce levels when compared to fiscal year 2017 and prior years. Included this year is a section on taxpayer attitudes from a long-running opinion survey.

“Underlying the numbers in this year’s edition of the Data Book is the hard work of IRS employees,” said IRS Commissioner Chuck Rettig. “Our employees are the backbone of this agency, delivering our mission efficiently and effectively. They work hard to help taxpayers, and the numbers outlined in the Data Book reflect their commitment.”

Revenue Collection, Returns Processing, Taxpayer Service and Enforcement Actions

During fiscal year 2018, the IRS collected nearly $3.5 trillion, processed more than 250 million tax returns and other forms, and issued over 120 million individual income tax refunds totaling almost $395 billion.

The IRS received and processed more of every major type of form during FY 2018 than during the prior year, with the exception of estate tax returns; those filings were down slightly less than 1 percent compared to the prior year. However, filings by pass-through entities were up in FY 2018; partnerships filed almost 5 percent more forms with the IRS in FY 2018 than in the prior year, S-corporation filings were up almost 6 percent in the same time frame.

The IRS provided taxpayer assistance through more than a half-billion visits to IRS.gov and helped more than 64.8 million taxpayers through different service channels, such as correspondence, toll-free telephone helplines or at Taxpayer Assistance Centers. There were also more than 309 million inquiries to the “Where’s My Refund?” application, up 11 percent compared to the prior year.

Net revenue from delinquent collection activities rose to just over $40 billion, an increase of 1.6 percent compared to the prior year. IRS levies were up 8.3 percent compared to the prior year, but the agency filed about 8 percent fewer liens than in fiscal year 2017.

Compared to the prior year, there were fewer audits during fiscal year 2018. The IRS audited more than 892,000 individual income tax returns during the fiscal year, down slightly from the prior year.

Comprehensive Taxpayer Attitude Survey

The IRS Data Book contains the results of the 2018 Comprehensive Taxpayer Attitude Survey (CTAS) which drew from feedback from 2,000 taxpayers through cell phone, landline phone or online surveys. Their opinions continue to inform IRS’ efforts to improve taxpayer service. Some of the results of the survey for 2018 show the following results:

  • Most taxpayers continued to agree that it is not at all acceptable to cheat on their income taxes. This attitude has remained within a four-point range since 2009.
  • Most taxpayers are still satisfied with their personal interactions with the IRS.
  • Almost half of the taxpayers who responded in 2018 agreed that service and enforcement are properly balanced.

The IRS Data Book’s online format makes navigating data on taxpayer assistance, enforcement, and IRS operations easier. The publication contains depictions of key areas and quick links to the underlying data.

An electronic version of the 2018 IRS Data Book can be found on the Tax Stats page of IRS.gov. Printed copies of the 2018 IRS Data Book, Publication 55B, will be available June 2019 from the U.S. Government Printing Office. To obtain a copy, write to the Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954, or call (202) 512-1800 for voicemail or fax a request to (202) 512-2250.

IRS issues guidance relating to deferral of gains for investments in a qualified opportunity fund

For answers to your questions regarding tax returns, please call Kevin M. Sayed, J.D., LL.M., at 252-321-2020. The following materials were originally published by the IRS.

The Internal Revenue Service today issued guidance (PDF) providing additional details about investment in qualified opportunity zones.

The proposed regulations allow the deferral of all or part of a gain that is invested into a Qualified Opportunity Fund (QO Fund) that would otherwise be includible in income. The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a QO Fund.

Qualified opportunity zone business property is tangible property used in a trade or business of the QO Fund if the property was purchased after Dec. 31, 2017. The guidance permits tangible property acquired after Dec. 31, 2017, under a market rate lease to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone.

A key part of the newly released guidance clarifies the “substantially all” requirements for the holding period and use of the tangible business property:

  • For use of the property, at least 70 percent of the property must be used in a qualified opportunity zone.
  • For the holding period of the property, tangible property must be qualified opportunity zone business property for at least 90 percent of the QO Fund’s or qualified opportunity zone business’s holding period.
  • The partnership or corporation must be a qualified opportunity zone business for at least 90 percent of the QO Fund’s holding period.

The guidance notes there are situations where deferred gains may become taxable if an investor transfers their interest in a QO Fund. For example, if the transfer is done by gift the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QO Fund to an estate or a revocable trust that becomes irrevocable upon death.

The guidance (PDF) is posted on IRS.gov. These regulations relate to the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017.

For information about other TCJA provisions, visit IRS.gov/taxreform

Trump’s shutdown could hinder tax collectors for ‘months, and even years’

For answers to your tax questions, please call Kevin M. Sayed, J.D., LL.M., at 252-321-2020. The following article by Joe Davidson was originally published by The Washington Post.

Taxpayer trust in tax system and voluntary compliance have been undermined.

President Trump’s partial government shutdown is over, but the haunting effects are not.

Perhaps nowhere is that demonstrated more than in the Internal Revenue Service, one agency that affects all Americans.

Listen to the words of advocate Nina Olson, an independent official within the IRS. Her latest report describes an agency with a “shocking” level of service, suffering a “cycle of frustration,” and one beset with long-standing problems made worse by the 35-day partial shutdown.

She described an agency so damaged that taxpayer trust and confidence in our tax system have been crippled.

“It is irresponsible for an agency that touches all aspects of people’s lives to be underfunded, understaffed, and at the mercy of shutdowns,” she wrote. “It is making strategic decisions that ultimately burden taxpayers, increase its own rework, and create distance and distrust between taxpayers and the tax agency, thereby undermining voluntary compliance.”

The report provided a slew of statistics demonstrating the depth of the problem. For the last week of the shutdown, ending Jan. 26, 12.8 percent of taxpayer calls on installment agreements and balance-due questions were answered. Those that were answered waited 93 minutes. The day before the shutdown stopped, the IRS had:

  • “Over 5 million pieces of mail that had not been batched for processing.”
  • “80,000 responses to FY 2018 Earned Income Tax Credit audits that had not been addressed.”
  • “87,000 amended returns waiting to be processed.”

Metrics like these “translate into real harm to real taxpayers,” Olson said. “And they represent increased rework for the IRS downstream, at a time when the IRS is already resource challenged.”

IRS officials responded with a statement that said the agency “successfully reopened operations following the shutdown, and the agency is seeing a good start to the 2019 filing season. We are continuing to assess the impact of the shutdown on our various operations across the agency and remain proud of the many IRS employees who have risen to the resulting challenges.”

The full impact of the shutdown won’t be known for “months, and even years, down the road,” Olson predicted. She praised IRS employees who “returned to work with energy.”

National Treasury Employees Union (NTEU) President Tony Reardon said that “in some cases, employees are being asked to work overtime specifically to get the agency caught up. Orientation for new hires and refresher training for employees is also behind schedule in some areas. These are all signs of an agency still grappling with a record five-week shutdown on the eve of a tax filing season that was already going to be challenging because of the new tax law.”

Despite its many difficulties, the IRS remains the lifeblood of the federal government. Tax collectors raise about 93 percent of the national budget. They do so on a relative shoestring. The $3.5 trillion collected in fiscal 2018 was on an $11.43 billion IRS budget, a return on investment of about 300 to 1.

“I don’t know how anyone can read this report,” Reardon said, “and not be alarmed at the massive amount of damage that has been done to the agency’s workforce and the taxpayers they want to serve.”

The damage did not begin with the shutdown. Years of taxpayer-advocate reports, congressional testimony, taxpayer protests and employee complaints have chronicled an agency that suffered at the hands of Republican appropriators who wanted to punish the tax collectors. Republicans charged the IRS with unfairly scrutinizing conservative nonprofit organizations under the Obama administration, despite evidence that progressive groups also were scrutinized.

The IRS still has not recovered. The title of the report’s list of “Most Serious Problems” is illustrative — “The Taxpayer’s Journey.”

The problems, which cause “extreme frustration” for taxpayers and employees, include “antiquated technology systems” that if not replaced will “increasingly harm taxpayers and impair revenue collection,” according to the report. Olson also cited agreements between private tax collectors (PCA) and low-income taxpayers “to make payments they cannot afford.” Of “taxpayers who made commissionable payments while their debts were assigned to PCAs,” she added, “24 percent had incomes at or below the federal poverty level.”

Because of the shutdown, employees estimate that “it may take them almost a year to catch up, but many taxpayers cannot wait that long because they need their responses” by April 15, when 2018 taxes are due, said David Carron, a revenue agent speaking as president of NTEU Chapter 6 covering Louisiana and Arkansas. “We would relate this to an assembly line that has been stopped for over a month, but the same amount of products have to be produced” by then.

Federal charity drive extended

The donation period for the Combined Federal Campaign (CFC), the federal workplace-giving vehicle for a variety of charities, has been extended until Friday. The original date was Jan. 11, which came during the shutdown.

“Many charities came to the aid of Federal employees throughout the shutdown in December and January,” said a memorandum announcing the extension from Keith Willingham, CFC director for the Office of Personnel Management. “Those organizations are under fiscal pressure with increased demands and because of an interruption.”

That represents a reversal of position.

On Dec. 19, shortly before the shutdown began, Willingham said that “under no circumstances will the 2019 CFC solicitation period be extended.”

Wiser heads prevailed.

 

After tax reform, many corporations will pay blended tax rate

Please call Kevin M. Sayed, J.D., LL.M., with questions about tax issues, and tax or business planning, at 252-321-2020. The following materials were originally published by the IRS.

Last year’s tax reform legislation replaced the graduated corporate tax structure with a flat 21 percent corporate tax rate. This new maximum tax rate for corporations is effective for tax years beginning after Dec. 31, 2017.

A corporation with a fiscal year that includes Jan. 1, 2018, will pay federal income tax using what is called a blended tax rate. They will not use the flat 21 percent tax rate for their entire fiscal year. To calculate their blended tax rate, these corporations will:

  • First calculate their tax for the entire taxable year using the tax rates that were in effect prior to the Tax Cuts and Jobs Act.
  • Then calculate their tax using the new 21 percent rate.
  • Proportion each tax amount based on the number of days in the taxable year when the different rates were in effect.
  • Take the sum of these two amounts, which is the corporation’s federal income tax for the fiscal year.

The blended rate applies to all fiscal year corporations whose fiscal year includes Jan. 1, 2018.  Fiscal year corporations that have already filed their federal income tax returns that do not reflect the blended rate may want to consider filing an amended return.

This change will affect many tax forms and instructions that corporations use. For a complete list, see the 2017 Fiscal Tax Year Filers Must Use Blended Corporate Tax Rates page on IRS.gov.
More information:
Notice 2018-38

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401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000

Please call Kevin M. Sayed, J.D., LL.M., with questions about tax issues and tax planning at 252-321-2020.  The following materials were originally published by the IRS.

The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019.  The IRS today issued technical guidance detailing these items in Notice 2018-83.

Highlights of Changes for 2019

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000.

The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2019.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2019:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married

couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500.

Highlights of Limitations that Remain Unchanged from 2018

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

Detailed Description of Adjusted and Unchanged Limitations

Section 415 of the Internal Revenue Code (Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made following adjustment procedures similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective Jan. 1, 2019, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $220,000 to $225,000. For a participant who separated from service before Jan. 1, 2019, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2018, by 1.0264.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2019 from $55,000 to $56,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2019 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $18,500 to $19,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $275,000 to $280,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $175,000 to $180,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five year distribution period is increased from

$1,105,000 to $1,130,000, while the dollar amount used to determine the lengthening of the five year distribution period is increased from $220,000 to $225,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $120,000 to $125,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $6,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $3,000.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $405,000 to $415,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $12,500 to $13,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $18,500 to $19,000.

The limitation under Section 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan remains unchanged at $50,000.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation remains unchanged at $110,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $220,000 to $225,000.

The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under Section 1.401(a)(9)-6, A-17(b)(2)(i) of the Income Tax Regulations remains unchanged at $130,000.

The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under Section 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is increased for 2019 from $1,087,000,000 to $1,097,000,000.

The Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2019 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $38,000 to $38,500; the limitation under Section 25B(b)(1)(B) is increased from $41,000 to $41,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $63,000 to $64,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for taxpayers filing as head of household is increased from $28,500 to $28,875; the limitation under Section 25B(b)(1)(B) is increased from $30,750 to $31,125; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $47,250 to $48,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for all other taxpayers is increased from $19,000 to $19,250; the limitation under Section 25B(b)(1)(B) is increased from $20,500 to $20,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $31,500 to $32,000.

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions is increased from $5,500 to $6,000.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) increased from $101,000 to $103,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers who are active participants (other than married taxpayers filing separate returns) increased from $63,000 to $64,000. If an individual or the individual’s spouse is an active participant, the applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $189,000 to $193,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $189,000 to $193,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $120,000 to $122,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

 

Treasury, IRS issue proposed regulations on new Opportunity Zone tax incentive

Please call Kevin Sayed, J.D., LL.M., to discuss the opportunity to defer capital gains taxes, or any other tax planning and business matters.  The following materials were originally published by the IRS.

The Treasury Department and the Internal Revenue Service issued proposed regulations for the new Opportunity Zone tax incentive to clarify that almost all of the associated capital gains qualify for deferral.

Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, are designed to spur investment in distressed communities through tax benefits. A nomination process completed in June resulted in the designation of qualified Opportunity Zones in 8,761 communities in all 50 states, the District of Columbia and five U.S. territories. Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone, making an election after Dec. 21, 2017, and meeting other requirements.

More information on Opportunity Zones is available on IRS.gov/taxreform. This page will also feature updates on the implementation of this and other TCJA provisions.

Click here for a complete list of Opportunity Zones.

IRS: Several tax law changes may affect bottom line of many business owners

 

Please call Kevin M. Sayed, J.D., LL.M., with questions about tax issues, about tax issues, and tax or business planning, at 252-321-2020. The following materials were originally published by the IRS.

WASHINGTON —The Internal Revenue Service today reminded business owners that tax reform legislation passed last December affects nearly every business.

With just a few months left in the year, the IRS is highlighting important information for small businesses and self-employed individuals to help them understand and meet their tax obligations.

Here are several changes that could affect the bottom line of many small businesses:

Qualified Business Income Deduction 

Many owners of sole proprietorships, partnerships, trusts and S corporations may deduct 20 percent of their qualified business income. The new deduction — referred to as the Section 199A deduction or the qualified business income deduction — is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

A set of FAQs provides more information on the deduction, income and other limitations.

Temporary 100 percent expensing for certain business assets

Businesses are now able to write off most depreciable business assets in the year the business places them in service. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.

Taxpayers can find more information in the proposed regulations.

Fringe benefits

  • Entertainment and meals: The new law eliminates the deduction for expenses related to entertainment, amusement or recreation. However, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer or an employee of the taxpayer is present and other conditions are met. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
  • Qualified transportation: The new law disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting. There’s an exception when the transportation expenses are necessary for employee safety.
  • Bicycle commuting reimbursements: Employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. The new tax law also suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for 2018 through 2025. Employers must now include these reimbursements in the employee’s wages.
  • Qualified moving expenses reimbursements: Reimbursements an employer pays to an employee in 2018 for qualified moving expenses are subject to federal income tax.  Reimbursements incurred in a prior year are not subject to federal income or employment taxes; nor are payments from an employer to a moving company in 2018 for qualified moving services provided to an employee prior to 2018.
  • Employee achievement award: Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. The new law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities and other similar items.

The tax reform for businesses page has more information on fringe benefit changes.

Estimated Taxes

Individuals, including sole proprietors, partners and S corporation shareholders, may need to pay quarterly installments of estimated tax unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions). More information about tax withholding and estimated taxes can be found on the agency’s Pay As You Go web page as well as in Publication 505, Tax Withholding and Estimated Tax. Publication 505 has additional details, including worksheets and examples, which can help taxpayers determine whether they should pay estimated taxes. Some affected taxpayers may include those who have dividend or capital gain income, owe alternative minimum tax or have other special situations.

More information

See IRS.gov/taxreform for more information about these and many other tax law changes.

New 100-percent depreciation deduction benefits business taxpayers

Please call Kevin M. Sayed, J.D., LL.M., with questions about tax issues, and tax or business planning, at 252-321-2020.  The following materials were originally published by the IRS.

Tax reform legislation passed in December 2017 includes changes that affect businesses. One of these changes allows businesses to write off most depreciable business assets in the year they place them in service.

Here are some facts about this deduction to help businesses better understand how to claim it:

  • The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property.
  • Machinery, equipment, computers, appliances and furniture generally qualify.
  • The 100-percent depreciation deduction applies to qualifying property acquired and placed in service after Sept. 27, 2017.
  • Taxpayers who elect out of the 100-percent depreciation deduction for a class of property must do so on a timely filed return. Those who have already timely filed their 2017 return and did not elect out can still do so. These taxpayers have six months from the original filing deadline, to file an amended return. For calendar-year corporations, this means Oct. 15, 2018.
  • The IRS issued proposed regulations with guidance on what property qualifies and rules for qualified film, television and live theatrical productions, and certain plants.
  • For details on claiming the 100-percent depreciation deduction or electing out of claiming it, taxpayers should refer to the proposed regulations or the instructions to Form 4562, Depreciation and Amortization.

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For many business taxpayers, time is running out

Please call Kevin M. Sayed, J.D., LL.M., with questions about tax issues, and tax or business planning, at 252-321-2020.  The following materials were originally published by the IRS.

For many business taxpayers, time is running out to elect out of new 100-percent depreciation deduction for 2017

WASHINGTON — The Internal Revenue Service today reminds business taxpayers who placed qualifying property in service during 2017 but choose not to claim the new 100-percent depreciation deduction, that they have a limited time to file the required election with the IRS.

In general, individuals and calendar-year corporations must file the election with the IRS by Oct. 15, 2018. The new 100-percent deduction allows businesses to write off most depreciable business assets in the year they are placed in service. This deduction was created by the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017. Because the deduction is retroactive and applies to qualifying property acquired and placed in service after Sept. 27, 2017, it may affect many 2017 tax returns. See IRS Fact Sheet 2018-09 for more details.

The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances, furniture, certain plants and qualified film, television and live theatrical productions generally qualify. Further details can be found in proposed regulations, issued last month, as well as in Publication 946, How to Depreciate Property, and in Form 4562, Depreciation and Amortization, and its instructions.

Taxpayers who elect out of the 100-percent depreciation deduction, as well as the 50-percent deduction available under prior law, must do so by attaching a statement to a timely-filed return. For details, see the instructions for Part II of Form 4562.

Those who have already timely filed their 2017 return and did not elect out but still wish to do so need to file an amended return. The deadline for filing the election is six months after the original deadline. For individuals or calendar-year corporations, this means Oct. 15, 2018.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.